##### Table of Contents

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**
 
**

**FORM 20-F**

 

**
 
**

**ANNUAL REPORT**

**PURSUANT TO SECTION 13**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended: December 31, 2011**

**Commission file number 333-155319**

 

**
 
**

**PETROBRASARGENTINA S.A.**

**(Exact name of Registrant as specified in its charter)**

 

**
 
**

**N/A**

**(Translation of Registrant’s name into English)**

**REPUBLIC OF ARGENTINA**

**(Jurisdiction of incorporation of organization)**

**Maipú 1, 22 S.S. Floor**

**(C1084ABA) Buenos Aires**

**Argentina**

**(Address of principal executive offices)**

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

 

 

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

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

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2011 was: 

Petrobras Argentina S.A. Class B ordinary shares, nominal value Ps. 1.00 per share 1,009,618,410 

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

Petrobras Argentina S.A.    Yes  x    No   ̈

 

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

Petrobras Argentina S.A.    Yes   ̈    No  x

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

Petrobras ArgentinaS.A.    Yes  x    No   ̈

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

Not applicable. 

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

U.S. GAAP    ̈    IFRS   ̈    Other  x

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

Petrobras ArgentinaS.A.            Large accelerated filer   ̈            Accelerated filer  x            Non-accelerated filer   ̈

 

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

Item 17   ̈    Item 18  x

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). 

Petrobras Argentina S.A.     Yes   ̈    No  x

 

 

 

Table of Contents
**TABLE OF CONTENTS**

 

Item 1. Identity of Directors, Senior Management and Advisors
   3  
Item 2. Offer Statistics and Expected Timetable
   3  
Item 3. Key Information
   4  
Selected Financial Data
   4  
Exchange Rates
   8  
Exchange Controls
   9  
Risk Factors
   10  
Item 4. Information on the Company
   19  
History and Development
   19  
Business Overview
   21  
Oil and Gas Exploration and Production
   25  
Refining and Distribution
   42  
Petrochemicals
   47  
Gas and Energy
   50  
Insurance
   62  
Patents and Trademarks
   63  
Quality, Safety, Environment and Health
   64  
Regulation of our Business
   68  
Organizational Structure
   91  
Property, Plant and Equipment
   92  
Item 4A. Unresolved Staff Comments
   92  
Item 5. Operating and Financial Review and Prospects
   93  
Analysis of Consolidated Results of Operations
   93  
Proportional Consolidation and Presentation of Discussion
   93  
Overview
   93  
Factors Affecting our Consolidated Results of Operations
   95  
Discussion of Results
   103  
Year ended December 31, 2011 compared to year ended December 31, 2010
   106  
Analysis of Operating Results by Business Segment
   108  
Analysis of Equity in Earnings of Affiliates
   114  
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
   115  
Analysis of Operating Results by Business Segment
   118  
Analysis of Equity in Earnings of Affiliates
   123  
Critical Accounting Policies
   124  
Liquidity and Capital Resources
   127  
Description of Indebtedness
   131  
Future Capital Requirements
   133  
Off-Balance Sheet Transactions
   134  
Contractual Obligations
   134  
U.S. GAAP Reconciliation
   136  
Reconciliation Tables
   136  
Item 6. Directors, Senior Management and Employees
   139  
Directors and Senior Management
   139  
Compensation
   146  
Board Practices
   147  
Employees
   151  
Share Ownership
   151  
Item 7. Major Shareholder and Related Party Transactions
   152  
Major Shareholders
   152  
Related Party Transactions
   152  
Item 8. Financial Information
   158  
Consolidated Financial Statements
   158  
Legal Proceedings
   158  
Dividends
   158  
Item 9. Offer and Listing
   159  
Markets
   160  
Item 10. Additional Information
   161  
Memorandum and Articles of Association
   161  
Table of Contents
Material Contracts
   166  
Exchange Controls
   167  
Taxation
   167  
Documents on Display
   170  
Item 11. Quantitative and Qualitative Disclosures About Market Risk
   171  
Item 12. Description of Securities Other than Equity Securities
   172  
Item 13. Defaults, Dividend Arrearages and Delinquencies
   174  
Item 14. Material Modifications to the Rights of Security Holders and Use ofProceeds
   174  
Item 15. Controls and Procedures
   174  
Item 16A. Audit Committee Financial Expert
   176  
Item 16B. Code of Ethics
   176  
Item 16C. Principal Accountant Fees and Services
   176  
Item 16D. Exemption from the Listing Standard for Audit Committees
   177  
Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers
   177  
Item 16F. Change in Registrant’s Certifying Accountant
   177  
Item 16G. Corporate Governance
   178  
Item 16H. Mine Safety Disclosure
   183  
Item 17. Financial Statements
   183  
Item 18. Financial Statements
   183  
Item 19. Exhibits
   183  
Table of Contents
**NOTE ON MERGER**

This Annual Report on Form 20-F has been filed by Petrobras Argentina S.A. (“PESA”) (formerly Petrobras Energía S.A.).On January 30, 2009, separate shareholders’ meetings of Petrobras Energía Participaciones S.A. (“PEPSA”) and PESA approved their merger, pursuant to which PEPSA was merged and absorbed into PESA, the surviving company.

Shareholders of PEPSA have received shares of PESA (in the United States, in the form of American Depositary Receipts)(“ADSs”), and the ADSs of PEPSA have been removed from listing on the New York Stock Exchange (the “NYSE”) and from registration with the U.S. Securities and Exchange Commission (the “SEC”). Following this exchange ofshares, ADSs, each representing 10 Class B shares of PESA, have been listed and began trading on the NYSE. PESA is the successor issuer to PEPSA, as contemplated by Rule 12g-3 of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). 

All references in this Annual Report to: 

“Petrobras Argentina”, “Petrobras Energía,” “PESA”, “the Company”, “we,”“us,” “our,” and similar terms refer to Petrobras Argentina S.A. and its subsidiaries, but excludes affiliates and companies under joint control. Prior to July 2003, PESA’s corporate name was Pecom Energía S.A. OnMarch 27, 2009, the shareholders of PESA approved the change of the company’s corporate name from Petrobras Energía S.A. to Petrobras Argentina, S.A. See “Item 4—History and Development.” 

“Petrobras Energía Participaciones,” and “PEPSA” refer to Petrobras Energía Participaciones S.A. Priorto July 2003, the corporate name of PEPSA was Pérez Companc S.A. 

“Petrobras” refers to PetróleoBrasileiro S.A. – PETROBRAS. 

“Argentine pesos”, “pesos” or “Ps.” refer to the currency ofthe Republic of Argentina. 

“U.S. dollars” or “U.S.$” refer to the currency of the United States ofAmerica. 

“Argentina” refers to the Republic of Argentina, and “Argentine government” refer to the federalgovernment of Argentina. 

**FORWARD LOOKING STATEMENTS**

Some of the information included in this Annual Report contains information that is forward looking, including statements regardingcapital expenditures, competition and sales, oil and gas reserves and prospects and trends in the oil and gas, Refining and Distribution, Petrochemicals and electricity industries. 

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

 
 • 
Changes in general economic, business, political or other conditions in Argentina or changes in general economic or business conditions in other LatinAmerican countries; 

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

 
 • 
The failure of governmental authorities to approve proposed measures or transactions described in this Annual Report; 

 
 • 
Changes in the price of hydrocarbons and oil products; 

 
 • 
Changes to our capital expenditure plans; 

 
 • 
Changes in laws or regulations affecting our operations; 

 
1 

Table of Contents • 
Increased costs; and 

 
 • 
Other factors discussed under “Risk Factors” in Item 3 of this Annual Report. 

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

 
2 

Table of Contents
**PART I**

**Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**

Not applicable. 

**Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE**

Not applicable. 

 
3 

Table of Contents
**Item 3. KEY INFORMATION**

**SELECTED FINANCIAL DATA**

The financial information set forth below may not contain all of the financial information that you should consider when making an investment decision. This information should be read in conjunction with,and is qualified in its entirety by reference to, the “Risk Factors” included in this Annual Report. See “Item 3—Risk Factors.” You should also carefully read our financial statements and “Item 5. Operating andFinancial Review and Prospects” included in this Annual Report for additional financial information about us. 

Ourconsolidated financial statements are prepared in accordance with regulations of the *Comisión Nacional de Valores*(the Argentine Securities Commission, or “CNV”), and, except for the matters described in Note 3 to ourconsolidated financial statements, with generally accepted accounting principles in Argentina (as approved by the Professional Council of Economic Sciences of the City of Buenos Aires, or its Spanish acronym “CPCECABA”), or Argentine GAAP.Argentine GAAP differs in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Note 21 to our financial statements as of and for the fiscal years ended December 31, 2011, 2010 and 2009(the “audited consolidated financial statements”) provides a description of the principal differences between Argentine GAAP and U.S. GAAP, and Note 22 provides reconciliation to U.S. GAAP of net income, shareholders’ equity andcertain other selected financial data. 

*Consideration of the effects of inflation. Accounting practices*

We maintain our statutory financial records in pesos. In addition, we present our audited consolidated financial statements in constantcurrency following the restatement method established by Technical Resolution No. 6 of the Argentine Federation of Professional Councils in Economic Science (or its Spanish acronym “FACPCE”) and in accordance with CNV GeneralResolutions No. 415 and 441. 

Under such method, the audited consolidated financial statements reflected the effects ofthe changes in the purchasing power of the Argentine peso through August 31, 1995. Starting September 1, 1995, under CNV General Resolution No. 272, we interrupted the use of this method and maintained the restatements made throughsuch date. 

On March 6, 2002, the CPCECABA approved Resolution MD No. 3/2002 providing, among other things, thereinstatement of the adjustment-for-inflation method for the interim periods or years ended after March 31, 2002, allowing for the accounting measurements restated based on the change in the purchasing power of the Argentine peso through theinterruption of adjustments, such as those whose original date is within the stability period, to be stated in Argentine pesos as of December 2001. Through General Resolution No. 415 dated July 25, 2002, the CNV requires that theinformation related to the financial statements that are to be filed after the date on which the regulation became effective be disclosed adjusted for inflation. 

On March 25, 2003, the PEN issued Decree No. 664 establishing that the financial statements for years ending as from such date be filed in nominal currency. Consequently, and under CNVResolution No. 441, we no longer applied inflation accounting as from March 1, 2003. 

According to inflation datapublished by the *Instituto Nacional de Estadística y Censos* (the national statistics and census institute, or “INDEC”), from 2007 to 2011, the Argentine consumer price index increased 8.5%, 7.2%, 7.7%, 10.9% and 9.5%,respectively; and the wholesale price index increased 14.4%, 8.8%, 10.3%, 14.5% and 12.7%, respectively. Notwithstanding the above mentioned, reports published by the International Monetary Fund (the “IMF”) state that their staff is alsousing alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown inflation rates considerably higher than those issued by the INDEC since 2007. The IMF has called on Argentina toadopt remedial measures to address the quality of official data. 

Inflation could also affect the comparability among thedifferent periods presented herein. 

Information presented in US GAAP does not include any adjustment to eliminate theeffects of inflation required under Argentina GAAP, as they are also permitted by Regulation S-X of the SEC. 

*Proportionalconsolidation of companies under which we exercise joint control*

In accordance with the procedure set forth in TechnicalResolution No. 21 of the FACPCE , we have consolidated our financial statements line by line on a proportional basis with the companies in which we exercise joint control (other than Compañía Inversora en TransmisiónEléctrica Citelec S.A., or “Citelec”, which we sold on July 19, 2007). See “Item 5—Proportional Consolidation and Presentation of Discussion.” In the consolidation of companies over which we exercise jointcontrol, the amount of the investment in the companies under joint control and the interest in their income (loss) and cash flows are replaced by our proportional interest in the subsidiaries assets, liabilities and income (loss) and cash flows. Inaddition, related party receivables, payables and transactions within the consolidated group and companies under joint control are eliminated on a pro rata basis pursuant to our ownership share in that company. 

 
4 

Table of Contents
*New accounting standards – Adoption of IFRS for Fiscal year ending December 31,2012*

On December 30, 2009, the CNV issued General Resolution No. 562/09 providing for the application ofTechnical Resolution No.26 of the FACPCE which adopts, for certain entities admitted to the public offering regime under Law No. 17,811, whether by reason of the public offering of their shares or corporate bonds, or of their having requestedauthorization to be admitted to the above referenced regime, the international financial reporting standards (“IFRS”) issued by the International Accounting Standards Board (IASB). The Company will be required to adopt such standards asfrom fiscal year beginning January 1, 2012. 

On April 13, 2010, the Company ́s board of directors (the“Board of Directors”) approved an implementation plan for adoption of such accounting standards. 

In compliance withthe requirements of General Resolution No. 562/09, as amended, and after reviewing the Company’s implementation plan in connection with the adoption of IFRS, as of December 31, 2011 the Board has not become aware of circumstancesrequiring changes to the before mentioned plan or indicating deviation from the established goals and dates. 

Pursuant to CNVGeneral Resolution No. 562/09, as supplemented, the Company’s financial statements for fiscal years starting as from January 1, 2012 shall be prepared in accordance with Technical Resolution No. 26 of the FACPCE providing for theadoption of IFRS. 

Accordingly, the first annual and interim financial statements to be prepared by the Company in accordancewith IFRS will be those for fiscal year ending December 31, 2012 and the three-month period ended March 31, 2012, respectively. 

As of the date of this Annual Report, the Company has complied with the specific implementation plan. The effects of adopting IFRS and reconciliation between Argentine GAAP and IFRS are set forth in Note20 to our audited consolidated financial statements. 

Notwithstanding the above mentioned, information presented under IFRS inNote 20 is for illustrative purposes only and subject to change. The amounts under IFRS will only be final when Petrobras Argentina issues its consolidated financial statements for 2012, the year in which it adopts IFRS for the first time inaccordance with CNV resolutions. 

U.S. GAAP Information 

The effects of inflation accounting and the proportional consolidation of Distrilec Inversora S.A. (“Distrilec”) (for all yearspresented) or Petrobras de Valores Internacional de España S.L. (“PVIE”) (for the years ended December 31, 2007 and 2008 and for the three months ended March 31, 2009), jointly controlled companies under Argentine GAAP,have not been reversed in the reconciliations to U.S. GAAP. 

The proportional consolidation of Compañía deInversiones de Energía S.A. (“CIESA”), for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 under Argentine GAAP, has been reversed in the U.S. GAAP information. This reversal was due to (1) CIESA havingnegative shareholders’ equity for each of those five years for purposes of U.S. GAAP, and (2) our not having assumed commitments to make capital contributions or to provide financial assistance to CIESA, which caused our interests in CIESAto be valued at zero. 

 
5 

Table of Contents
The following tables set forth selected financial data (including data for joint controlcompanies consolidated under the proportional consolidation method), as of and for the years ended December 31, 2011, 2010, 2009, 2008, and 2007. 

**Petrobras Argentina S.A.—Income Statement Data**

 
   **Year Ended December 31,**    **2011**  **2010**  **2009**  **2008**  **2007**    
**(in millions of pesos, except for per share amounts and number of**

**shares or as otherwise indicated)**
 
**Argentine GAAP:**
      
Net sales
   14,278    14,442    11,972    15,175    13,458  
Cost of sales
   (11,025)   (10,806)   (8,858)   (11,000)   (10,111)   
 

 
  
 

 
  
 

 
  
 

 
  
 

 
 
Gross profit
   3,253    3,636    3,114    4,175    3,347  
Administrative and selling expenses
   (1,708)   (1,746)   (1,668)   (1,758)   (1,465) 
Exploration expenses
   (391)   (190)   (336)   (238)   (172) 
Other operating expenses, net
   (560)   (258)   (192)   (231)   (177)   
 

 
  
 

 
  
 

 
  
 

 
  
 

 
 
Operating income
   594    1,442    918    1,948    1,533  
Equity in earnings of affiliates
   223    156    210    305    176  
Financial expenses and holding losses, net
   (317)   (401)   (701)   (782)   (495) 
Other (expenses) income, net
   189    (357)   1,288    (117)   139    
 

 
  
 

 
  
 

 
  
 

 
  
 

 
 
Income before income tax and minority interest in subsidiaries
   689    840    1,715    1,354    1,353  
Income tax
   7    (201)   (726)   (508)   (503) 
Minority interest in subsidiaries
   8    (29)   (64)   (70)   (88)   
 

 
  
 

 
  
 

 
  
 

 
  
 

 
 
Net income
   704    610    925    776    762    
 

 
  
 

 
  
 

 
  
 

 
  
 

 
 
Basic/diluted earnings per share
   0.697    0.604    0.916    0.769    0.755  
Number of shares outstanding (in millions):
      
Class B
   1,010    1,010    1,010    1,010    1,010  
**U.S. GAAP:**
      
Net sales
   12,178    11,036    8,558    10,994    9,469  
Operating income (loss)
   (196)   420    287    704    64  
Income (loss) from continuing operations
   (121)   265    (6)   187    (458) 
Income (loss) from discontinued operations
   71    268    102    247    434  
Net income (loss)
   (50)   533    96    434    (24) 
Basic/diluted net income (loss) per share
      
Income (loss) from continuing operations
   (0.120)   0.262    (0.006)   0.185    (0.453) 
Income (loss) from discontinued operations
   0.070    0.265    (0.101)   0.245    0.430  
 
6 

Table of Contents
**Petrobras Argentina S.A.—Balance Sheet Data**

 
   **Year Ended December 31,**    **2011**   **2010**   **2009**   **2008**   **2007**    
**(in millions of pesos, except for per share amounts and number of**

**shares or as otherwise indicated)**
 
**Argentine GAAP:**
          
**Consolidated Balance Sheet**
          
**Assets**
          
**Current assets**
          
Cash
   247     581     327     492     98  
Investments
   1,563     2,325     1,243     989     1,094  
Trade receivables
   2,224     1,824     1,792     1,635     1,605  
Other receivables
   1,089     1,802     2,467     1,595     2,659  
Inventories
   1,001     1,099     1,011     1,536     996  
Other assets
   52     142     269     5     —      
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Total current assets
   6,176     7,773     7,109     6,252     6,452  
**Non-current assets**
          
Trade receivables
   244     230     202     154     228  
Other receivables
   1,475     446     790     522     657  
Inventories
   98     81     82     95     100  
Investments
   3,400     3,351     3,709     3,477     3,270  
Property, plant and equipment
   10,726     10,789     11,128     12,556     10,609  
Other assets
   51     89     63     35     41    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Total non-current assets
   15,994     14,986     15,974     16,839     14,905    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Total assets
   22,170     22,759     23,083     23,091     21,357    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
**Liabilities**
          
**Current liabilities**
          
Accounts payable
   1,976     1,926     1,607     1,873     1,728  
Short-term debt
   856     1,285     2,508     2,445     1,922  
Payroll and social security taxes
   312     270     260     351     261  
Taxes payable
   359     503     415     463     280  
Reserves
   160     162     124     125     124  
Other liabilities
   1,202     960     575     530     305    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Total current liabilities
   4,865     5,106     5,489     5,787     4,620  
**Non-current liabilities**
          
Accounts payable
   190     171     161     136     179  
Long-term debt
   3,137     4,257     4,590     5,152     5,430  
Payroll and social security taxes
   166     125     111     73     60  
Taxes payable
   1,066     1,102     1,451     1,501     1,428  
Reserves
   290     167     136     119     86  
Other Liabilities
   1,325     868     587     494     307    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Total non-current liabilities
   6,174     6,690     7,036     7,475     7,490    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Total liabilities
   11,039     11,796     12,525     13,262     12,110    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
**Minority interest in subsidiaries**
   760     989     969     882     817  
**Total Shareholders’ Equity**
   10,371     9,974     9,589     8,947     8,430    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Total liabilities and shareholders’ equity
   22,170     22,759     23,083     23,091     21,357    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
Capital Stock
   1,010     1,010     1,010     1,010     1,010    
 

 
   
 

 
   
 

 
   
 

 
   
 

 
 
**U.S. GAAP:**
          
Total assets
   18,687     19,772     20,161     20,502     19,343  
Shareholders’ equity
   10,033     9,864     9,537     8,886     8,689  
 
7 

Table of Contents
**EXCHANGE RATES**

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

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

 
   **Argentine peso per U.S. dollar**    **High**   **Low**   **Average (1)**   **Period-end** 
**Year ended December 31,**
        
2011
   4.30     3.97     4.13     4.30  
2010
   3.99     3.79     3.91     3.98  
2009
   3.85     3.45     3.73     3.80  
2008
   3.47     2.98     3.16     3.45  
2007
   3.18     3.06     3.12     3.15  
**Month:**
        
April 2012
   4.42     4.32     4.36     4.42  
March 2012
   4.38     4.34     4.36     4.38  
February 2012
   4.36     4.33     4.35     4.36  
January 2012
   4.34     4.30     4.32     4.34  
 
(1)
The figuresprovided represent the average of the exchange rates at the close of trading on each business day during the relevant period. 

 
8 

Table of Contents
**EXCHANGE CONTROLS**

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

On December 3, 2001, the Argentine government imposed a number of monetary and currency exchange control measures through DecreeNo. 1,570/01, which included restrictions on the free disposition of funds deposited with banks and tight restrictions on transferring funds abroad without the Central Bank’s prior authorization subject to specific exceptions for transfersrelated to foreign trade. The Central Bank has gradually eased these restrictions with a view to gradually normalizing the domestic exchange market, and as a result, most restrictions relating to the repayment of foreign creditors and the payment ofdividends to foreign shareholders have been lifted. In June 2003 the Argentine government set restrictions on capital flows into Argentina, which mainly consisted of a prohibition against the transfer abroad of any funds until 180 days after theirentry into the country. 

Furthermore, in June 2005, through Decree No. 616/05, the Argentine government establishedfurther restrictions on capital flows into Argentina, including increasing the period that certain incoming funds must remain in Argentina to 365 calendar days and requiring that 30% of such incoming funds be deposited with a bank in Argentina in anon-transferable, non-interest bearing account for 365 calendar days. Export and import financing operations, as well as primary public offerings of corporate bonds listed on self-regulated markets, among others, are exempt from the foregoingprovision. 

On October 26, 2011, the Argentine government issued Decree No. 1,722/11 providing that all foreigncurrency revenues obtained from exports made by mining and oil and gas companies must be repatriated and sold within the local foreign exchange market, which is the general regime applicable to revenues generated by Argentine exports. Prior to theissuance of Decree No. 1,722/11, companies engaged in the hydrocarbon exploration and development benefited from a special regime that allowed them to retain overseas up to 70% of the proceeds of certain exports. See “*item 3 – RiskFactors—Exchange controls in Argentina may impair our ability to service our foreign currency-denominated debt obligations and pay dividends*.” 

 
9 

Table of Contents
**RISK FACTORS**

**Factors Relating to Argentina**

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

We are an Argentine corporation (*sociedad anónima*). As of December 31, 2011, approximately 84% ofour total assets, 94% of our net sales, 87% of our combined crude oil and gas production and 84% of our proved oil and gas reserves were located in Argentina. Fluctuations in the Argentine economy and actions adopted by the Argentine government havehad and may continue to have a significant impact on Argentine companies, including us. Specifically, we have been affected and may continue to be affected by inflation, interest rates, the value of the peso against foreign currencies, increasinglyburdensome foreign exchange and price controls, regulatory policies, business and tax regulations and in general by the political, social and economic scenario in Argentina and in other countries that may affect Argentina. 

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

During 2001 and 2002, Argentina went through a period of severepolitical, economic and social crisis. See “Item 4—Business Overview—Our Principal Market.” The crisis had significant and adverse consequences on our company, including (i) losses derived from the effects of the pesodevaluation on our affiliates and our affiliates’ net borrowing position, which primarily was denominated in U.S. dollars, (ii) the impairment of the book value of certain gas areas and tax assets due to material changes in the prospectsof our operations, (iii) a decrease in U.S. dollar cash flows due to the imposition of export taxes, (iv) limits on the availability in the financial market to renew our short-term lines of credit and the current portion of our medium andlong-term financings at maturity and (v) restrictions on our ability to pass through the effects of inflation to the prices of products sold by us in the domestic market. In 2002, we reported a significant net loss and our liquidity wasadversely affected. Within this context and in order to secure compliance with our financial commitments, we reduced our investment plan and reached an agreement with our financial creditors and holders of notes to extend the maturity profile of asubstantial portion of our debt, at face value. As a result, capital expenditures in 2002, net of divestments, totaled only Ps. 139 million, a relatively low amount compared to our historical average investment. 

Following the 2001 crisis, the Argentine economy experienced a strong recovery. During 2008 and 2009, however, the Argentine economysuffered a new deceleration of activity caused by local and external factors, including an extended drought and effects from a global economic crisis. Real Gross Domestic Product (“GDP”) growth recovered in 2010 and 2011, at annual ratesof 9% according to the Ministry of Economy and Production (the “Ministry of Economy”). Nevertheless, uncertainty remains as to whether Argentina ́s long-term growth will not be adversely affected by continued inflationary pressures,the loss of competitiveness and the lack of a legal framework that is suitable to attract foreign investments. 

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

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

Financial and securities markets in Argentina are influenced by economic and market conditions in other markets worldwide. Althougheconomic conditions vary from country to country, investors’ perceptions of events occurring in one country may substantially affect capital flows into and investments in securities from issuers in other countries, including Argentina.Furthermore, the Argentine economy has been affected by events in developed economies which are trading partners or that impact the global economy. Consequently, there can be no assurance that the Argentine financial system and securities marketswill not continue to be adversely affected by events in developed countries’ economies or events in other emerging markets. This could adversely affect our results of operations and financial condition. 

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

The prospects for Argentine companies of accessing financial markets might be limited interms of the amount of financing available, and the conditions and cost of such financing. The default on the Argentine sovereign debt at the end of 2001, the global economic crisis that started in the fourth quarter of 2008 and the resultinginternational stock market crash and the insolvency of major financial institutions toward the end of 2008, have limited the ability of Argentine companies to access international financial markets as they have in the past. Since June 2009, agreater number of Argentine companies have gained access to the international capital markets, albeit at conditions more onerous than competitors based in other countries in the region. 

 
10 

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

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

The value of the peso has fluctuated significantly in the past and may do so in the future.Since the end of the Ps.1.00 to U.S.$1.00 parity in January 2002, the peso has fluctuated significantly in value. As a result, the Central Bank has taken several measures to stabilize the exchange rate. The marked devaluation of the peso in 2002 hada negative impact on the ability of the Argentine government and companies to honor their foreign currency-denominated debt, led to very high inflation initially and had a negative impact on businesses whose success depends on domestic marketdemand, including public utilities. 

The significant peso devaluation during 2002 adversely affected our results of operationsand financial condition. Substantially all of our financial debt and a significant portion of our affiliates’ debt were denominated in U.S. dollars. Before the enactment of the Public Emergency Law in January 2002, our cash flow, generallydenominated in U.S. dollars or dollar-adjusted, provided a natural hedge against exchange rate risks. The Argentine regulatory framework after the enactment of the Public Emergency Law (which included the pesification of utility rates, regulatoryissues related to the renegotiation of pesified utility rates, new taxes on hydrocarbon exports, and the implementation of regulations to prevent an increase in prices to final users in the domestic market and restrictions on exports), however,limited our ability to hedge the impact of the peso devaluation. 

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

We are unableto predict the future value of the peso against the U.S. dollar and how any fluctuations may affect the demand of our products and services. Moreover, the Argentine government may introduce regulatory changes that prevent or limit us from offsettingthe risk derived from our exposure to the U.S. dollar and, if so, we cannot predict the impact of these changes on our financial condition and results of operations. See “Item 3 – Exchange Rates” 

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

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

In addition,according to inflation data published by the INDEC, from 2007 to 2011, the Argentine consumer price index increased 8.5%, 7.2%, 7.7%, 10.9% and 9.5%, respectively; and the wholesale price index increased 14.4%, 8.8%, 10.3%, 14.5% and 12.7%,respectively. Notwithstanding the above mentioned, reports published by the IMF state that their staff is also using alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have showninflation rates considerably higher than those issued by the INDEC since 2007. The IMF has called on Argentina to adopt remedial measures to address the quality of official data. 

 
11 

Table of Contents
Uncertainty surrounding future inflation may result in slowed economic activity and reducedgrowth. A high inflation environment could also undermine Argentina’s foreign competitiveness by diluting the effects of the peso devaluation, with negative effects on the level of economic activity and employment. Sustained inflation inArgentina, without a corresponding increase in the price paid by consumers for our products in the local market would have a negative effect on our results of operations and financial condition. We cannot estimate how our activities and results ofoperations will be affected by inflation in the future. 

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

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

On October 26, 2011, the Argentine government issued Decree No. 1,722/11 providing that all foreign currency revenues obtainedfrom exports made by mining and oil and gas companies must be repatriated and sold within the local foreign exchange market, which is the general regime applicable to export revenues generated by Argentine exports. Prior to the issuance of DecreeNo. 1,722/11, companies engaged in the hydrocarbon exploration and development benefited from a special regime that allowed them to retain overseas up to 70% of the proceeds of certain exports. 

In a further attempt to ease the pressure on the dollar and decrease the outflow of the Central Bank’s foreign currency reserves,through Resolution No. 36,162/11 of the *Superintendencia de Seguros de la Nación*, dated October 26, 2011, the Argentine government ordered insurance companies to repatriate their foreign investments. 

The Argentine government may impose additional exchange controls, which may adversely affect the Company ́s ability to pay principalor interest payments on its debt when it becomes due or to pay dividends. See “item 3 – Risk Factors—Exchange controls in Argentina may impair our ability to service our foreign currency-denominated debt obligations and paydividends,” “Item 3—Exchange Rates—Exchange controls” and “Item 5—Description of Indebtedness.” 

**Factors Relating to Our Business**

***Substantial or extended declines and volatility in the prices of crude oil, oil products and natural gas may have an adverse effect on our resultsof operations and financial condition.***

A significant amount of our revenue is derived from sales of crude oil, oilproducts and natural gas. Factors affecting international prices for crude oil and related oil products include: political developments in crude oil producing regions, particularly in the Middle East; the ability of the Organization of PetroleumExporting Countries (“OPEC”) and other crude oil producing nations to set and maintain crude oil production levels and prices; global and regional supply and demand for crude oil; competition from other energy sources; domestic and foreigngovernment regulations; weather conditions and global conflicts or acts of terrorism. We have no control over these factors. Changes in crude oil prices generally result in changes in prices for related products. International oil prices havefluctuated widely over the last ten years. 

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

 
12 

Table of Contents
***Argentine oil and gas production concessions and exploration permits are subject to certain conditionsand may not be renewed or could be revoked.***

The Hydrocarbons Law provides for oil and gas concessions to remain ineffect for 25 years as from the date of their award, and further provides for the concession term to be extended for up to 10 additional years, subject to terms and conditions approved by the grantor at the time of the extension. The authority toextend the terms of current and new permits, concessions and contracts has been vested with the government of the province in which the relevant area is located (and the Argentine government in respect of offshore areas beyond 12 nautical miles). Inorder to be eligible for the extension, any concessionaire and permit holder must have complied with its obligations under the Hydrocarbons Law and the terms of the particular concession or permit, including evidence of payment of taxes androyalties, the supply of the necessary technology, equipment and labor force and compliance with various environmental, investment and development obligations. Under the Hydrocarbons Law, non-compliance with these obligations and standards may alsoresult 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 provide assurances that concessions that have not yet been renewedwill be extended or that additional investment, royalty payment or other requirements will not be imposed on us in order to obtain extensions. See “item 4—Business Overview – Oil and Gas Exploration and Production—StatisticalInformation Relating to Oil and Gas Production.” 

On April 4, 2012, the Company received notice of the decision bythe government of the Province of Neuquén to terminate the concession for the Veta Escondida area. Within this context, the Company will enforce its rights regarding this reversal by the Province of Neuquén. A number of provincialgovernments have also recently revoked certain of YPF S.A. ́s (“YPF”) concessions for lack of investment. 

Thetermination or revocation of, or failure to obtain the extension of, additional concessions or permits could have a material adverse effect on our business and results of operations. See “Item 4—Regulation of Our Business.”

***Our crude oil and natural gas reserves estimates involve some degree of uncertainty which could adversely affect our ability togenerate income.***

The proved crude oil and natural gas reserves set forth in this Annual Report account for ourestimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions according toapplicable regulations. Our proved developed crude oil and natural gas reserves are those that can be expected to be recovered through existing wells with existing equipment and operating methods. See “Item 4—Oil and Gas Exploration andProduction—Reserves.” 

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

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

In recent years, we have experienced a decline in reserves and production, including as a result of thesale of our interest in PVIE, new regulations in Bolivia which prevent us from accounting for reserves (see “Item 4— Business Overview—Reserves—Internal Control over Proved Reserves”) as well as our decision of not tomigrate to service contracts for Block 18 and Palo Azul Unified Field in Ecuador. The possibility of replacing our crude oil and gas reserves in the future is dependent on our ability to access new reserves, both through successful exploration andreserve acquisitions. We consider exploration, which carries inherent risks and uncertainties, our main vehicle for future growth and reserves replacement. 

Without successful exploration activities or reserve acquisitions, our proved reserves will decline as our oil and gas production will be forced to rely on our current portfolio of assets. 

We cannot guarantee that our exploration, development and acquisition activities will allow us to offset the decline of our reserves. Ifwe are not able to successfully find, develop or acquire additional reserves, our reserves and therefore our production may continue to decline and, consequently, this may adversely affect our future results of operations and financial condition.

 
13 

Table of Contents
***The Argentine government has intervened in the oil and gas industry in the past, and is likely tocontinue to intervene.***

To address the Argentine crisis of 2001 and 2002, the Argentine Congress enacted the PublicEmergency Law and other emergency regulations, some of which continue in effect to date. Some of these regulations introduced a number of material changes to the regulatory framework applicable to the oil and gas industry in Argentina, and to otherindustries on which the Company ́s affiliates are active, like the electricity industry. 

As of the date of this AnnualReport, the Public Emergency Law is still in effect. In addition, the Argentine government continues to introduce material changes to the regulatory regime applicable to the oil and gas industry, such as the recent revocation of the*Petróleo Plus*(“Oil Plus”) and *Refinación Plus*(“Refining Plus”) programs, or the obligation to repatriate and sell in the local market 100% of the foreign currency revenues obtained from oil and gasexports. 

On April 16, 2012, the Argentine government, through Decree No. 530/12, removed YPF ́s seniorofficers and empowered a government interventor of YPF for a period of 30 days with immediate effect. On May 3, 2012 the Argentine Congress enacted Law No. 26,741 for the expropriation of 51% of YPF ́s Class D shares, out of theshares currently held by Repsol YPF S.A. (Spain), and 51% of Repsol YPF GAS S.A., represented by 60% of its Class A shares then held by Repsol Butano S.A. (Spain). Additionally, Law No. 26,741 declares that hydrocarbons self-sufficiency,as well as their production, industrialization, transport and marketing, are activities of public interest and primary goals of Argentina, empowering the Argentine government to take the necessary measures to achieve such goals. 

The Company has a number of areas under concession held jointly with YPF, as well as joint ownership of some affiliates. The Argentinegovernment ́s expropriation of a majority of shares in YPF and intervention in YPF ́s business could adversely affect our business, financial condition and results of operations. 

We cannot assure that these or other measures that may be adopted by the Argentine government will not have a material adverse effect onour business, financial condition or results of operations. 

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

In recent periods, the Argentine government has introduced aseries of measures limiting exports of hydrocarbons and related oil products, which have prevented us from profiting from higher prices of these commodities in the international markets, and materially affected our competitiveness and results ofoperations. 

In April 2004, to facilitate the recovery of natural gas prices, the Argentine Secretary of Energy (the“SE”) entered into an agreement with natural gas producers requiring them to sell a specified amount of gas in the local regulated market. During 2006, the SE required producers to redirect gas earmarked for export to supply local thermalpower plants and gas distribution companies. In January 2007, the SE confirmed that the ability to export hydrocarbons would be subject to the satisfaction of domestic demand and that export would have to be authorized on a case-by-case basis by theSE. These measures prevent us from benefiting from higher margins in the international markets. In 2007, upon the expiration of the aforementioned agreement, the Argentine government and producers signed a new agreement effective until 2011 aimed atsecuring the domestic supply of gas. 

Under these agreements, temporary limits on certain natural gas exports have beenimposed to avoid a crisis in the local supply of natural gas, depriving us of higher margins in the international markets. 

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

 
14 

Table of Contents
These restrictions may significantly and adversely affect the profitability of ouroperations, preventing us from capturing the upside of export prices, and negatively impacting the total volume of refined products sold in the domestic market, due to our need to manage crude oil volumes processed in accordance with our storagecapacity. 

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

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

On March 1, 2002, the Argentine government imposed a withholding tax on exports of hydrocarbons, initially lasting five years. Thistax framework has prevented us from benefiting from significant increases in international prices for oil, oil related products and natural gas, hindered us from offsetting sustained increases in costs endemic to the energy industry, and materiallyaffected our competitiveness and results of operations. Effective November 2007, the Ministry of Economy adopted a more onerous method for calculating withholding taxes on exports of crude oil and certain oil by-products. See “Item5**—**Factors affecting our consolidated results of operations**—**Regulations of the Energy Industry in Argentina**—**Withholding Taxes on Exports.” 

We cannot assure you that the Argentine government will reduce current export tax rates or will not increase them further. We cannotpredict the impact that any changes may have on our results of operations and financial condition. 

***Limitations on local pricing inArgentina may adversely affect our results of operations.***

In recent years, due to regulatory, economic and governmentpolicy factors, our domestic crude oil, gasoline, diesel and other fuel prices have frequently lagged substantially behind prevailing international and regional market prices for such products, and our ability to increase prices has been limited.Likewise, the prices at which we sell natural gas in Argentina (particularly to the residential sector) are subject to government regulations and currently are substantially below regional market prices for natural gas. For additional information ondomestic pricing for our products, see “Item 5—Factors Affecting our Consolidated Results of Operations—Regulation of the Energy Industry in Argentina” and “Item 4—Regulation of our Business—Argentine RegulatoryFramework.” 

We cannot assure you that we will be able to increase the domestic prices of our products, and limitationson our ability to do so will continue to adversely affect our financial condition and results of operations. Similarly, we cannot assure you that hydrocarbon prices in Argentina will track increases or decreases in hydrocarbon prices in theinternational or regional markets. 

***Oil and gas prices could affect our level of capital expenditures.***

The prices that we are able to obtain for our hydrocarbon products affect the viability of investments in new exploration, development andrefining, 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. In the event that currentdomestic prices decrease, our ability to improve our hydrocarbon recovery rates, identify new reserves and carry out certain of our other capital expenditure plans is likely to be affected, which, in turn, could have an adverse effect on our resultsof operations. 

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

The macroeconomic situation of the country after the enactment of the Public Emergency Law impacted the economic and financial conditionof utility companies in Argentina. The combined effect of (i) the devaluation of the peso in 2002, (ii) the government decision to freeze rates in pesos without reflecting the impact of the devaluation and (iii) financial debtsprimarily denominated in foreign currency, adversely affected the financial condition, results of operations and ability to satisfy financial obligations and pay dividends of utility companies. Although some of these utility companies have beensuccessful in restructuring their indebtedness, their return to financial stability and profitability on a long-term basis depends on a successful negotiation of tariff increases with the Argentine government. Our affiliates Edesur S.A.(“EDESUR”) and Transportadora de Gas del Sur S.A. (“TGS”) have engaged in negotiations with the Utilities Contract Renegotiation and Analysis Committee (*Unidad de Renegociación y Análisis de Contratos deServicios Públicos*) (“UNIREN”). However, to date, these discussions have not resulted in tariff increases sufficient for our affiliated utility companies to return to financial stability and profitability. See “Item4—Gas and Energy—Gas Transportation-TGS—Tariff Renegotiation Process” and “Item 4—Gas and Energy— Electricity—Electricity Distribution: EDESUR” and “Item 4—Regulation of OurBusiness—Argentine Regulatory Framework—Natural Gas and Electricity.” 

 
15 

Table of Contents
***Our operations could be adversely affected by events beyond our control.***

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

***Our activities may beadversely affected by events in countries in which we do business.***

Our operations are concentrated in Latin America, aregion that has experienced significant economic, social, political and regulatory volatility. In recent periods, many governments in Latin America have taken steps to assert greater control or increase their share of revenues from the energysector, spurred by soaring oil and gas prices and nationalist politics. See “Item 4—Regulation of our Businesses—Venezuelan Regulatory Framework—Bolivian Regulatory Framework.” 

These risks are evidenced by changes in business conditions that we have experienced in Venezuela, Bolivia and Ecuador. See “Item5—Factors affecting our Consolidated Results of Operations” See “Item 4—Oil and Gas Exploration and Production—Production—Production Outside Argentina.” 

***We could be subject to organized labor action.***

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

In 2008 unionized employees went on strike over salary increases, adversely affecting our operations. In 2008, in the Austral basin inArgentina, the pace of production slowed as a result of the labor strike held by our contractor’s employees throughout May 2008, with an adverse impact on production levels in subsequent months. During 2009, 2010 and 2011, to a lesser extent,gas production in the Austral basin was affected by labor strikes by contractors’ personnel. See “Item 6– Employees.” 

We do not maintain insurance coverage for business interruptions, including business interruptions caused by labor actions. Strikes, picketing or other types of conflict with the unionized personnel mayadversely affect our results of operations and financial condition. 

***Our operations could cause environmental damage, and any changes inenvironmental laws may increase our operational costs.***

Some of our operations are subject to environmental risks thatmay arise unexpectedly and result in material adverse effects on our results of operations and financial condition. In addition, the occurrence of any of these risks could result in personal injuries, loss of life, environmental damage, clean-up andrepair expenses, equipment damage and liability in civil and administrative proceedings. We cannot assure you that we will not incur in additional costs related to the environment in the future, which could negatively impact our results ofoperations and financial condition. In addition, we cannot assure that the insurance coverage that we maintain is adequate to cover the losses that may potentially arise from these environmental risks. 

Furthermore, we are subject to extensive environmental regulation both in Argentina and in the other countries in which we operate.Local, provincial and national authorities in Argentina and other countries where we operate are moving towards more stringent enforcement of environmental laws, which may require us to incur in higher compliance costs. We cannot predict whateffects this may have on our financial condition and results of operations. 

 
16 

Table of Contents
**Risks Relating to Our Shares and ADSs**

***Our principal shareholders can exercise control over the Company.***

As of the date of this Annual Report, Petrobras holds 67.2% of our capital stock and voting rights and ANSES holds approximately 9.8% ofour shares and voting rights. Petrobras will be able to determine or influence substantially on all matters requiring approval by a majority of our shareholders, including the election of a majority of our directors. Petrobras will also direct ouroperations and may be able to cause or prevent a change in our control. See “Item 7—Major Shareholders and Related Party Transactions.” 

***Restrictions on capital outflows imposed by Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the shares underlying the ADSs.***

Argentine law currently permits the government to impose temporary restrictions on capital movements in circumstanceswhere a serious imbalance develops in Argentina’s balance of payments or where there are reasons to foresee such an imbalance. Restrictions on capital outflows imposed by Argentina such as those that existed following the 2001 Argentine crisiscould, if reinstated, impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of shares, as the case may be, from pesos into U.S. dollars and the remittance of the U.S. dollars abroad. We cannot assure that theArgentine government will not take such measures in the future. 

Under the terms of our deposit agreement with the depositaryfor the ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the shares underlying the ADSs into U.S. dollars if, in the judgment of the depositary, that can be made on a practicable basis, and shall distributesuch U.S. dollars in accordance with the Deposit Agreement subject, in each case, to any restrictions under Argentine laws or regulations or applicable permits issued by an Argentine governmental body. If the exchange rate fluctuates significantlyduring a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the dividend distribution. 

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

Our corporate affairs are governed by our by-laws and by Argentine Companies Law, which differ from the legal principles that would applyif 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 inother jurisdictions. 

***Sales of a substantial number of shares could decrease the market prices of our shares and the ADSs.***

Petrobras owns shares representing a significant majority of our capital stock. Sales of a substantial number ofshares or ADSs by Petrobras, ANSES, or any other future significant shareholder, or the anticipation of such sales, could decrease the trading price of our shares and ADSs. 

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

You may not be able to exercise the preemptive or accretion rights relating to the shares underlying your ADSs (see “Item 10. Additional Information—Preemptive Rights”) unless aregistration 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 tofile 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 isavailable, you may receive only the net proceeds from the sale of your 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 shares or ADSs may suffer dilution oftheir interest in our company upon future capital increases. 

In addition, under the Argentine Companies Law, foreigncompanies that own shares in an Argentine corporation are required to register with the *Inspección General de Justicia* (Superintendency of Legal Entities, the “IGJ”) in order to exercise certain shareholder rights, includingvoting rights. If you own our shares directly (rather than in the form of ADSs) and you are a non-Argentine company and you fail to register with IGJ, your ability to exercise your rights as a holder of our shares may be limited. 

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

The depositary will be treated by us for all purposes as the shareholder with respect to the shares underlying your ADSs. As a holder ofADRs representing the ADSs being held by the depositary in your name, you will not have direct shareholder rights and may exercise voting rights with respect to the shares represented by the ADSs only in accordance with the deposit agreementrelating 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 shares. However, there are practicallimitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. ADS holders may be unable to exercise voting rights with respect to the shares underlyingthe ADSs as a result of these practical limitations. 

 
17 

Table of Contents
***Shareholders outside Argentina may face additional investment risk from currency exchange ratefluctuations in connection with their holding of our shares or ADSs.***

We are an Argentine company and any futurepayments of dividends on our shares will be denominated in pesos. The peso has historically fluctuated significantly against many major world currencies, including the U.S. dollar. A depreciation of the peso would likely adversely affect the U.S.dollar or other currency equivalent of any dividends paid on our shares and could result in a decline in the value of our shares and ADSs as measured in U.S. dollars. 

 
18 

Table of Contents
**Item 4. INFORMATION ON THE COMPANY**

**HISTORY AND DEVELOPMENT**

**History**

***Petrobras Argentina S.A.***

PESA is a corporation (*sociedad anónima)* organized and existing under the laws of the Republic of Argentina and registeredon November 17, 1947 with the Public Registry of Commerce, under No.759, page 569, Book 47, Volume A, with a term of duration expiring June 18, 2046. Our principal place of business is located at Maipú 1, (C1084ABA), Buenos Aires,Argentina. Telephone: 54-11-4344-6000, fax 54-11-4344-6315 and web site at www.petrobras.com.ar. Our process agent in the U.S. for certain contracts is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. Ourauthorized representative in United States for our registration statement with SEC is Puglisi Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711. 

We are an integrated energy company**,**engaged in oil and gas exploration and production, refining, petrochemicals, electricity generation, transmission and distribution and hydrocarbon marketing andtransportation. As of December 31, 2011, we maintain operations primarily in Argentina, and to a lesser extent in Bolivia, Ecuador, Mexico and Venezuela. Our operations are currently divided into four business segments that are in turnsupported by corporate functions. The four business units are: (1) Oil and Gas Exploration and Production, (2) Gas and Energy, (3) Refining and Distribution, and (4) Petrochemicals. 

PESA was founded in 1946 under the name “Compañía Naviera Pérez Companc” as a shipping company by thePérez Companc family. In the mid-1950’s, the Company began its forestry operations when it acquired an important forestry area in northeastern Argentina. In the 1960s, it began servicing oil wells; over time, its maritime operations weregradually discontinued and replaced by oil-related activities. 

The development of our oil and gas business is marked by twosignificant events. The first occurred in 1991 when we were awarded concessions to operate Puesto Hernández, one of the most important oilfields in Argentina in terms of reserves and production, located in the provinces of Neuquén andMendoza, and the Faro Vírgenes and Santa Cruz areas in the Austral basin, located in the province of Santa Cruz. As a result of these concessions, we have become one of the largest oil and gas producers in Argentina. 

The second event that was a key factor in our oil and gas operations growth abroad occurred in March 1994 when PESA was awarded theOritupano-Leona area in Venezuela. This was the first step towards a significant regional expansion of our businesses. 

Between 1990 and 1994, many state-owned enterprises were privatized in Argentina. As a result, PESA acquired interests in companiesoperating in the natural gas transportation and distribution, electricity generation, transmission and distribution, oil transportation, storage and shipment and refining sectors. These activities have formed our core business. 

PESA has in the past conducted operations in other industries, including construction, real estate, telecommunications, mining andagriculture. Beginning in 1997, and through successive divestments, PESA restructured its business strategy with a focus on the energy sector in Argentina. As a result of these divestitures and the development of our energy businesses, PESA hasbecome a vertically-integrated energy company whose operations are mainly located in Argentina. 

***Corporatereorganization of PESA and PEPSA***

On September 2, 2008, the board of directors of each of PESA and PEPSA approveda preliminary agreement for the merger of both companies through the absorption of PEPSA by PESA. The effective merger date was set at January 1, 2009. As of that date all assets, liabilities, rights and obligations of the absorbed company wereincorporated into Petrobras Energía. Immediately following the merger, Petrobras continued holding 67.2% of the outstanding shares of Petrobras Energía. 

On January 30, 2009, the special shareholders’ meetings of PESA and PEPSA approved the merger of both companies, pursuant to which PEPSA was merged and absorbed into PESA, as surviving company.The board of directors of each of PESA and PEPSA approved the merger agreement between the two companies on April 14, 2009. This reorganization was authorized by Resolution No. 16,131 and subsequently registered with the IGJ. 

 
19 

Table of Contents
As a result of this corporate reorganization, shareholders of PEPSA received shares of PESA(in the United States, in the form of ADSs), and the ADSs of PEPSA were removed from listing on the NYSE and from registration with the SEC. Immediately subsequent to this exchange of shares, ADSs, each representing 10 Class B shares of PESA, werelisted and began trading on the NYSE. 

***Change of corporate name***

On March 27, 2009, the general regular and special shareholders’ meeting of PESA approved the change of the Company’scorporate name to Petrobras Argentina S.A., which became effective on July 19, 2010, CNV notified PESA of the registration of the change of its corporate name with the IGJ. 

**Capital Expenditures and Divestitures**

For a description of our capitalexpenditures see “Item 5—Liquidity and Capital Resources.” 

For a description of our most significantdivestitures see “Item 5—Factors Affecting Our Consolidated Results of Operations—Operations in Ecuador—Sale of Petrobras Argentina’s Interest in PVIE—Sale of the fertilizers business—Divestment ofInnova—Divestment of the San Lorenzo refinery and other assets associated with the Refining and Distribution business segment.” 

 
20 

Table of Contents
**BUSINESS OVERVIEW**

**Our Strategy**

Ourlong-term strategy is to grow as an integrated energy company in Argentina, while being a leader in profitability as well as social and environmental responsibility. 

The main points of this strategy are: 

 
 • 
Setting our focus on our Argentine operations. 

 
 • 
Increasing oil and gas reserves and maintaining production levels through profitable operations with a commitment to social and environmentalresponsibility. 

 
 • 
Seeking profitability in the downstream business in Argentina, through a balanced crude production – refining – logistics – distributionchain. 

 
 • 
Generating energy solutions through the development of businesses in the Gas and Energy segment. 

 
 • 
Maintaining our position in styrenics markets. 

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

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

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

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

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

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

We currently manage our activities, with the support of a corporate center, in four business segments:(1) Oil and Gas Exploration and Production, (2) Gas and Energy, (3) Refining and Distribution, and (4) Petrochemicals. 

 
21 

Table of Contents
**Our Principal Market**

PESA is an Argentine *sociedad anónima*. As of December 31, 2011, approximately 84% of total assets, 94% of net sales, 87% of combined crude oil and gas production and 84% of proved oiland gas reserves were located in Argentina. Fluctuations in the Argentine economy and actions adopted by the Argentine government have had and may continue to have a significant effect on Argentine private sector entities, including us.Specifically, we have been affected and may be affected by inflation, interest rates, the value of the peso against foreign currencies, price and export controls on oil and oil by-products, business regulations, fluctuations in tax regulations andin general by the political, social and economic environment affecting Argentina and other countries. See “Item 3—Risk Factors—Factors Relating to Argentina.” 

Historically, the Argentine economy has been characterized by its macroeconomic instability and by periods of low or negative growth andhigh and variable levels of inflation and currency devaluation. In 1988, 1989 and 1990, the annual inflation rates were approximately 388%, 4,924% and 1,344%, respectively, based on the Argentine consumer price index and approximately 422%, 5,386%and 798%, respectively, based on the Argentine wholesale price index. As a result of inflationary pressures, the Argentine currency was devalued repeatedly during the 1960s, 1970s and 1980s. Macroeconomic instability led to broad changes in the realexchange rate of the Argentine currency relative to the U.S. dollar. To address these pressures, the Argentine government implemented various plans and utilized a number of exchange rate systems and controls. 

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

Partly due to the convertibility model, in 1998 the Argentine economy entered a recession period, hitting its lowest point in December 2001, which resulted in a massive withdrawal of deposits and capitaloutflow. In light of the situation, following a 10% decrease of GDP, the Argentine government implemented a number of monetary and exchange control measures, which proved to be insufficient and caused a sharp rise in social discontent. Thistriggered a political, social and economic crisis. 

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

The Argentine government implemented a number of far-reaching initiatives, which included: 

 
 • 
Pesification of certain assets and liabilities denominated in foreign currency that were held in Argentina; 

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

 
 • 
Pesification of, and elimination of indexing clauses for utility rates, fixing those rates in pesos at the Ps. 1=U.S.$1 exchange rate; and

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

In 2002, commercial and financial activities were virtually paralyzed, further aggravating the economic recession which resulted in a10.9% decline in GDP. Within this context, the peso devalued 238% against the U.S. dollar and wholesale inflation grew 118.2%. Towards the end of 2002, the Argentine government implemented different measures aimed at stimulating the economy andeliminating certain restrictions to gradually normalize the foreign exchange market and the commercial and financial flow of foreign currency. 

During the years that followed the 2001 crisis, the activity level exhibited an accelerated recovery, taking advantage of existing idle capacity, a high real exchange rate and increased internationalprices for commodities. During this period, inflation remained stable and there was an excess supply of U.S. dollars, supported by a significant trade surplus. The Central Bank sought to prevent the nominal appreciation of the Argentine peso bypurchasing foreign currency, increasing its international reserves. 

 
22 

Table of Contents
During that period, the Argentine government maintained a surplus in its public accounts. In2005, the government was able to restructure the debt in default with 76% of creditors accepting the government’s exchange proposal, with reductions in principal amount, term extensions and reductions in interest rates. Early in 2006, Argentinaprepaid the debt outstanding with the IMF (around U.S.$10 billion) using freely available Central Bank reserves. Between 2004 and 2008, Argentina recorded primary budget surpluses in excess of 3% at national levels. 

The primary surplus fell to 1.5% in 2009, to 1.7% in 2010 and 0.3% in 2011, according to the Ministry of Economy. 

The annual consumer price index, according to the INDEC, increased by 7.2% in 2008, 7.7% in 2009, 10.9% in 2010 and 9.5% in 2011.Notwithstanding the above mentioned, reports published by the IMF state that their staff is also using alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown inflation ratesconsiderably higher than those issued by the INDEC since 2007. The IMF has called on Argentina to adopt remedial measures to address the quality of official data. 

During 2008, unlike previous years and despite the benefit of record commodity prices, the foreign currency supply did not show a surplus, reserves at the Central Bank stagnated and the nominal exchangerate showed a depreciation, triggered by capital outflows. Within this context, and with the combined effect of an international context affected by the financial crisis and reduced domestic growth, the government was unable to raise sufficientvoluntary funds to make its foreign debt payments and had to resort mostly to intra-public sector financing. Consequently, the country-risk exhibited a clear upward trend, which was exacerbated as from September 2008 and reached approximately 1,800basis points. By the end of 2008, Congress passed a bill that eliminated the private pension system and provided for a return to the public pension regime. This allowed the government to have additional funds available in the short term. 

In 2009, the Argentine economy was affected by a serious drought that negatively impacted harvests, together with lower commodity pricesand reduced external demand resulting from the global crisis. In this context, industrial production suffered a deeper impact than non-industrial activities. In addition, salaries increased less in real peso terms than in previous years. 

The Argentine trade balance surplus increased to over U.S.$16 billion in 2009, compared to U.S.$12 billion in 2008 and U.S.$11 billion in2007, as a result of imports contracting more rapidly than exports. Exports were mainly affected by fewer sales of commodities due to the drought. In spite of this significant trade surplus, the reserves at the Central Bank ended the year at levelssimilar to those recorded by the end of 2008. Private foreign currency demand was very high during the first part of the year, but then dropped progressively as a result of a more favorable domestic and overseas macro-economic trends. Thepeso-dollar exchange rate was consistent with this evolution, having a higher depreciation rate at the beginning of the year and a more stable behavior in the last months of the period. The exchange rate closed the year at Ps. 3.80 = U.S.$1.00 (a10% depreciation), with an average of Ps. 3.73 = U.S.$1.00 in the twelve-month period. 

The public sector had a primarysurplus in 2009, though lower than 2008, with increases in pension contributions resulting from the nationalization of the private pension system in November 2008 and the application of the capital expansion of the IMF, but decreases in otherincome, mainly taxes and export duties, because of the weaknesses in the economy and lower international commodity prices. By the end of 2009, the Argentine government announced a second exchange offer to holders of its pre-2001 bonds that had notbeen restructured in 2005, and its intentions to renegotiate its debt with the Paris Club, which remained in default. 

TheArgentine economy recovered in the second half of 2009, resulting in a GDP increase of 0.9% for the year ended December 31, 2009, according to the INDEC. 

Central Bank reserves increased by over U.S.$4.0 billion in 2010 to approximately U.S.$52.1 billion at the end of 2010, in spite of withdrawal of reserves to support payments to sovereign multilaterallenders and bondholders. For 2011, Congress has passed legislation allowing the government to access up to an additional U.S.$7.5 billion of the Central Bank’s international reserves for the same purpose. 

In May 2010, the Argentine government made a third exchange offer to holders of its pre-2001 bonds that did not participate in the 2005restructuring, amounting to U.S.$18.7 billion. The acceptance rate for the exchange was above 60% of the overall amount. 

After a decline in trade in 2009, caused mainly by lower commodity prices and the effects of a severe drought, both exports and importsincreased during 2010. Industrial goods exports (in particular, related to the automotive industry) as well as agricultural exports boosted exports, while imports increased more rapidly than exports, mainly as a result of increased economicactivity, which resulted in higher demand for fuel, consumer and intermediate goods, and capital assets, according to the Central Bank. As a result, the trade balance surplus decreased to U.S.$12 billion. 

The increased economic activity during 2010 boosted imports by more than 40%, resulting in a trade balance surplus reduction onlypartially offset by an increase of approximately 20% in exports as a consequence of the good harvest and strong prices. 

 
23 

Table of Contents
In 2011, the Argentine economy continued growing. The strong increase in public expenditureand credit facilities and a good harvest with high international prices impacted positively on internal demand. Financial intermediation, trade and investment in construction were some of the most dynamic sectors. This increase in activity levelsresulted in a strong increase of imports (approximately 30%) which was partially offset by a 25% increase in exports; thus, the trade balance recorded a U.S.$10.3 billion surplus for the year. In terms of trade balance, energy imports grew during2011, which resulted in a negative energy trade balance of U.S.$2.9 billion. 

Despite the trade surplus, foreign exchangesupply was reduced on account of a lower inflow of funds from loans and direct foreign investments and, primarily, due to increasing capital outflows as a consequence of the portfolio dollarization. The Argentine government continued using freeavailable reserves to pay foreign debt and the Central Bank’s reserves dropped by 5.8 billion, to approximately U.S.$46.3 billion. Within this context, the exchange rate averaged Ps. 4.13 per U.S.$1,00 and closed the year at Ps. 4.30 =U.S.$1,00, 8% higher compared to the previous year-end. Interest rates showed a significant increase, especially during the last quarter. Finally, the country risk reached an annual average of 676 basis points but with a strong growth as fromAugust, reaching 927 basis points (EMBI+) as of December 31, 2011. 

Presidential elections held on October 23, 2011resulted in the reelection of President Cristina Fernández de Kirchner, with 54% of votes cast. 

According to INDEC, 6.7% of the active population was unemployed in the 4th quarter of 2011, compared to 7.3% and 8.4% in 2010 and 2009,respectively. 

During 2011, Argentine crude oil production from all basins dropped by an average of 8%, while overallArgentine natural gas production declined 3%, with a dissimilar performance in the different basins. The Austral and Cuyana basins showed gas production improvements in contrast with the decreased recorded in San Jorge and Neuquén basins.Domestic supply of natural gas was supplemented by LNG (liquefied natural gas) imports at regasification centers in Bahía Blanca and Escobar, and natural gas imports from Bolivia. 

Demand for gasoline grew an average of 12% (accumulated to November 30 compared to same period of previous year) and diesel oildemand increased only 3% during 2011, with premium products grew at higher rates. 

Electricity demand, in turn, increasedapproximately 5.7% from January to November 2011 compared to the same period of 2010. 

On March 22, 2012, the ArgentineCongress enacted Law No. 26,739, which amended the charter of the Central Bank and the Convertibility Law. This new law amended the objectives of the Central Bank (established in its charter) and removed certain provisions previously in force.Pursuant to the terms of the new law, the Central Bank will focus on promoting monetary and financial stability as well as development with social equity. In addition, the so called “freely available reserves” were eliminated, granting theArgentine government access to additional reserves to pay debt. 

Also, the Argentine government has recently stepped up itspressure on importers to curtail access to the foreign exchange markets. In this regard, effective February 1, 2012, it has introduced new requirements for the import of goods in an effort to reduce imports and improve trade surplus.

 
24 

Table of Contents
**OIL AND GAS EXPLORATION AND PRODUCTION**

**Overview**

The core ofour operations is the Oil and Gas Exploration and Production business segment, as a key link in our business chain. This business segment’s strategy is to increase oil and gas reserves and maintain production levels through profitableoperations with a commitment to social and environmental responsibility. This strategy is focused on four main initiatives: 

 
 • 
Exploration for reserve replacement; 

 
 • 
Optimization of operations and existing infrastructure as leverage for new projects; 

 
 • 
Development and monetization of non-conventional gas reserves; 

 
 • 
Portfolio management through acquisition of reserves and negotiations. 

As of December 31, 2011, we participated in oil and gas exploration and production activities in Argentina and in other LatinAmerican countries, including Venezuela (through our equity interest in mixed-ownership companies), and Bolivia. In addition, we act as a contractor and provide technical and operating support in Mexico. 

As of December 31, 2011, our combined crude oil and natural gas proved reserves, including our share of the reserves of ourunconsolidated investees, were estimated at 223 million barrels of oil equivalent (“MMboe”), approximately 56% of which were proved developed reserves and approximately 44% of which were proved undeveloped reserves. Crude oilaccounted for approximately 41% of our combined proved reserves, while natural gas accounted for about 59%. As of December 31, 2011, 84% of our total combined proved reserves were located in Argentina and 16% were located abroad. 

During 2011, our combined oil and gas production in Argentina averaged 85,800 barrels of oil equivalent per day, including unconsolidatedinvestees. Our total oil and gas production for this period, including our share in the production of unconsolidated investees, averaged 98,800 barrels of oil equivalent per day. Crude oil accounted for approximately 48,600 barrels per day, whilenatural gas accounted for approximately 301.2 million cubic feet per day (“MMcf/d”). Approximately 82% of our oil production and 92% of our gas production during 2011 was derived from our operations in Argentina. 

Integration with our Refining and Distribution business segment enables us to process a large part of our crude oil production inArgentina. The Genelba thermal power plant (“Genelba”), allows us to use approximately 100 million cubic feet of natural gas per day and Genelba Plus (as defined below), placed contiguous to Genelba, uses 37 million cubic feet ofnatural gas per day, 50% of the natural gas, come from our own production. In addition, in Argentina our Oil and Gas Exploration and Production business segment supplies gas to our Petrochemical and Refining operations. 

***Our Oil and Gas Exploration and Production Interests***

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

Asof December 31, 2011, we had interests in thirty nine blocks: twenty-three oil and gas production blocks (eighteen in Argentina and five outside Argentina) and sixteen exploration blocks located within exploration areas or pending authorizationfor production (all of them located in Argentina). We were directly or indirectly the contractual operator of twenty-two of the thirty nine blocks in which we had an interest. 

On April 4, 2012, the Company received notice of the decision of the government of the Province of Neuquén to terminate the concession for the Veta Escondida area. The Company considers thatit has at all times complied with all licensee requirements and that, in its opinion, the exploration and production agreement is still in force, within the framework of its concession and renegotiation rights, pursuant to the agreements signed withthe Province of Neuquén under a memorandum of agreement dated December 10, 2008, ratified by the provincial government, which is scheduled to terminate in 2027. Within this context, the Company will enforce its rights regarding thisreversal by the Province of Neuquén. See “Item 3–Risk Factors–Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may not be renewed or could be revoked.” 

 
25 

Table of Contents
As of December 31, 2011, our total gross and net productive wells were as follows:

 
   **Oil**   **Gas**   **Total** 
Gross productive wells (1)
   3,260     360     3,620  
Net productive wells (2)
   1,675     250     1,925  
 
(1)Refers to number of wells completed. (2)Refers to fractional ownership working interest in gross wells. 
As of December 31, 2011, our total production and exploration acreage, both gross and net, was as follows: 

 
   **Average**    **Production (1)**   **Exploration (2)**    **Gross**   **Net (3)**   **Gross**  **Net (3)**    ****(in thousands of acres)**** 
Argentina
   4,124     2,600     16,328(4)   5,413(5) 
Venezuela
   485     125     —      —    
Bolivia
   56     56     —      —      
 

 
   
 

 
   
 

 
  
 

 
 
Total
   4,665     2,781     16,328    5,413    
 

 
   
 

 
   
 

 
  
 

 
 
 
(1)Includes all areas in which we produce commercial quantities of oil and gas or areas in the development stage. (2)Includes all areas in which we are allowed to perform exploration activities but where commercial quantities of oil and gas are not produced or areas that are not inthe development stage. (3)Represents our fractional ownership working interest in the gross acreage. (4)Includes 14.3 million exploration acres in offshore areas. (5)Includes 4.1 million exploration acres in offshore areas. 
The following table sets forth the number of total wells we drilled in Argentina and outside Argentina and the results for the relevant periods. A development well, for purposes of the following table, isone that justifies the installation of permanent equipment for the production of oil or gas. A well is deemed to be a dry well if it is determined to be incapable of commercial production. “Gross wells drilled” in the table below refers tothe number of wells completed during each fiscal year, regardless of the spud date, and “net wells drilled” relates to our fractional ownership working interest in wells drilled. This table includes wells drilled by our consolidatedsubsidiaries, companies under joint control and unconsolidated investees. 

 
   **Year ended December 31,**    **2011**   **2010**   **2009**    **Argentina**   **Venezuela**   **Rest of**