PZE Petrobras Argentina S.A. Ads (delisted)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

The Securities Exchange Act of 1934

April 5, 2016

PETROBRAS ARGENTINA S.A.

(Exact Name of Registrant as Specified in its Charter)

Maipú 1, 22 S.S. Floor

(C1084ABA)  Buenos Aires

Argentina

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file

 annual reports under cover of Form 20-F or Form 40-F.

Form 20-F    X    Form 40-F ____

Indicate by check mark if the registrant is submitting the Form 6-K

in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes ____ No    X   

Indicate by check mark if the registrant is submitting the Form 6-K

in paper as permitted by Regulation S-T Rule 101(b)(7)

Yes ____ No    X

ANNUAL REPORT AND

CONSOLIDATED FINANCIAL STATEMENTS

as of December 31, 2015

PETROBRAS ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS

as of December 31, 2015

Annual Report

1.

Letter to the Shareholders

2.

Macroeconomic Overview

3.

2015 Business Performance

4.

A Company behind Business

5.

Corporate Governance

6.

Dividends

7.

Analysis of the Consolidated Results of Operations

8.

Summarized Balance Sheet and Income Statement Structure

10.

Listed Price of Company’s Shares

11.

Board of Directors’ Proposal

Annex I: Corporate Governance Code Report

Consolidated Statements

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Financial Position

Statements of Changes in Equity

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

Independent Accountants’ Report

ANNUAL REPORT

as of December 31, 2015

PETROBRAS ARGENTINA S.A.

Annual Report

1. Letter to the Shareholders

2. Macroeconomic Overview

3. 2015 Business Performance

3.1. Oil and Gas Exploration and Production

3.2. Refining and Distribution

3.3. Petrochemicals

3.4. Gas and Energy

4. A Company behind Business

4.1. Organization and Management

4.2. Safety, Environment and Occupational Health

4.3. Our People

4.4. Corporate Social Responsibility

4.5. Communications

5. Corporate Governance

6. Dividends

7. Analysis of the Consolidated Results of Operations

8. Summarized Balance Sheet and Income Statement Structure

9. Statistical Data

10. Listed Price of Company’s Shares

11. Board of Directors’ Proposal

Appendix I: Corporate Governance Code

1. Letter to the Shareholders

To our Shareholders:

We submit to your consideration Petrobras Argentina’s Annual Report and Financial Statements which reflect the Company’s performance and results of operations during fiscal year No. 70 ended December 31, 2015.

Our business performance

We are a leading company that manages its businesses with social and environmental responsibility. Our investment programs are implemented with a focus on management efficiency, resource optimization and financial order, which enables us to continuously improve the quality of management.

During fiscal year 2015, we developed our businesses within a complex macroeconomic context, both at the international and domestic level, representing a significant challenge to maintain our sustainable growth strategy.

Consistent with the commitment to optimize costs and improve our processes, we encouraged greater efficiency in the management of the Company’s assets, creating interdisciplinary teams to attain operating and management synergies. Along these lines, we identified, assessed and implemented optimization opportunities, including, among others, matters relating to energy efficiency and transportation, operation and maintenance costs.

In financial terms, during 2015, the Company did not have significant debt maturities, and orderly actions taken by the Company allowed operations to provide the funds required to carry out our investment program. We are a sound company, without significant indebtedness, which fact allowed us to move smoothly within a volatile global context.

Our investments

Our investment plan is geared towards the Company’s sustainability with a focus on the development of exploration and production of oil and gas, mainly non-conventional, and on the support of the Refining and Distribution, Petrochemicals and Gas and Energy business activities.

In 2015 we made investments in the amount of approximately 5,474 million, a figure that reflects the size of our investments and the Company’s high degree of commitment to the country’s interests and future.

In this respect, we applied more than 90% of our investments to oil and gas exploration and production activities, with a priority focus on exploration and development activities in Argentina, basically in the Neuquén basin.

In 2015, 42 producing and injection wells were drilled and 23 wells were repaired. The Company’s drilling and repair activities were mainly focused on Medanito, El Mangrullo, Sierra Chata, Jagüel de los Machos and Río Neuquén areas.

The application of new technologies together with our staff’s know-how, expertise and dedication allowed us to maintain the 2 million cubic meter record production in El Mangrullo area and increase production in Río Neuquén area which, as a result of the drilling of ten wells, increased its average gas production to over 2.1 million cubic meters per day in the last quarter.   

Considering exploration as the main vehicle for reserve replacement, we allocated part of our investments to the drilling of 4 onshore exploration wells, two Shale Gas wells in Parva Negra Este area, another in El Mangrullo area and the last one in Medanito. The primary objective of the wells in Parva Negra Este is to acquire data and assess the productivity potential of Vaca Muerta formation as part of the non-conventional reserve exploration program started in 2013. Drilling of the well in El Mangrullo area is part of delimitation works in connection with the discovery made in 2013 in Agrio formation, along with the completion and subsequent testing of two wells, one drilled in 2014 and the other one in 2015.

We made investments in the amount of 191 million in the Refining and Distribution business segment, both in Bahía Blanca Refinery and Dock Sud and Caleta Paula Plants, mainly for works related to safety, the environment, legal compliance, logistics, storage, optimization and revamping of operations.  

As regards the Petrochemicals business segment, the Company made investments in the amount of 119 million mainly allocated to scheduled shutdowns for maintenance works in Puerto General San Martín Plant and the rubber unit, which also enabled improvements related to plant operating efficiency and flexibilization.

Concerning the Gas and Energy business segment, we invested 65 million basically in successful major maintenance works at Genelba Power Plant. The investments made in this segment allow the Company to maintain high operating reliability and availability factors in all its power generation plants.

Investments over recent years led to achievements at the operational level, mainly improvements in energy and operational efficiency that supported product recycling, production increase, fuel consumption savings and emission reduction.

We perform evaluations of our business and asset portfolio on a permanent basis and consider that changes to such businesses and assets are part of the regular business dynamics. In such respect, in March 2015 we sold all our interest in the Austral basin in Argentina to Compañía General de Combustibles S.A. in an amount of USD 101 million, with sales proceeds fully applied to the development of our investment plan.

Commitment to our people and the community

We develop our businesses and activities through an integrated, ethical and transparent management, maintaining a relationship with stakeholders, developing, among other things, activities for the promotion of human rights and citizenship and the respect for human and cultural diversity, and contributing to sustainable development and reduction of social inequality.

The Company continues developing health promotion and protection programs with a focus on prevention and the generation of a healthy workplace. In this respect, we continued the Heart Safe program, maintained the certification as smoke-free company and implemented campaigns for voluntary donation of blood.

We consolidated our link to the community by contributing to its development through investment programs aimed at improving life quality of the communities in which we live and work. In this respect, we moved on to the stage of financing and providing technical assistance to the projects selected in the fifth edition of Petrobras Social and Environmental Project, supporting larger scale projects and projects with greater social impact and enhancing the social benefits from such initiatives. In addition, we continued developing local social responsibility management, through responsibility committees and the implementation of the Local Agenda Program.

Concerning quality, safety, the environment and health, our policy focuses on caring for the environment, a fundamental value to secure sustainability of our operations within a context of optimization in the use of natural resources and energy. The Company applies policies and guidelines on these topics which are an integral part of its management model, through the implementation of programs, training efforts and assessments that enable it to be a safe and eco-efficient company that optimizes its resources and works for the staff’s quality of life and community welfare.

The Company continues working and taking actions to reduce the risks of accidental spills, mainly with pipeline and tank integrity programs. Along these lines, we moved forward with the implementation of the Zero Spill program, which is now part of the Continuous Improvement Program.

As regards sponsorships, they were focused on technical meetings related to the activities conducted by the Company and local events in the cities in which it has a presence. Besides, we maintain our commitment to support culture, technology, innovation, music and sports.  

We are industry leaders in the regular and systematic rendering of accounts concerning the management of social responsibility and sustainability. We have presented our Social and Environmental Report since 2010, following Petrobras’ guidance and different international guidelines for preparation of sustainability reports.

Certifications and Recognitions  

The Company successfully completed the Certifications Program according to ISO 9001, ISO 14001, OHSAS 18001, ISO 50001 standards and met the quality requirements of the Institute of Internal Auditors and the requirements for Heart Safe Company and Healthy Workplace Certifications. The Annual Certifications Program includes in-house and external audits on maintenance and recertification of the management system, as well as the implementation of new certificates.

During this year, Petrobras Argentina received significant recognitions, with the following being worth a mention:  2015 IAPG Annual Safety Award in the Production Companies category granted by the IAPG (Argentine Oil and Gas Association) for Safety Management in E&P operations, and for the sixth year in a row we are among the 10 leading companies in the Sustainability-oriented Corporate Management category of the award granted by the American Chamber (AMCHAM).

Outlook 2016

Our main goal for 2016 is to consolidate Petrobras Argentina as a robust, flexible, efficient and profitable company to overcome the challenges posed by the context and identify new business opportunities. Along these lines, the Company plans to enhance development of its potential resources in order to achieve a balanced replacement of production from mature reservoirs and grow sustainably with consistency and efficiency.

Concerning the Oil and Gas Exploration and Production business, the Company plans to develop its non-conventional resources, strengthening the development of tight gas and taking advantage of the greater expertise acquired in the field and a more favorable outlook for gas prices. At the same time, the Company plans to continue with shale exploration campaigns so as to lay foundations for future developments of these non-conventional resources.

As regards Refining and Distribution activities, in 2016 the Company expects to respond with cost and management efficiency to the challenge posed by the fall in international prices of oil related products and the domestic margin on fuels.

As regards the Petrochemicals business segment, in 2016 we will continue with a focus on securing availability of basic raw material at prices in line with those for our products and ensuring plant operations at a cost level required to reach a standard of competitiveness.

In the Gas and Energy business segment, we plan to continue with the high operating performance for which our assets stand out in the power generation sector.

Challenges

We focus and develop our core businesses in Argentina within a context based on safety, social responsibility, respect for the environment, quality, competitiveness and profitability for our shareholders.

We develop our asset portfolio with a long term, sustainability and profitability vision, optimizing our efforts on production activities identified as a priority and whose operating availability enables us to leverage synergies and growth opportunities.

The investments made, the negotiations related to the extension of our oil and gas exploitation concessions and our future investment plans show our commitment to the development of the country and Petrobras’ strategic interest in developing its operations in Argentina. We are in a position to play an important role in the reshaping and expansion process of the energy sector in Argentina.

A word of thanks

Finally, we thank our employees, shareholders, clients and suppliers for their commitment and support which enable us to achieve goals, improve our performance and continue contributing to the development of the country.

Marcos Benício Pompa Antunes

Representative Director

2. Macroeconomic Overview – FY 2015

International Context

Last year’s trends strengthened in 2015. The slowdown of Chinese economy, the dollar appreciation, the delay of European economies in responding to the stimulus actions of the European Central Bank and the sharp decline in activity in emerging countries following the steeper drop in commodity prices, make us aware that we are into a new cycle of global economy rather than undergoing a simple correction within the same cycle.

The characteristics of this new cycle derive from the exhaustion of the Asian export-oriented model led over the past twenty years by China and previously started and exhausted, like in a relay race, by South Korea and Japan. In the best-case scenario, for China’s shift from an export-led model to a consumption-led model China will necessarily pay the slowdown cost.

The GDP growth rate in the United States for 2015 was 2.4%, apparently maintaining the same pace as in the previous year but showing a quarter to quarter slowdown. On the other hand, after its first negative quarter of 1.1%, in the second quarter of this year Japan was able to break the bad streak of four consecutive negative quarters and aim at ending the year with a positive growth rate ranging from 0.5% to 0.7%. The positive evolution of prices is the best indication that Japan seems to be getting out of the deflationary trap. As to the Eurozone, the growth rate was 1.1% with signs that prices and activity are starting to respond as expected to the expansionary monetary policies.

In emerging countries, the drop in commodity prices that started in the second quarter of 2011 was followed by a sharp fall in crude oil price since the last quarter of 2014. Thus, this year, the misfortune of mineral and metal exporting countries also hit oil exporting countries. The currencies of these countries accelerated its pace of depreciation against the dollar and uncertainties as to their debt repayment capacity did not take much time to arise. The series of currency depreciations was followed by a rise in the country risk premium and a fall in direct foreign investments.

Oil

The sharp fall in oil prices that started in early July 2014 and in an abrupt and continuous manner caused Brent prices to fall from USD 115 per barrel to USD 53 per barrel by the end of the last quarter of 2015 continued in the first quarter of the year. The price recovery since that moment could not be sustained not even in that attempt recover the barrier of USD 70 per barrel. Finally a new downward slide started in mid May and pulled down prices to USD 35 per barrel at year end.

The abrupt fall is comparable to the one that followed the subprime crisis which, in the second half of 2008 pulled down Brent crude price from USD 140 per barrel in July 2008 to USD 38 per barrel in December of the same year. However, the root cause of these falls is different. While the 2008 fall relates to the plunge in demand in central countries, the current collapse in prices is due to an excess of supply.

In 2015, global production of oil and related liquid fuels increased at an annual rate of 2.4% to 95.7 million barrels per day, according to the EIA (U.S. Energy Information Administration) report. The increased extraction activity was not accompanied by the demand which grew at an annual rate of 1.5% compared to the previous year, leading to a consumption level of 93.8 million barrels per day. This contrast between production and consumption reflects the problem of mismatch between supply and demand.

A major part of supply was provided by non-OPEC countries. These countries contributed 1.32 million barrels per day, while OPEC countries contributed 1.06 million barrels per day. However, in percentage terms, the production of OPEC countries accounted for a 2.8% variation while non-OPEC production variation was 2.4% compared to the previous year.

In 2015, the supply did not seem to respond to the clear signs of low prices. In the case of the supply provided by non-OPEC countries, particularly the United States of America, the issue is the speed of adjustment, while rigs go down at a good pace, production does it at a slower pace. The fracking revolution has generated a basic production that still enables to maintain a high production level with a decline to be seen initially well into 2016 and in full in 2017. As regards OPEC countries, the increase in production is due to their unwillingness to lose its market share in the short and medium term. Their fiscal and debt needs and the dependence of their economies on the pace of oil and gas activities do not allow them a sufficient margin to lead the decline in production either.

Argentina

In 2015, the Argentine economy grew by 1.0% and, at the expense of losing reserves, it could maintain a stable rate of exchange and prevent acceleration in the inflation rate. The year 2015 was characterized by the increase of fiscal, monetary and external current account imbalances.

The fiscal deficit before interest payments and without considering profit remittances by the Argentine Central Bank (BCRA) and the Argentine Social Security Administration (ANSES) accounted for 5.8% and 8.0% of the GDP after interest payments, as reported by the Minister of Finance of the new government. In this context of extremely high fiscal deficit in 2015, the expansion of the monetary base measured by calendar year was 34.9%.

On the other hand, the trade balance closed whit a deficit of USD 3.0 billion according to INDEC, after 15 years of positive trade balance, mainly due to decline in exports of 17% in 2014. The current account balance of the first half of the year reflected a deficit of USD 5.8 billion, while the deficit in the same period of the previous year was USD 3.4 billion. As a result of the current account gap and the payments of principal and interest, international reserves of the BCRA as of December 31, 2015 excluding the 2009 special drawing rights, totaled USD 25.6 billion, USD 5.9 billion lower compared to 2014 year-end.

The wholesale official exchange rate BCRA Res. A3500 averaged 9.26 ARS/USD over the year, as it was sustained by the monetary authority in spite of the fact that the exchange rate implied by the price of Dollar-denominated sovereign bonds had a gap with respect to the official exchange rate that averaged 40% and peaked 56% over the year. The BCRA new authorities appointed by the new government that took over on December 10, 2015, decided to lift controls on the purchase and sale of foreign currency, starting on December 17, and this resulted, in practice, in the convergence of the official exchange rate and the free exchange rate, thus the closing exchange rate for the year was 13.04 ARS/USD.  

The country risk premium fell significantly in 2015 in spite of the greater fiscal, monetary and foreign trade imbalances. With the expectation that a change of government would lead to macroeconomic adjustments and mainly resolve the situation with holdouts, the country risk premium measured by J.P. Morgan EMBI + index declined from 747 (bps) basis points in December 2014 to an average of 478 bps in December 2015.

Crude oil production dropped by 1.4% in 2015 compared to the previous year, while gas production increased 1.5%. On the other hand, Bolivian gas and LNG imports totaled 11.5 million cubic meters, 3.89% less than in the previous year. Likewise, crude imports declined by 12.2% compared to the same period of 2014.

As regards fuel demand, diesel oil demand increased by 2.0% while overall gasoline demand rose by 5.1% compared to the previous year. The growth trend in demand for premium fuels intensified in 2015 compared to other fuels. For example, the demand for higher octane gasoline grew 24.8% while the demand for 85 octane gasoline declined 1.0%.

As regards the electricity market, the year’s consumption grew 4.4% compared to the previous year, from 126,405 GWh in 2014 to 131,998 GWh in 2015.

3. 2015 Business Performance

3.1. Oil and Gas Exploration and Production

The Oil and Gas Exploration and Production segment is Petrobras Argentina’s core business: excellence in this sector is the first step to ensure quality in all the oil related products that reach the Company’s clients.

Petrobras Argentina is one of the largest hydrocarbon exploration and production companies in Argentina: it currently has a presence in the country’s major oil basins from which it obtains oil, natural gas and LPG, and holds equity interest in PELSA and Oleoductos del Valle. In addition, the Company maintains an investment portfolio in other Latin American countries, including assets in Bolivia and a minority equity interest in assets in Venezuela, through Mixed Companies, and in Ecuador, through Oleoducto de Crudos Pesados.

In 2015, the Company  

- made exploration and development investments in Argentina in an amount of ARS 4,585 million.

- set a new daily gas production record in the Neuquén basin in December which exceeded maximum gas production in the last 10 years, with an injection to the national transportation system of 6.5 million cubic meters per day.

- intensified development of tight gas reserves in the Neuquén basin. In this respect, ten development wells were drilled in the Río Neuquén area with very good results and development of tight gas reserves was extended in El Mangrullo and Sierra Chata areas. Delimitation activities continued in connection with the discovery of Agrio formation made in 2013 in El Mangrullo area, through drilling and completion of well M a-1048 and completion and extended test of well M a–1049, drilled in 2014.

- made progress in studies on shale oil and shale gas in the Neuquén basin , with the aim of developing non-conventional reserves. In this respect, the exploration program continued in Parva Negra Este area with the start of drilling of wells PNE x-1004 and PNE x-1001 to test gas production in Vaca Muerta formation, and activities continued in connection with early production from Rincón de Aranda x-1 and Sierra Chata x-97 oil wells.

- assigned 50% of interest in exploration permits for Chirete and Parva Negra Este to High Luck Group Limited and ExxonMobil Exploration Argentina S.A., respectively.

 

3.1.1. Production and investments

In 2015, Petrobras Argentina’s oil and gas production, including its related companies’ production, totaled 74,303 barrels of oil equivalent per day, accounting for a 15% decline compared to 2014 which is mainly attributable to the sale of interest in Santa Cruz I, Santa Cruz I Oeste and Santa Cruz II areas in the Austral basin as from March, the handing over of Jagüel de los Machos area in the Province of La Pampa as from September and, to a lesser extent, the natural decline of production from mature fields in Argentina, offset by the increase in production from Río Neuquén and El Mangrullo areas.

Argentina

Production in Argentina averaged 68,164 barrels of oil equivalent per day. This figure, which includes related companies’ production, was 14% lower compared to 2014. This decrease mainly results from the sale of interest in Santa Cruz I, Santa Cruz I Oeste and Santa Cruz II areas in March 2015 and the natural decline of production from mature fields.

With a strong presence in the Neuquén basin, during 2015 Petrobras Argentina’s investment plan involved drilling of 42 producing and injection wells and repair of 23 wells. Specifically in the Neuquén basin, the Company focused oil drilling activities on Medanito and Jagüel de los Machos areas and natural gas drilling activities on Río Neuquén, El Mangrullo and Sierra Chata areas. Workover activities in oil wells were performed in Medanito and Jagüel de los Machos areas.

In El Mangrullo area a record production of 2 million cubic meters of gas per day was achieved in 2013 and this plateau was maintained all over 2014 and 2015. Production peaked at 2.1 million cubic meters of gas per day in 2015, accounting for a 3% increase compared to daily average production in 2014. The gas produced is sold under the “Gas Plus” production incentive program.

The Company intensified its activities in the Río Neuquén area. Ten wells were drilled, accounting for a 71% increase in daily average production of gas and exceeding 2.1 million cubic meters per day in the last quarter. This increase is attributable to the implementation of new technologies, expertise, know-how, effort and dedication of the Company’s technical and operational teams in connection with the drilling and completion of wells with target in Punta Rosada formation. The gas produced in Río Neuquén is tight gas which is sold under the “Gas Plus” program.

Veta Escondida Area Exploitation Concession

On December 19, 2013, Petrobras Argentina, acting as operator, and Total Austral with a 55% and 45% interest in Veta Escondida exploitation concession, respectively, negotiated an out-of-court agreement with the Province of Neuquén and GyP in order to find a solution to the dispute derived from issuance of Provincial Decree No. 563/12. The Decree provided for the expiration of the rights of concessionaire companies over this exploitation concession. As a result, Petrobras Argentina brought legal action against the Province of Neuquén.

On March 17, 2015, under Decree No. 565/2015 the Province of Neuquén approved a standard agreement including terms and conditions similar to those provided in the agreement reached in December 2013. At the date of these financial statements, the parties are negotiating a solution to the conflict taking into account the model agreement approved and the current situation of the industry and market.

Agreement for the sale of Assets in the Austral basin

On March 30, 2015, the Company’s Board of Directors approved the sale to Compañía General de Combustibles S.A. (CGC) of its entire interest in the Austral basin in Argentina, including interest in the concessions operated under the Joint Ventures ( UTE ) of Santa Cruz I, Santa Cruz I Oeste, Glencross and Estancia Chiripá, in assets related to Santa Cruz II, in Punta Loyola Terminal and in the oil and gas pipelines operated in the basin.

Jagüel de los Machos Concession in the Province of La Pampa

As regards Jagüel de los Machos area located in the Province of La Pampa, a legal dispute arose with such Province since it disregarded extension rights over the area acquired by the Company under the provisions of Law No. 17,319 as amended by Law No. 27,007 and Provincial Decree No. 18/2015 dated January 28, 2015. Consequently, although the Company filed the relevant administrative appeals for the defense of acquired rights, on September 7, 2015 the Province of La Pampa took possession of the area and since that date the Company has ceased its activities in that area.

Venezuela – Equity Interest in Mixed Companies

In Venezuela, oil and gas production attributable to the Company’s interest in Mixed Companies averaged 3,502 barrels of oil equivalent per day, accounting for a 29% decrease compared to 2014 in fields operated by Petroritupano S.A., Petrowayú S.A., Petroven-Bras S.A. and Petrokariña S.A.

Bolivia

In Bolivia, production totaled approximately 2,637 barrels of oil equivalent per day, 11% lower compared to 2014, of which 12.2 million cubic feet per day are attributable to gas production (2,031 barrels of oil equivalent per day) and 606 barrels of oil per day are attributable to liquid hydrocarbon production, including LPG. This drop is attributable to the natural decline of mature fields with high production rates, offset by the addition of production from wells as a result of investments made during the year.

3.1.2. Exploration

Since for Petrobras Argentina exploration is the main vehicle for reserve replacement, investments in exploration activities during 2015 were mainly directed to drilling of new non-conventional exploratory plays, deep reservoirs and non traditional shallow wells, in the areas in which Petrobras Argentina operates.

During 2015, Petrobras Argentina drilled two wells completed onshore in the Neuquén basin: Mangrullo a-1048 in El Mangrullo area and TA a-1149d in Jagüel de los Machos area. In Parva Negra Este area well PNE x-1004 was drilled, with drilling activities temporarily suspended for operational reasons. Completion of the last stage is scheduled for 2016. Drilling of well PNE x-1001 is currently conducted and is scheduled to be completed by the first quarter of 2016.

The main purpose of Parva Negra Este wells is to obtain data and assess productivity of Vaca Muerta formation at a depth of 2,300 meters. These wells are a key component of the non-conventional resource exploration program started in 2013.

Drilling of the well in El Mangrullo area is part of delimitation activities in connection with the discovery made in 2013 in Agrio formation with the drilling of well Mangrullo x-1015. In this respect, activities concerning completion and subsequent testing of two wells – one drilled in 2014 and the other in 2015 - were performed.

The purpose of well TA a-1149d was delimitation to the south of Tapera Este field in Jagüel de los Machos area. Such well is a productive well and is currently producing.

In 2015, well AtO.x-1 in Río Atuel area and well JCPS.x-1001 in Gobernador Ayala, Province of Mendoza, and well PB.xp-226 in Entre Lomas, Province of Río Negro were drilled in non-operated areas in the Neuquén basin. Wells AtO.x-1 and JCPS.x-1001 were discovery wells and well PB.xp-226 is currently under evaluation, with good forecast for a gas productive well. In addition, in the Noroeste basin, drilling activities in well Los Blancos.x-1002 in Chirete area were completed early in January 2016. Completion activities will be performed during the year with good forecast for an oil discovery well.

It should be mentioned that during 2014 early production started from the non-conventional oil discovery in Rincón de Aranda area made in 2013 in the Province of Neuquén through drilling of Rincón de Aranda x-1 exploration well, with drilling activities continuing during 2015. Moreover, activities continued in connection with extended test and production of well SCh.x-97 drilled in 2013 and completed in 2014, which was a non-conventional gas discovery well in Vaca Muerta formation.

3.1.3. Liquid Hydrocarbon and Natural Gas Reserves

Reserve estimation process

Petrobras Argentina estimates its reserves at least once a year.

Proved reserves are estimated by the Company’s reservoir engineers. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be precisely measured and that depends on the quality of the available data and on engineering and geological interpretation and judgment. Accordingly, reserve estimates, as well as future production profiles, are often different from the quantities of oil and gas that are ultimately recovered. Validity of estimates largely depends on the underlying assumptions.

Petrobras Argentina believes that estimates of oil and gas recoverable reserves volumes are reasonable as a whole. Such reserve estimates were prepared according to the rules for the Modernization of Oil and Gas Reporting issued by the SEC late in 2008.

DeGolyer and MacNaughton, international technical consultants, carried out an independent assessment of our reserves and provided verification of approximately 81% of the Company’s total estimated reserves and 100% of estimated reserves in areas operated by Petrobras Argentina. DeGolyer and MacNaughton concluded that oil and natural gas audited reserve volumes are reasonable.

Evolution of Reserves in 2015

Production for the year totaled 27.12 million barrels of oil equivalent, of which 0.96 million barrels are attributable to the Colpa Caranda field in Bolivia.

During 2015, reserves in Argentina increased 2.5 million barrels of oil equivalent. This increase is mainly attributable to recategorization of probable and possible reserves to proved reserves, as a result of the activities performed in the projects mainly related to Río Neuquén and El Mangrullo gas areas and, to a lesser extent, Sierra Chata and 25 de Mayo – Medanito areas, operated by PESA. As regards non-operated areas, contribution by Entre Lomas and Bajada del Palo areas, operated by PELSA is worth a mention.

These increases total 22.0 million barrels of oil equivalent, offset by the sale of interest in Santa Cruz I, Santa Cruz I Oeste and Santa Cruz II areas in the Austral basin in an amount of 19.5 million barrels of oil equivalent.

In addition, outside of Argentina a 3.9 million boe downward revision was attributable to a lower than expected performance in fields operated by Mixed Companies in Venezuela.

As of December 31, 2015, Petrobras Argentina´s liquid hydrocarbon and natural gas proved reserves totaled 183.1 million barrels of oil equivalent: 66.8 million barrels of oil and 697.4 billion cubic feet of gas.

As of December 31, 2015, total oil proved reserves (including crude oil, condensate and NGL) and total natural gas proved reserves of Petrobras Argentina were equal to 7 years of production, measured according to 2015 oil and gas production levels.

The table below presents estimated proved reserves of oil and natural gas by region as of December 31, 2015. Liquid hydrocarbon and natural gas accounted for 37% and 63%, respectively, of total proved reserves. In addition, 90.5% of total proved reserves are located in Argentina.

Estimated reserves in Argentina are shown before deduction of royalty payments since royalties have characteristics similar to taxes on production and, therefore, are treated as operating costs.

In Venezuela, estimated reserves were calculated based on the current contractual structure, before royalties, and by multiplying our interest in each mixed company by proved reserve volumes of each mixed company.

As regards reserves in Bolivia, as from 2009, the power to book and record reserves was exclusively vested in the Bolivian State rather than third parties. As a result, as from such year, reserves were reduced by the barrels of oil equivalent attributable to reserves in Bolivia, without this implying a change in the economic value of Petrobras Argentina’s assets.

3.1.4. Hydrocarbon Transportation

Oleoductos del Valle S.A. – Oldelval

As of December 31, 2015, Petrobras Argentina holds a 23.10% direct interest in Oleoductos del Valle S.A.

Oldelval operates trunk oil pipelines providing access to Allen, in the Comahue area, and Allen - Puerto Rosales oil pipeline, which allow to transport the oil produced in the Neuquén basin to Puerto Rosales (a port in the City of Bahía Blanca) and supply distilleries located in the pipeline’s area of influence.

During the year under review, oil transportation from Allen to Puerto Rosales averaged 20,230 cubic meters per day while oil transportation to the refineries located in the Province of Neuquén totaled an average of 2,242 cubic meters per day. Total transportation volume was 22,472 cubic meters per day, with 51.6 million barrels transported in 2015, accounting for a 2.87% reduction compared to 2014.

During 2015, Oldelval managed to maintain uninterrupted transportation services and secured continuation of operations and pumping system reliability. Planned objectives were achieved and as regards safety, activities involving analysis of sensitive areas along the pipeline continued.

Oleoducto de Crudos Pesados (OCP)

As of December 31, 2015, Petrobras Argentina holds an 11.42% interest in OCP, an oil pipeline in Ecuador with a transportation capacity of 450,000 barrels per day.

As of December 31, 2015, OCP has a negative shareholders’ equity. However, and since Petrobras Argentina has not committed to make capital contributions or provide financial assistance to OCP, such equity interest was valued at zero.

3.2. Refining and Distribution

Through the Refining and Distribution business, Petrobras Argentina vertically integrates its operations. The Company thus makes up a balanced value chain which starts with hydrocarbon exploration and production and ends with the supply of products that stand out for their quality in every gas station.

In 2015, the Company:

- maintained high use of installed capacity at its refinery in terms of crude oil processing -  94.1% - , and high operational reliability.

- made investments in this business segment in an amount of ARS 229 million.

3.2.1. Refining Division

Bahía Blanca Refinery and Dispatch Plants

Dr. Ricardo Eliçabe Refinery has an installed capacity of 30,500 oil barrels per day and is located in Bahía Blanca, Province of Buenos Aires, a strategic point to receive crude oil from the Neuquén basin and a superb location for the supply by sea of the oil coming from the South of the country or from the international market, as it has been since late in 2014.

In 2015, Bahía Blanca Refinery processed 28,704 oil barrels per day, accounting for a 94.1% of its installed capacity, with this volume being 6% higher than the volume processed in the previous year. During 2015, in addition to the typical processing of domestic crude oils, several imported crude oils of different qualities were successfully processed.

During 2015, investments at the Refinery were mainly directed to safety and the environment, legal compliance and optimization and revamping of different refinery areas. Investments included acquisition of a Vacuum Recovery Unit (VRU) as part of the revamping plan for the truck loading yard, clean up of waste water treatment tanks, scheduled shutdowns of processing units and retrofitting works at barge loading areas at Puerto Galván.

At Dock Sud and Caleta Paula Terminals, tank revamping works continued to meet applicable Safety and Environmental requirements. During 2015, implementation of the value enhancement project related to the tank yard formerly used for reception and dispatch of crude oil started at Dock Sur Terminal, aimed at increasing storage capacity for light fuels.

Refining Investment Plan

In 2016, the refinery will continue making the necessary investments relating to legal compliance, maintenance and reliability of plant operations including continuous revamping of the tank yard to meet applicable regulations, facility maintenance projects with a view to maintaining reliability and optimizing unit operations, continuing works for retrofitting of loading points at Puerto Galván and scheduled shutdowns of the visbreakin g and hydroprocess units. In addition, the Company moved forward with the Extended Basic Engineering phase of the project involving a new diesel oil hydrotreatment unit and expansion of crude oil processing capacity.

At Dock Sud, investments will be mainly directed towards retrofitting of the pump room, reservoir and ducts of the fire system, and the Company will continue tank revamping works to meet applicable requirements and value enhancement works related to the tank yard aimed at increasing storage capacity for light fuels.

At Caleta Paula, in turn, the necessary investments relating to maintenance and legal compliance will be made to upgrade operations, with works involving revamping of tanks, piping and reverse osmosis plant.

3.2.2. Distribution Division

The Argentine liquid fuel market

In 2015, the domestic liquid fuel market —gasoline and diesel oil— increased to 21.7 million cubic meters or 3.3% as compared to 2014.

The gasoline market grew 5.6%, with sales volumes amounting to 8.5 million cubic meters.

The diesel oil market also rose by 1.9% to 13.2 million cubic meters.

Both as regards gasoline and diesel oil, market growth was focused on premium fuels, that is grade 3 gasoline and diesel oil.

Moreover, the compressed natural gas (CNG) market grew by 4.6% compared to 2014, with sales volumes amounting to 2.9 million cubic meters.

Petrobras Argentina fuels

Sales volumes of Petrobras Argentina’s liquid fuels to the domestic market totaled 1.3 million cubic meters in 2015. As a result, Petrobras Argentina is ranked fourth in the Argentine market.

Out of this total, 0.84 million cubic meters are attributable to diesel oil and 0.45 million cubic meters to gasoline, accounting for a market share of 6.4% and 5.2%, respectively. In addition, annual sales of premium gasoline totaled 92.1 thousand cubic meters, with a 3.9% market share. Annual sales of premium diesel oil, in turn, grew by 65.5% compared to 2014 to 78.0 thousand cubic meters, with a 3.7% market share.

Lubricants

Petrobras Argentina has a lube oil manufacturing plant, a laboratory and a Lubrax distribution center in Argentina located in Avellaneda, Province of Buenos Aires.

In 2015, Lubrax sales in the Argentine market totaled 15.5 thousand cubic meters. Even though this figure represents a 4.0% drop in volume terms compared to 2014, it resulted in a market share increase to 5.5% in a total market exhibiting a 6.7% decline.

Other programs implemented at gas stations

Petrobras Argentina has a 265 gas station network, three more compared to 2014, of which 24 are operated by the Company, 36 include Spacio 1 convenience stores, and 5 agro-centers.

In 2015, implementation of the gas pump replacement program continued in the gas station network.

In addition, the Company moved forward with the image revamping plan in the gas station network and implemented the new EcoPlus image in some of them. The new image meets state-of-the art standards in energy efficiency and environmental care.

In addition, implementation of the program for upgrading of CNG Compressors of the Company’s Own Network continued.

In 2016 the Company plans to continue with EcoPlus image-related investments and replacement of tanks in gas stations throughout the country, installation of CNG compressor equipment and refurbishment of convenience stores.

Asphalt and bunker markets  

In 2015, sales in the asphalt market dropped 6.1% to 350 thousand tons, of which 70 thousand tons are attributable to Petrobras Argentina, accounting for a 17.4% market share.

Moreover, sales volumes in the bunker IFO market declined by 47.6% to 0.9 million cubic meters in 2015, of which approximately 85 thousand cubic meters of IFO and 15 thousand cubic meters of Gas Oil Bunker were sold by Petrobras Argentina, with a market share of 9.5% and 10.2%, respectively.

Refinor

In 2015, daily average volumes of crude oil processed totaled 9,075 barrels, accounting for a 34% of its installed capacity since condensate from Bolivia is no longer received and processed. During 2015, only 443 thousand barrels of oil from Bolivia were received, representing 18% of the volume received in 2014. Sales in the domestic market reached 515 thousand cubic meters, accounting for a 16.3% increase compared to previous year.

Gas processing, in turn, reached a daily average of 14.7 million cubic meters.

 

Production of LPG from rich gas totaled 279 thousand tons, 6.3% lower compared to 2014. Sales totaled 302 thousand tons, 1.3% higher compared to 2014.

3.3. Petrochemicals

In the Petrochemicals segment, Petrobras Argentina produces octane bases for gasoline, aromatic solvents, hexane and other hydrogenated paraffinic solvents, propellants for the cosmetic industry, monomer styrene, rubber and polymers for the domestic and foreign markets from virgin naphtha, propane, butane and other supplies. Thus, the Company is engaged in an important business for its strategy of vertical integration of operations.  

In 2015, the Company

- gave priority to the styrene, polystyrene and synthetic rubber domestic market, totaling 121 thousand tons in domestic sales, of which 53 thousand tons are attributable to polystyrene, setting an all-time high in sales volumes.

- made investments in an amount of ARS 127 million, with the largest investment involving the simultaneous shutdown performed at Puerto General San Martín complex including the Ethylene, Ethylbenzene and Styrene plants, the Power Plant and the waste water treatment plant. In addition, in the Rubber unit the Company made the investments required for the Gasoline Reforming unit shutdown to be performed in 2016, and additional investments in improvements related to HES-and operational reliability at PGSM plant.

3.3.1. Gasoline Reforming

Sales volumes of octane bases and gasoline during 2015 totaled 277 thousand tons, of which 73 thousand were directed to the export market. Sales of hexane, paraffinic solvents and aromatics during 2015 totaled 64 thousand tons. Sixty nine per cent (69%) of these sales was directed to the domestic market, a percentage similar to that recorded in 2014.

Propellant sales volumes totaled 12.2 thousand tons in 2015, accounting for a 21% drop compared to 2014. This decline is attributable to the domestic market decline.

3.3.2. Styrenics

In 2015, sales volumes of the four product lines (styrene, polystyrene, bi-oriented polystyrene and synthetic rubber) totaled 170 thousand tons. This volume is 1% higher compared to 2014, due to increased domestic sales offset by a decline in exports directed to the Brazilian market.

Styrene

Monomer styrene sales volumes during 2015 totaled 55.7 thousand tons, a volume similar to that recorded in 2014, with a decline in exports directed to Chile and Brazil, offset by an increase in domestic market sales compared to previous year.

Polystyrene

In 2015, polystyrene sales volumes totaled 58.8 thousand tons, 19% higher compared to 2014, mainly due to increased domestic sales.  

BOPS

In 2015, sales volumes of bi-oriented polystyrene (BOPS) totaled 7.7 thousand tons, 15% lower compared to 2014, with a 30% decline in exports and a 33% increase in domestic sales.

Synthetic rubber

Petrobras Argentina’s sales of synthetic rubber totaled 34.7 thousand tons, of which 22.8 thousand tons are attributable to the domestic market and 11.9 thousand tons to exports. Sales volumes in 2015 were 13% lower compared to previous year, mainly due to a 32% decline in exports, attributable to lower demand from the Brazilian market.

In addition, in 2015 the Company moved forward with the production of polymers with low aromatic content according to European regulations, in line with our clients’ demand.

3.3.3. Investment Plan

During 2015, Petrobras Argentina made investments in an amount of ARS 127 million, mainly directed to works related to the general scheduled shutdown performed at Puerto General San Martín complex involving the Styrene, Ethylbenzene, PGSM Ethylene and San Lorenzo Ethylene Plants, the Power Plant and the waste water treatment plant.

In addition, in the Synthetic Rubber Unit the Company made the investments required for the Gasoline Reforming unit shutdown to be performed in 2016, and additional investments related to HES, maintenance and operational reliability at the Styrene, Polystyrene and Synthetic Rubber plants. Investment highlights include assembly of the rubber reverse osmosis plant, the passing of intelligent tools through ducts, environmental remediation works and energy recovery projects in styrene furnaces.

In 2016, the Company will continue to make investments on maintenance, reliability and legal compliance and a scheduled plant shutdown for maintenance of the Gasoline Reforming unit at Puerto General San Martín will be performed.

3.4. Gas and Energy

The Gas and Energy segment links two essential supplies for the country’s industrial development: gas and electric power. Through its involvement in both businesses, Petrobras Argentina maximizes production profitability.

In the Gas segment, the Company sells gas produced by the Company, provides brokerage services to producers that outsource sales, purchases gas from third parties to secure self-supply and, through TGS, holds a license to transport natural gas in the southern region of Argentina.

In the Electricity business, Petrobras Argentina is engaged in generation activities through Genelba Thermoelectric Power Plant, Pichi Picún Leufú Hydroelectrical Complex and EcoEnergía Power Plant. Petrobras Argentina’s installed capacity totals 1,124 Mw.

In 2015, the Company

- achieved excellent reliability levels of 99.5%, 100%, 100% and 96.8% at Genelba Power Plant, Genelba Plus Power Plant, Pichi Picún Leufú Complex and EcoEnergía Power Plant, respectively.

- successfully performed, in a shorter than expected time period, major maintenance works to Genelba combined cycle involving Gas Turbine 11.

- joined the Excess Injection Incentive Program, called Gas Plan II, approved by the Strategic Planning and Coordination Commission for the National Hydrocarbons Investment Plan (the Commission) on January 30, 2015, through which a floor price is ensured provided injection targets set in the above plan regulations are achieved.  

- renewed the agreements for the sale of gas under the Gas Plus program for “El Mangrullo” and “Río Neuquén” fields and recorded growing production volumes of non-conventional gas.

3.4.1. Gas and Transportation Business

Marketing

In 2015, in Argentina sales volumes of gas produced by the Company totaled 6.0 million cubic meters per day. The Company sold 1.6 million cubic meters per day of gas under the brokerage modality and purchased from third parties 1.1 million cubic meters per day to meet domestic demand. Distribution was implemented through the Company´s own and third party transport fleet in order to supply clients and secure compliance with commitments undertaken.

In January, the Commission approved PESA’s entry into the Excess Injection Program Gas Plan II, which was recognized in results of operations, to continue underpinning the Company’s projects related to the increase in natural gas production.

In July the Company renewed with CAMMESA the agreements for the sale of non-conventional gas from El Mangrullo and Río Neuquén areas under the Gas Plus modality.

It should be pointed out that a better total average sales price for gas was achieved due to increased sales volumes of non-conventional gas and improved prices in the industrial segment.

TGS

As of December 31, 2015, Petrobras Argentina holds a 25.5% indirect interest in TGS through CIESA, owner of 51% of its capital stock. Petrobras Argentina has a 50% direct and indirect interest in CIESA.

During 2015 revenues from gas transportation services rose mainly due to the impact of the tariff adjustment approved under Resolution No. 3,347/15 issued by ENARGAS, within a context where efforts to improve the tariff schedule applicable to this business segment continued. In addition, the rise in revenues is attributable to higher interruptible transportation volumes and increased natural gas transportation services provided to clients for export purposes.

Revenues from the liquid fuel business declined as a result of the drop in international average reference prices which maintained its downward trend during 2015. Such effect was partially offset by the positive impact of the rise in the Argentine peso exchange rate on US dollar-denominated sales and the increase in tons sold on the Company’s own account for export purposes.

Total sales volumes, in turn, slightly dropped by 0.5% in 2015 compared to previous fiscal year. It should be highlighted that during the first quarter of 2015, the Argentine government made positive changes to the cylinder LPG supply schedule and to export parity pricing, both for domestic market sales.

Finally, sales revenues from the other services business segment showed a slight decline. This drop is mainly attributable to lower revenues from telecommunication services and natural gas compression and treatment services. Such effect was partially offset by higher revenues from management services in connection with gas pipeline system expansion works performed by the trust created for such purpose in 2006 and steam generation services.

Moreover, in 2015 the Company moved forward with the development of an execution plan, under the gas trust program, which will allow for the transportation of an additional volume of 10.7 million cubic meters per day, of which 8.7 million cubic meters per day are already authorized for transportation.

LPG Business

In 2015, volumes of LPG produced by the Company and LPG produced by third parties were 85.6 thousand tons, 1.5% lower compared to previous year. No transactions under the brokerage modality were performed during the year under review.

As in the previous year, in 2015, from Bahía Blanca Refinery, the Company complied with the requirements imposed by the SE as to butane supply to the domestic market. As from April, changes in the domestic price policy for both committed and free availability volumes resulted in an improvement in butane sales margins.

3.4.2. Electricity

Electricity generation in Argentina – Overview

Demand for energy continued to grow sustainably throughout 2015, with a yoy variation rate of 4%. This positive variation was mainly driven by residential demand, accounting for an 8% growth rate throughout the year. Moreover, the yoy variation in the industrial sector was 2%.

Demand was supplied by thermal generation (63%), hydraulic generation (30%) and nuclear generation (5%). Average temperature during the year was 18.8°C, 1.1°C above historical average, which fact significantly affected residential demand due to higher power consumption for cooling by this sector.

As regards fuel average consumption, natural gas consumption was 39.6 million cubic meters per day, diesel oil consumption was 2.2 million cubic meters, fuel oil averaged 3.1 million tons and the average use of coal was close to 1 million tons.

 

Genelba Thermoelectric Power Plant

In 2015, Genelba Thermoelectric Power Plant generation totaled 5,913 GWh, 3.7% higher compared to 2014, of which 80% was attributable to Genelba Combined Cycle and 20% to Genelba Plus. Such annual power generation accounts for a 4.4% share of the country’s total power generation and a 6.8% share of thermal generation. The increase in Genelba generation volumes is due to the fact that major maintenance works were performed only in TG11 gas turbine and this allowed the power plant to continue operations with half Cycle. Conversely, in 2014 major maintenance works were performed in TG12 gas turbine and TV10 steam turbine. The scheduled shutdown was performed in a shorter than expected period of time.

Genelba Plus operated with a 100% reliability factor and the Combined Cycle with a 99.5% reliability factor. Genelba Plus availability factor was 98.7% and Genelba Combined Cycle availability factor was 92.7%.

Pichi Picún Leufú Hydroelectric Complex - HPPL

Throughout 2015, water flows from Limay and Collon Curá rivers were below historical average, thus affecting Pichi Picún Leufú Hydroelectric Plant generation. However, water flows were higher compared to those recorded in 2014.

Annual generation was 962 GWh, 15% higher compared to 2014 and only 1% lower compared to historical average generation. With a 100% availability factor and a 100% reliability factor, in 2015 HPPL had an approximately 0.7% share of the country’s total power generation and a 2.3% share of annual hydraulic generation.

EcoEnergía Power Plant

During 2015, annual generation was 93 Gwh, 10% lower compared to 2014, with a 95.9% availability factor and a 96.8% reliability factor.

4. A Company behind Business

4.1. Organization and Management

Petrobras Argentina considers that economic progress will only be sustainable to the extent performance is attained through the implementation and improvement of a management system committed to all stakeholders: shareholders, customers, employees, community, suppliers and control bodies.  According to this vision, Petrobras Argentina applies policies which are an integral part of its management system and are followed at all the organization's levels through the implementation of projects, plans, programs, training efforts and assessments that enable it to improve quality in management on a permanent basis.  

By the end of 2013, in order to strengthen its management system, the Company created the Organization and Management Department aimed at encouraging a continuous improvement of the organization and providing basic support and corporate safety and security services, ensuring corporate compliance and business sustainability.

 

In 2015, the Company :

Implemented a systematic process to assess the controlling company's Common Corporate Rules with a view to maintaining compliance with corporate requirements considering the local context where the Company operates.

Systematized internal processes to ensure compliance with SEDRONAR/RENPRE's new reporting requirements in relation to the management of chemical precursors by means of the redesign of processes, roles and responsibilities.

Participated, for the eighth year in a row, in the benchmarking of management indicators coordinated by IPACE (Argentine Professional Institute for Quality and Excellence) and was positioned above the average of companies in the large manufacturing segment which are a benchmark of excellence within their fields of work.

Continued with the Improvement Teams initiative aimed at obtaining efficient operations and improved results. To such end, the Company organized 9 new teams with participants from all the Company's Businesses and Corporate Center, totaling 33 teams formed since 2012 that address improvement initiatives in terms of efficiency, productivity, costs, quality, safety and the environment.

Presented 3 improvement teams in the 20th National Meeting for Continuous Improvement organized by SAMECO (Argentine Society for Continuous Improvement) aimed at disseminating successful experiences and giving recognition to team members.

Once again successfully completed the Certifications Program according to ISO 9001, ISO 14001, OHSAS 18001 and ISO 50001 standards, met the quality requirements established by the Institute of Internal Auditors and the Heart-safe Company and the Healthy Workplace requirements, thus showing its commitment to customers, suppliers, shareholders, employees and the community in which it operates. The Annual Certifications Program includes in-house and external audits on maintenance and re-certification of the management system as well as implementation of new certificates. External audits were performed by recognized institutions such as TÜV Rheinland, the Institute of Internal Auditors of Argentina and Spain, Medical Tech and the Ministry of Health of the Republic of Argentina. In-house audits were efficiently carried out by the Company's qualified personnel. The before mentioned program is a preventive activity aimed at identifying findings that enable to strengthen and improve management to thus support implementation of organizational strategies and goals.

Achieved ISO 9001 certification for the Procurement Department, a completely new initiative in the market which focuses more closely on internal customer orientation in order to contribute to contract management quality and ISO 50001 Certification (Energy Management) for the Lubricant Plant.

In addition, organized a corporate team to seek re-certification to the new 2015 versions of ISO 9001 and 14001 standards. This initiative will further enhance risk management and management systems approach to attain business objectives.

Concerning Corporate Safety and Security, with the implementation of Petrobras Corruption Prevention Program (PPPC), a new system was designed to tackle fraud, corruption and money laundering, in line with corporate policies.

4.2.  Safety, Environment and Occupational Health

Petrobras Argentina considers that economic progress will only be sustainable to the extent its performance relies on the implementation and improvement of a management model committed to the people's health and safety, environmental care and energy efficiency.

According to these premises, Petrobras Argentina applies Safety, Environmental and Occupational Health policies and guidelines which are an integral part of its management system and are followed at all the organization's levels through the implementation of programs, training efforts and assessments that enable it to be a safe and eco-efficient company, optimize its resources and work for the staff's quality of life and community welfare.

In 2015, the Company

- achieved the best performance in its history in terms of personal accident rate: with about 14 million man/hours of exposure, the Company obtained an annual accident occurrence rate of 4.36, accounting for a 22% improvement on the admissible limit.

- did not record typical motor vehicle accidents during the year, with an exposure of over 37 million vehicle-kilometers traveled, the best performance in its history.

- reached an accumulated VAZO indicator of 0.30 cubic meters, with the admissible limit being 20 cubic meters. This indicator measures hydrocarbon spills greater than a barrel.

- reduced accumulated waste by 63% compared to previous year, mainly as a result of waste treatment in the Neuquén basin.

- received the IAPG 2015 Annual Safety Award granted by the Argentine Oil and Gas Association (IAPG).

- maintained control over assurance of legal compliance and strengthened HES management in its project portfolio with a view to promoting safety and environmental and energy sustainability, both in existing activities and new undertakings.

4.2.1 HES Management:

The HES risk management matrix consolidated in order to measure the degree of management in the implementation of Health, Environmental and Safety processes at all Company's assets and plants. The scope of this tool involved the assessment of 7 HES dimensions broken down into 65 sub-items with a focus on: permits and authorizations, integrity, reliability, operational discipline, environmental liabilities, contingencies and occupational health and industrial hygiene. In this way, it is easier to systematically assess HES Risk Management of Petrobras Argentina and each asset focusing on priorities in the actions to be performed.  

During 2015, 36 initiatives included in the HES Continuous Improvement Program designed for the second cycle (July 2015 - July 2016) were accomplished. The program involves implementation and follow-up of systematic actions in terms of Safety, Environment, Contingency and Health. For example: Process Safety, Accident Reduction Plan, Zero Spill, Scope Analysis, Risk Assessment Recommendations and HES Audits, among others.

During 2015, the Company continued implementing its Project Portfolio with the purpose of minimizing HES-related risks at its facilities, and working on the evaluation of HES-related requirements of new projects, in this case Exploration and Production (E&P) projects, both for conventional and non-conventional developments in operated and non-operated areas. This process involves preparation of deliverables which are systematically required for approval purposes. Each assessed Technical and Economic Feasibility Study (EVTE) includes the relevant HES chapter.

During 2015, two Assessments of Compliance with the Headquarters 15 HES Guidelines were performed. Such assessments were carried out in Genelba and Bahía Blanca Refinery and demonstrated excellent alignment and compliance with management standards. In addition, self-assessment at Gas Stations was performed.

Senior Management HES Critical Analysis Meetings (RAC) were implemented. Since August, Senior Management, all asset managers, their direct reports and the Corporate HES Department have held a monthly meeting to assess performance of HES-related programs and actions with a view to ensuring continuous improvement.

As of December 31, 2015, 3,928 Behavioral Audits were recorded in Audicomp application, showing through line leadership the commitment to deviation prevention and minimization and the promotion of safe behavior.

With a view to strengthening HES culture and preventing damage to people, facilities and the environment, the Safety Mobilization Campaign was performed and on September 28, 2015 Petrobras' Management approved implementation of ten priority actions. Such actions included ten "Golden Rules" supporting HES basic aspects. During October and November 2015 the 10 Golden Rules were disseminated by all PESA's departments to the Company's and contractors' staff and in November a campaign was launched for on-site verification of each rule.

As part of the 2015 HES campaign a Seminar on HES good practices and lessons learnt was held in August.

With a view to offering an interactive space to address Safety, Environmental and Health related topics throughout PESA, the HES Corporate Department together with the IT Department developed the "HES Shared Knowledge Portal" on the Intranet using SharePoint collaboration tool.

Within the framework of Process Safety, 7 Corporate Indicators were implemented to assess management and enhance Process Safety in the Company's assets.

4.2.2  Safety

As part of the Operational Safety Improvement Plan 18 initiatives were developed to address issues supporting the implementation and reinforcement of Process Safety actions.

An international consulting firm performed five Process Risk Studies (APR/Hazop). The assessments were carried out in Puerto General San Martín plant and in Medanito, Sierra Chata, Río Neuquén and Aguada de La Arena areas, with a view to keeping processes under control.

Three International Reassurance Audits were carried out at Bahía Blanca Refinery, Genelba and Zarate Plant, with a very good performance rating.

At the international level, Petrobras Argentina received the "IAPG 2015 Annual Safety Award" granted by the Argentine Oil and Gas Association (IAPG). In this opportunity, the Company received the award within the group of companies in the Producers category for Safety Management in Exploration and Production operations. This recognition considers the safety performance achieved between 2014 second semester and 2015 first semester.

4.2.3  Environment

The Company continues working and developing actions aimed at permanently reducing accidental spill risks mainly under programs for the integrity of aerial and underground pipelines and tanks. In addition, monitoring and environmental studies are performed in order to become acquainted with the different situations in target sectors. Implementation within the Petrobras System of the Zero Spill ("Vazamento Zero") program, which it is now part of the Continuous Improvement Program, continued. The Program is focused on three key areas: Management System, Facility Integrity and Contingencies.

In 2015, PESA's Pipeline and Tank Integrity Committee was consolidated with the participation of technical heads from all the Businesses. The Committee's purpose is to perform a critical analysis of the Facilities Integrity Management standards, define and monitor indicators that are common across all the Company, coordinate and conduct pipeline (internal and cross) audits and share experiences among Business Units (good practices/lessons learnt).

In September 2015, a Sub-committee was formed to assess internally operational safety at Terminals during loading and unloading operations in vessels with product aboard, based on continuous improvement processes. The Sub-committee's purpose is to review laws and regulations applicable to the terminals and assess compliance, revise and update PESA's existing standards, define and monitor management indicators for terminals and conduct (internal and cross) audits on terminals.

Though HES programs are focused on prevention, the Company also encourages programs related to preparation for possible incidents. In this respect, two training seminars on fuel transportation incidents were organized during 2015. These activities comprised a workshop in Bahía Blanca which was declared of municipal interest, with the participation of local authorities, community leaders and companies from the industrial complex. The other training activity, in coordination with Autopistas del Oeste, involved two days. On the first day training was provided to community leaders from seven municipal districts. On the second day a fuel spill drill was perform to put into practice what was learnt on the first day. These training activities with the community promote interaction among groups to assure immediate response to road emergency situations and strengthen bonds to improve response coordination and operations.

Two Assessments of Fire-fighting Systems were performed: at the San Lorenzo Ethylene plant and in El Mangrullo area.

Concerned over global energy issues, the Company's investments continue focusing on the reduction of green house gas emissions, through energy efficiency upgrade at its facilities. This year's highlights include Styrene Furnaces efficiency upgrade through the expansion of both furnaces convection area and decocking of heat exchangers at San Lorenzo Ethylene Plant (first time in the history of the plant) to increase exchange efficiency.

On December 10, 2015, the Lubricant Plant equipment was audited by TÜV Rheinland Argentina and achieved ISO 50001 (Energy Management) certification for "Lubricant Development, Production and Dispatch". We thus consolidate our commitment to continuous improvement and quality in management by ensuring efficient use of energy in our operations. During December, PGSM and San Lorenzo Ethylene Plants' certifications for Responsible Environmental Care and the National Contingency Plan were successfully renewed. Within the framework of the Responsible Environmental Care Program (PCRMA), in September we received an IRAM audit from the Chemical and Petrochemical Industry Chamber and obtained an outstanding audit rating. The auditing firm certified that Petrobras Argentina's management system is compliant with PCRMA standards. As a result of the rating obtained, the certification was renewed for three years, a longer-than average period.

This is in addition to the satisfactory results obtained in the annual audit of the National Contingency Plan (PLANACON) implemented by the Argentine Coast Guard (PNA), with an excellent performance by the internal brigade in the drill performed at Petrobras Argentina Dock on December 15.

4.2.4. Occupational Health

In 2015, the Company continued with its health promotion and protection programs with a focus on primary and secondary prevention and the generation of a healthy workplace.

Within this context the Company continued with its Health Promotion and Protection Program (PPS) aimed at generating healthy life habits and behavior through healthy diet and food safety actions according to IRAM 14201, physical activity, dental prevention, smoking cessation and addiction prevention.

These actions are developed on the basis of an annual health diagnosis performed through a medical test to all employees, which contemplates occupational and epidemiological risks, thus facilitating the implementation of a specific health program tailored to the needs of the risk groups surveyed.  

Concerning prevention, the Company continued with the Cardiopulmonary Resuscitation and First Aid training courses, the physical activities plan and flu and tetanus vaccination campaigns.

During 2015, Petrobras Argentina continued with its Heart Safe program under the American Heart Association's international standards and maintained its certification as a smoke-free company through the Argentine Ministry of Health. In addition, it was recognized by the before mentioned Ministry as a blood donation-friendly company on account of the implementation of campaigns for voluntary donation of blood in the different assets, and as a Healthy Workplace.

Within the framework of the Occupational Hygiene Program, the relevant measurements in connection with the work environment and specific risk maps were completed and follow-up of deviations was performed. The Company also continued with the ergonomics program involving the ergonomic survey of specific workplaces.

4.3. Our People

Petrobras Argentina is built on the basis of organizational values directed towards encouraging sustainable development, integrated actions and responsibility for results, cultivating readiness for change and an entrepreneurial, innovative and self-improvement spirit.

These values are framed within ethical and transparent principles aimed at recognizing human and cultural diversity and constitute the vehicle for the materialization of actions related to the strategic management of the people involved.

To such end, the Company supports several practices aimed at human resource training, development, attraction and fidelization thus building a favorable work environment to achieve organizational results.

In 2015, the Company:

- implemented an online tool that progressively centralizes all personnel management processes so that both employees and leaders may manage their own information, thus ensuring reliability and traceability. During 2015, the Employee Profile, Recruitment and Selection and Compensation and Benefits modules were uploaded on the Portal.

- for the sixth year in a row, ranked among the first five companies of the Oil Club in terms of compensations and maintained a competitive benefit package at market level, based on the research performed around mid year.

- invested approximately USD 1.5 million in training programs aimed at encouraging development of technical and staff management competencies.

4.3.1. Recruiting and Selection

When a position is vacant, Petrobras Argentina encourages the filling of each position with the best qualified candidate through the implementation of several strategies and tools aimed at contributing to the attainment of such goal.

4.3.1.1. Job - Posting System "Moviliza"

In 2015, the in-house job-posting system of Petrobras Argentina continued to secure the dissemination of job opportunities throughout the Company, thus facilitating professional development and growth alternatives for employees by means of the posting of job searches in which several applicants from the Company's different areas and businesses were considered. During 2015, 66 staff members were promoted to higher-level positions.

4.3.1.2. Professional Practice

During 2015, the Company continued with the implementation of professional practice programs directed to students from technical schools aimed at contributing to their training and creating a first approach to employment. In 2015 the Avellaneda Lubricant plant joined this initiative that has been implemented by Genelba Thermoelectric Power Plant and Puerto General San Martín Petrochemical Plant since 2013.

This practice allowed to subsequently invite the same students to participate in recruitment processes for positions similar to those developed during the professional experience.

4.3.1.3. Employment Fairs

In 2015, the Company participated in "Expo Zonajobs 2015", the largest virtual employment fair in Argentina. It received more than 19,000 resumes from technicians and professionals from all over the country.

4.3.2. Human Resource Planning

Petrobras Argentina carries out this process by means of the review of its employees' career profile, considering their academic and job background, their performance within the Company and the assessment of their competencies.

During 2015, 25 current and potential competency assessments were made to coordinators and managers. As a result of such activities relevant information was obtained for decision-making actions regarding promotions, transfers and other career opportunities for each employee within the Company.

4.3.3. Compensation and Benefits

Petrobras Argentina's benefit and compensation policy relies on two key principles: securing external competitiveness and maintaining in-house equity.

Accordingly, every year the Company implements market surveys in order to adjust its benefit package and wage structure to those offered by other companies. As a result, in 2015 the Company granted increases equivalent to those offered by the labor market to personnel not subject to collective bargaining agreements.

4.3.4. Trade Union Relations

As a regular practice, Petrobras Argentina actively participated in Business Chambers and other labor negotiation entities and maintained a constructive relationship with unions in the industrial sectors where the Company has a presence, both at a domestic level and in the geographical areas in which it operates. During 2015 the Company maintained a relationship strategy focused on permanent dialogue aimed at maintaining and strengthening existing bonds.

4.3.5. Training and Development

Within the framework of its training strategy, in 2015 Petrobras Argentina made investments of approximately USD 1.5 million in training activities, thus covering 65% of the total staff.

The available academic offer included corporate individual competencies programs, graduate studies and language training. The training courses on corporate individual competencies provided by Austral University are worth a mention.

As a distinctive modality in competency development for managerial functions, the Network Leaders Program (Programa Líderes en Red) was implemented through a consortium of companies led by Petrobras Argentina, Banco Galicia and Swiss Medical. The program was conducted by faculty members of Torcuato Di Tella University.

Concerning training activities headed by in-house facilitators, Petrobras Argentina continued promoting this methodology through commitment and participation of its own employees in the transfer of knowledge and experience gained throughout their career.

Concerning technical training, the Company developed several programs offering training in specific competencies in all businesses, as well as programs related to specific knowledge required for the Company's own Gas Station Network.

4.3.6. Employees' commitment and satisfaction

4.3.6.1. Organizational Climate Survey

During 2015, the Company performed the 11th Organizational Climate Survey involving all Petrobras Argentina's employees, with a 73% participation rate and improvements in all the survey indicators.

Based on survey data, several action plans were designed and implemented in a transversal manner all across the organization and other initiatives were defined in each specific area.

4.3.6.2. Other Relevant Actions

In order to create room for exchange and updating of the Company's main target subjects, the Chief Executive Officer continued performing videoconferences to report the results of each business unit and other highlights of the Company's current situation.

Concerning actions aimed at strengthening the relationship with its personnel and encouraging identification with the Company, the Company engaged again in actions for the recognition of the career of almost 230 employees who had their 10, 20, 30 or 40 years' anniversaries with the Company.

In addition, other integration and recognition actions were again organized such as celebration of special days and the VIPP visit (Important Visit for Petrobras) for employees to share a day with their children and other family members.

4.3.6.3. Organizational Culture

Petrobras Corruption Prevention Program was implemented in the controlling company and by the end of 2015 Petrobras Argentina's Code of Ethics was updated to align its content and form with the Headquarters' Code.

4.4. Corporate Social Responsibility

In the eyes of Petrobras Argentina, Corporate Social Responsibility is a form of integrated, ethical and transparent management of its businesses and activities and of its relation with all stakeholders. This management policy is based on human rights' and citizenship promotion, respect for human and cultural diversity, disapproval of discrimination, degrading work and children and slave work and contributes to sustainable development and the reduction of social inequality.

In 2015, the Company:

- worked out the fifth Social and Environmental Report, a document that describes the Company's performance and its strategy to do business with social and environmental responsibility.

- started the financing and technical assistance phase for the projects selected in the fifth edition of Petrobras Social and Environmental Program, aimed at identifying and supporting the design and formulation of projects of a larger scale, social impact and public visibility.

- continued implementation of the Corporate Volunteer Program "Petrobras Positive Energy", conceived as a tool for social transformation representing the employees' interest for participation.

- moved forward with the development of strategies focused on the local management of social responsibility and relation with the community through responsibility committees and implementation of the Local Agenda Program.

4.4.1. Sustainable Management

Petrobras Argentina continued with the implementation of actions and policies focused on the strengthening of a sustainable culture and worked out its fifth Social and Environmental Report, a document that describes the performance in the area during 2014 and the strategy to conduct business with social and environmental responsibility.

During 2015, the Company moved forward with sustainability efforts in order to comply with its strategy and corporate parameters. In this respect, local goals were defined and a medium-term action plan was designed for the development of different tools to be implemented in a transversal manner all across the company with the coordination of the Communication and Social Responsibility Department. In addition, these tools are mutually complementary to achieve a sustainability-oriented integral management.

4.4.2 Petrobras Social and Environmental Program

During 2015, the Company started the financing and technical assistance stage for the projects selected in the fifth edition of Petrobras Social and Environmental Program, aimed at promoting local development. The projects selected work on the following subjects: human and social rights and citizenship promotion, educational inclusion, gender equality, culture and diversity, sports and social inclusion, environment and community, disability and social and productive inclusion and social productive undertakings. The 30 projects to be supported will work on the established subjects and will be implemented in the provinces of Santa Fe, Buenos Aires, Neuquén, Río Negro, La Pampa and Santa Cruz.

This support is provided for 2 years and involves a monetary award and technical support and training activities, with the purpose of generating greater potential and long-term social impact in selected projects and undertakings.

Concerning projects on Social Productive Undertakings, through an alliance with the Culture, Innovation and Development Institute (INCIDE), the Company provides, among other things, training and assistance for the working out of business plans, organization planning for self-financing and assistance on the implementation or expansion of corporate activities.

In 2015, the Company incorporated joint or network projects with the participation of at least three organizations, with the purpose of identifying territorially decentralized activities which, due to their scale and involvement model, may generate significant results in the resolution of social issues. The five projects selected will be provided with financing and technical assistance during three years. The organizations selected were: Otras Voces, Ashoka, Red Activos from Neuquén, Asociación Pequeños Criadores from Catriel and Acción Católica from Bahía Blanca.

As to the environment, the second stage of the PRODOS Program was implemented in alliance with San Andrés University through an open seminar. Twenty eight (28) representatives from 22 environmental organizations participated in the day organized by the Company for the purpose of defining a set of common issues and lines of work and the implementation of tools designed to build consensus and agreement.

In Zárate, Petrobras Argentina continued with AcercaRSE waste separation and recycling program "Waste is Useful" jointly with companies within such area. The program's goal is to stimulate community commitment to on-site cleaning and hygiene and to environmental care through a responsible handling of waste.

4.4.3. Volunteering Actions. Petrobras Positive Energy.

The volunteering program launched in 2013 is a tool for internal and external social transformation that promotes citizen participation and installs significant values in the Company, addressing relevant community issues.

During 2015, the Company continued implementing this program through initiatives presented by employees and proposals from volunteering committees at Maipú 1, Gas Stations, Avellaneda, Dock Sud, Genelba, Neuquén Asset, PGSM Plant and Bahía Blanca Refinery. Twenty three actions were carried out with 31 NGOs, with more than 600 volunteers involved in about 4,700 hours of solidarity work.

4.4.4. Community Relations Committees

In 2015, the Company continued consolidating the ability of the Social Responsibility and Community Committees to plan and manage a local sustainability strategy aligned with the business. Within the framework of ISO 26000 and the Global Compact standards, a diagnosis of the different actions implemented by the committees in relation to the different targets was made in order to define a baseline allowing to design a strengthening plan through training and generation of inputs in order to determine key issues concerning each asset.

Workshops were organized with the participation of members from Avellaneda, Dock Sud, Genelba, PGSM Plant, Bahía Blanca Refinery and Zárate Plant committees in order to establish a self-diagnosis in relation to ISO 26000 standard.

During 2015, the committees participated in the training workshops "Social Responsibility and Sustainability Self-assessment" and "Community Active Participation and Development", with the following aims:

- Identify the correlation between the Social Responsibility and Sustainability management processes developed by the Asset under SR ISO 26000 Standard.

- Detect improvement opportunities to align management with ISO 26000 Standard recommendations, in accordance with Petrobras community relations oriented guidelines.

Finally, the "Action Plan Design" workshop was conducted and included review of a Risk Matrix and detection of improvement opportunities. The workshop aimed at facilitating strategic planning for 2015/2016 and establishing conditions for the follow-up and monitoring of any actions required.

4.4.5. Local Agenda

The Local Agenda Program aims at the relationship with main stakeholders in the Company's critical assets, with a view to designing an investment strategy in a participative manner. To such effect, Petrobras Argentina funds and supports initiatives to promote the social and economic development of the areas in which it operates. The Company also promotes the identification of organizational strengthening alternatives, the development of networks and collaborative activities with a view to designing shared agendas.  

In 2015, the Company continued with the diagnosis and local agenda relating to the development performed in 2013 at Catriel, Peñas Blancas, Colonia 25 de Mayo and Colonia Chica areas. The program included eight participative planning meetings with over 150 participants, representing about twenty organizations from the public, private and social sectors.

These meetings resulted in different community projects which are currently supported by the Program both in their design and implementation stages. These projects aim at diversifying the production matrix, strengthening local leadership and developing capabilities.

4.5. Communications

Petrobras Argentina knows that communicating to the different stakeholders is of the essence to encourage all areas to work towards the same goal and in line with the same business objectives.

In 2015, the Company:

- strengthened its businesses' image, mainly in the Oil and Gas Exploration and Production segment, both in the media and specialized fairs.

- consolidated brand presence in the Argentine market through support to cultural initiatives.

- developed several in-house communication campaigns in order to reach the different stakeholders.

4.5.1. Press and External Communication

Throughout 2015 the Company worked out and sent to the main national, provincial and international media approximately 35 press releases related to business or institutional matters, including the appointment of the Company's new Chief Executive Officer, launching of Lubrax Gas LDI 40 lubricant, opening of new offices in the city of Cipolletti (Río Negro), and major works at Bahía Blanca Refinery, among others.

The Company's training courses and support to social organizations within the framework of the fifth edition of Petrobras Social and Environmental Program, among other areas of interest, were disseminated through different media related to social responsibility.

In addition, meetings were held with the country's main opinion leaders.

4.5.2. In-house Communication and Editorial

In 2015, Petrobras Argentina's efforts continued on the updating of its intranet, its main internal information portal, through the implementation of improvements in content quality, incorporation of multimedia language and design of minisites for human resources initiatives.

Improvements were made to the Open Dialog channel communication process which is used for the CEO communications and for his quarterly videoconference on the Company's results of operations. The main actions included open dialog with assets, participation of directors in videoconferences, publication of summaries, videos and presentations on the intranet, among others.

The digital billboard project was implemented in all assets in order to reinforce messages from other media and reach target audiences without regular access to the intranet.

The Company launched the fortnightly newsletter Informados en Cinco for all employees and designed the Info Líderes newsletter for managers as part of the cascading communication process.

In 2015 the main campaigns carried out by the Company included:

- Corporate Volunteering Actions.

- HES reinforcement and mobilization (10 Golden Rules).

- Road Education.

- Information Security.

- Standardization System.

- Updating of PESA's Code of Ethics.

The Company's Web sites: www.petrobras.com and www.lubrax.com were updated according to the businesses' requirements.

4.5.3. Sponsoring

During 2015 sponsoring was directed to technical meetings related to the Company's activities and local events in the cities in which it operates. In addition, the Company continued its commitment to promote culture by supporting the 2015 edition of La Nación Cultura, which involved a cycle of four meetings at the Colón Theatre with the participation of different exponents of contemporary music.

The Company's main sponsorships in 2015 included:

- Geosciences Technology Workshop organized in Buenos Aires in May.

- SPE VII Strategic Seminar, Evaluation of the Argentine Energy Outlook, held in Buenos Aires in June.

- Catalysis Congress organized in Bahía Blanca in September.

- 2nd Simulation Seminar held in Buenos Aires in July.

- Expo Avellaneda Fair held in September.

- XVIII CILA 2015 Iberoamerican Asphalt Conference held in Bariloche in November.

- Sports and Citinzenship. Support to Catriel Municipality, Catriel Rugby Club and Sports for Sharing.

- Maestro Arce Music Cycle organized in Bahía Blanca in May and September.

4.5.4. Advertising and Brand

During 2015, advertising actions were focused on disseminating the Company's social responsibility projects in the communities where the Company has a presence and in print campaigns for the bunker, asphalt and lubricants business in specialized media. The advertising campaign included ads in print media, radio and the Internet.

In Argentina, the Company moves forward with the process involving brand unification started in 2014 and to be accomplished in three stages, with final completion scheduled for 2021. As a result Petrobras is identified with a single brand in all countries in which it operates. A single and global brand seeks to promote integration of Petrobras businesses and reinforce its strategic vision in all the markets where it operates.

5. Corporate Governance

The Corporate Governance best practices, referred to as a set of policies, systems, standards and procedures regulating the Company’s management and development, provide the adequate framework to support organizational objectives, where the roles and responsibilities of the main players and their interaction are defined, securing the alignment, balance and respect of the interests of all shareholders and any other public involved, employees, clients, suppliers and the community at large.

Ethics in the conduction of business, transparency in the relationship with stakeholders and reliability of the financial information generated by the Company are the main pillars of the management practices on which the Company’s Corporate Governance philosophy is built.

During 2015, efforts continued to consolidate several initiatives implemented as from 2004, aimed at strengthening Corporate Governance good practices:

- Concerning the Audit Committee’s performance, a fluent interaction with the different company sectors is observed in addition to a high involvement with the Company’s business management, in compliance with the rules and regulations applicable in Argentina and USA.

- The tools and procedures for the reporting of irregularities involving accounting and financial issues and conflicts of interest implemented in 2005 allowed informants to report any irregularity to the Audit Committee on a confidential and anonymous basis.

- The Ombudsman’s Office is a channel that facilitates review and handling of claims, opinions, suggestions, requests and expectations of people directly or indirectly related to the Company.

- Relevant information was disclosed to the market in accordance with the standards and practices established by the Company, being respectful of good market practices, complying with applicable legal requirements and adjusting such standards and practices to the provisions of Law No. 26,831 (Capital Market Law) and the Revised Text of the CNV Rules included in General Resolution No. 622/13.

In compliance with Section 1, Chapter I, Title IV of the Rules issued by the CNV (2013 Revised Text), the Company worked out the Corporate Governance Code for fiscal year ended December 31, 2015, attached hereto as an exhibit and which thoroughly reviews the principles and recommendations included in Exhibit IV to the before mentioned Title. This code, which follows the guidelines adopted under General Resolution No.606/12, comprises nine corporate governance principles and each principle, in turn, contains a series of recommendations and comments where principles include general concepts underlying good corporate governance, recommendations suggest a framework for application of such principles and comments indicate how to implement the good practice in question.

In addition, since 2006 the Company, as a company registered with the US Securities and Exchange Commission (SEC), has obtained certification of the effectiveness of internal controls over financial reporting, in compliance with Section 404 of the Sarbanes-Oxley Law.

The Sarbanes-Oxley Law sets forth specific responsibilities of the Audit Committee, the Company’s Management and its external auditors, adds new reporting requirements for public companies subject to the law and imposes severe personal and institutional penalties for non-compliance with stated regulations. This law aims at strengthening the confidence of investors in the financial information of the companies involved and in the exchange markets on which their securities are listed.

5.1. Management and Administration

Board of Directors

Pursuant to Petrobras Argentina’s Corporate Bylaws, the Board of Directors that formally meets at least once every three months shall be composed by nine regular directors who are elected for a three-year term and renewed by thirds each year. The Meeting may appoint a number of alternate members that may be equal to or lower than the number of regular directors in order to fill any vacancy, in the order of their appointment.

The table below sets out the current structure of the Company’s Board of Directors, as approved by Petrobras Argentina’s General Regular and Special Shareholders’ Meeting held on March 19, 2015, including any subsequent changes:

 (*)  The Company’s Board of Directors, at the meeting held on May 7, 2015, dealt with and resolved to accept the resignation of Ronaldo Batista Assunção from his position as Regular Director. Given the vacancy in such position due to the before mentioned resignation, the Company’s Statutory Syndic Committee, at the meeting held on the same day, upon the powers conferred under Section 258 of the General Companies Law, appointed Marcos Benício Pompa Antunes as Regular Director, with the Board of Directors taking notice of such appointment at the meeting held on the same day.

 (**) The Company’s Board of Directors, at the meeting held on July 30, 2015, dealt with and resolved to accept the resignation of Benicio Schettini Frazão from his position as Alternate Director. Given the vacancy in such position due to the before mentioned resignation, the Company’s Statutory Syndic Committee, at the meeting held on the same day, upon the powers conferred under Section 258 of the General Companies Law, appointed Gustavo Adolfo Amaral as Alternate Director, with the Board of Directors taking notice of such appointment at the meeting held on the same day.

 (***)  The Company’s Board of Directors, at the meeting held on August 11, 2015, dealt with and resolved to accept the resignation of Luis Sas from his position as Regular Director. Given the vacancy in such position due to the before mentioned resignation, the Company’s Statutory Syndic Committee, at the meeting held on the same day, upon the powers conferred under Section 258 of the General Companies Law, appointed Maelcio Mauricio Soares as Regular Director, with the Board of Directors taking notice of such appointment at the meeting held on the same day.

 (****) The Company’s Board of Directors, at the meeting held on January 26, 2016, dealt with and resolved to accept the resignations of Carlos Ariel Lieutier from his position as Independent Regular Director and María Valeria Dallera from her position as Independent Alternate Director. Given the vacancy in such positions due to the before mentioned resignations, the Company’s Statutory Syndic Committee, upon the powers conferred under Section 258 of the General Companies Law, appointed at the meeting held on February 4, 2016, Roberto Fortunati and Santiago Montezanti as Independent Regular and Alternate Directors, respectively, with the Board of Directors taking notice of such appointment at the meeting held on the same day.

Pursuant to Section 11, Article III, Chapter III, Title II of the CNV Rules (2013 Revised Text), Cedric Bridger, Roberto Monti, Roberto Fortunati, Alejandro Poletto and Santiago Montezanti are independent Directors, the other directors being non-independent in accordance with such rule.

Compensation

Compensation of the Board of Directors’ members is determined at the General Regular Shareholders’ Meeting in compliance with the General Companies Law. The maximum amount of compensation the Board of Directors’ members may receive, including salaries and any other form of compensation for the performance of permanent technical and administrative functions, may not exceed 25% of the Company’s profits. This amount will be 5% in the event no dividends are distributed to the shareholders and will be increased pro rata on the basis of the dividend distribution up to the 25% cap when all profits are distributed. In the event one or more directors serve as members of a special committee or perform technical and administrative functions and profits are reduced or non-existent and consequently the preset limits need to be exceeded, compensations in excess of the limit may only be paid with the prior express approval by shareholders at the General Regular Shareholders’ Meeting.

Executive Officers

The table below sets out the names and positions of Petrobras Argentina’s executive officers: 

Compensation

The compensation policy for executive officers includes an annual cash compensation and a benefit program. The annual cash compensation is determined based on the characteristics and responsibilities of the relevant position and the executive officer’s qualifications and experience and pay benchmarking data. Such compensation consists of a monthly fixed compensation and an annual variable compensation dependent upon Petrobras Argentina’s results of operations and the achievement of individual objectives. Benefits granted to executive officers are similar to those granted to the Company’s staff, such as life insurance, health care plan and supplementary pension plan (see Note 28 to the consolidated financial statements).

5.2. Decision-making and Internal Control System

Petrobras Argentina’s operations are divided into Business Units which are, in turn, supported by a Corporate Center.

As far as decision-making is concerned, Petrobras Argentina is managed by an Executive Committee composed of five members: the Chief Executive Officer, the Chief Financial Officer, the Director of Oil and Gas Exploration and Production, the Corporate and Services Director and the Downstream Director.

Operations are managed through standardized processes that facilitate and secure coordination among the different Company areas. Delegation of authority is encouraged for the purpose of promoting agile and efficient responses to activities. In addition, the scope of the delegation of authority is clearly and expressly defined through systemized approval limits for risk minimization purposes.

The Company’s Internal Control system is supported by the policies established by the Executive Committee and by systems and procedures operated by qualified personnel. This Internal Control system is designed to ensure achievement of the Company’s objectives, securing operational efficiency, reliability of financial reporting and compliance with applicable laws, rules and policies in general.

5.3. Audit Committee

Pursuant to Sections 109 and 110 of Law No. 26,831 (Capital Market Law) and the CNV Rules, public companies must have an Audit Committee composed of at least three members of the Board of Directors. On May 21, 2003, the Company’s Board approved the implementation process provided under General Resolution No. 400/02 issued by the CNV. This Resolution also establishes that the implementation and operation of the Audit Committee shall be stated in the Company’s internal regulations or Bylaws.

In compliance with the above resolution, on March 19, 2004 the General Regular Shareholders’ Meeting approved, among other measures, the addition of a section to the Corporate Bylaws regarding the structure and operation of the Audit Committee.

The Audit Committee’s purpose is to assist the Board of Directors in fulfilling its responsibilities to investors and the market, among others, in matters relating to (1) integrity of the financial statements, (2) compliance with applicable legal, regulatory and behavioral requirements, (3) qualification and independence of the external auditor who will act as attesting accountant (the “Independent Auditor”), and (4) performance of the Independent Auditor and internal audit function.

The Audit Committee is composed of three regular directors and an equal or lower number of alternate members who are appointed by the Board from among its members. Directors having sufficient experience and ability in financial, accounting or business matters are eligible to become members of the Audit Committee. All members must be independent, under the standards provided for in the SEC and NYSE applicable rules (provided such rules are applicable to non-US issuers and taking into account all the exceptions therein stated), while under the CNV rules only a majority of its members must be independent. Considering that the Company’s shares constituting its capital stock are listed on the New York Stock Exchange through an American Depositary Shares program, with the Company being subject to the NYSE and SEC rules, the Audit Committee is fully composed of independent Directors, to wit: Cedric Bridger, Roberto Monti and Roberto Fortunati as regular members and Alejandro Poletto and Santiago Montezanti as alternate members.

The Audit Committee works out an annual action plan for each fiscal year that is reported to the Board of Directors and the Statutory Syndic Committee. The Directors, members of the Statutory Syndic Committee, managers and external auditors will be bound, at the Audit Committee’s request, to attend the Committee’s meetings, assist the Committee and provide it with any information available to them. The Audit Committee will have access to any information and documentation deemed necessary for the fulfillment of its functions. For the proper performance of its duties, the Committee may hire, on the Company’s account, advisory services of a counsel and other independent professionals on the basis of a budget previously approved at the General Shareholders’ Meeting.

The Audit Committee has the following powers and responsibilities:

a) supervising the performance of the internal control and administrative and accounting systems, as well as the reliability of the latter and of all the financial information or of other relevant events to be reported to the CNV and to markets in compliance with the applicable reporting requirements.

b) establishing and supervising the implementation of procedures for the reception, documentation, treatment and tracking of claims or reports on irregularities in connection with accounting, internal control or auditing matters, on a confidential and anonymous basis.

c) issuing founded opinions with respect to transactions with related parties as required by applicable law. Issuing founded opinions whenever a conflict of interest exists or may arise and communicating these opinions to the markets as required by the CNV.

d) providing the market with complete information with respect to transactions where members of the corporate bodies and/or controlling shareholders of ours have conflicts of interest.

e) issuing an opinion regarding the reasonableness of the compensation and stock option plans for the Company’s directors and managers proposed by the Board of Directors.

f) issuing an opinion regarding compliance with legal requirements and  reasonableness of proposals to issue shares or securities convertible into shares, in the case of capital increases that exclude or limit preemptive rights.

g) issuing at least at the time of submittal of the annual financial statements, a report on the treatment given during the year to the matters under its responsibility.

h) issuing an opinion at the Shareholders’ Meeting on the proposal submitted by the Board for the appointment (or revocation) of the Independent Auditor.

i) evaluating the qualifications and independence of the external auditor.

j) issuing and maintaining pre-approval procedures in connection with any service (whether audit-related or not) to be provided by the Independent Auditor, under which the Committee will be exclusively authorized to pre-approve any -service provided by the said Auditor.

k) evaluating the quality of, and the main changes to the application of, the Company’s accounting standards.

5.4. Compensation Committee

For a better supervision of salary and compensation programs, the Board of Directors of Petrobras Argentina created a Compensation Committee at the Meeting held on October 6, 2006. The main purpose of this Committee is to assure compliance with and revise, whenever necessary, policies relating to compensation with the aim of providing the Company with greater flexibility to make more effective decisions. The Committee operates on a permanent basis, approves matters relating to compensation policies, including variable compensation practices and must report to the Board of Directors at least semiannually.

5.5. Statutory Syndic Committee

The Company has a Statutory Syndic Committee comprised of three regular members and three alternate members. The table below sets out the name of each member of the Statutory Syndic Committee, as approved by the General Regular and Special Shareholders’ Meeting held on March 19, 2015.

The regular and alternate members of the Statutory Syndic Committee are elected by the shareholders at the General Shareholders’ Meeting to serve for a renewable term of one year. The primary responsibility of the Statutory Syndic Committee is to monitor Management’s compliance with the General Companies Law, the Corporate Bylaws and the shareholders’ resolutions. The Statutory Syndic Committee also performs other functions, including: (i) attending Board of Directors’ and shareholders’ meetings, (ii) calling Special Shareholders’ Meetings when deemed necessary or when required by shareholders, in accordance with the General Companies Law, (iii) submitting a report on the Board of Directors’ reports and the Company’s annual financial statements at Regular Shareholders’ Meetings, and (iv) investigating written complaints from shareholders representing not less than 2% of the capital stock. The Statutory Syndic Committee shall not be involved in the control of the Management’s performance and, accordingly, shall not evaluate the business criterion and decisions made on issues of administration, financing, sales and production, as these issues fall within the exclusive responsibility of the Board of Directors.

6. Dividends

Pursuant to the General Companies Law, the Company may only pay dividends to shareholders from the net profits reflected in its approved annual audited financial statements. The Company’s Board of Directors may declare interim dividends and each member of the Board of Directors and of the Statutory Syndic Committee, as far as their functions are concerned, will be jointly and severally liable for any payments made in excess of net profits at year-end. The declaration, amount and payment of dividends to shareholders are subject to approval by the General Regular Shareholders’ Meeting. Under the Company’s Bylaws, net income shall be allocated as follows: a) 5% to a legal reserve, until it equals 20% of Corporate Capital and Capital Adjustment; b) compensation of the members of the Board of Directors and Statutory Syndic Committee; c) dividends on preferred stock with priority to unpaid cumulative dividends and d) dividends on common stock or to an optional reserve fund or a contingency fund, or to a new account, or as otherwise determined by the Shareholders’ Meeting. Dividends shall be paid pro rata to the respective paid-in amount within the year of their declaration and distributed to each shareholder pro rata to the number of common shares held by each shareholder.

Under Law No. 25,063, any dividends distributed by Petrobras Argentina, in cash or in kind, in excess of the taxable income accumulated as of the year-end immediately prior to the respective payment or distribution date, will be subject to a 35% income tax withholding, as one-time and definitive payment. For this purpose, taxable income is deemed to be that resulting from adding up to income as determined under the general provisions of the Income Tax Law, any dividends or income from other corporations not considered in the computation of said income for the same tax period or periods.

Under the amendment of Law No. 26,893, any dividends received by individuals or undivided estates residing in the country and by any beneficiary thereof having domicile or located abroad will be subject to income tax and a 10% tax rate, as one-time and definitive payment, without prejudice to the 35% withholding as may be applicable under Law No. 25,063.

7. Analysis of the Consolidated Results of Operations

7.1. Factors affecting our consolidated results of operations

7.1.1. Argentine economic situation  

Value of the Peso Against Foreign Currencies

As of December 31, 2015, the peso-U.S. dollar rate of exchange was ARS 13.04 per U.S. dollar, compared to ARS 8.55 per U.S. dollar as of December 31, 2014.

As of December 31, 2015 and 2014, the Company's financial debt was mainly denominated in U.S. dollars. However, the impact on our results of operations deriving from variations in exchange rates related to our financial debt is offset by net investments in foreign operations denominated in foreign currency which are disclosed in Shareholders' Equity under Other Comprehensive Income in the Consolidated Statement of Comprehensive Income. Accordingly, the Company has a balanced net monetary position in foreign currency.

With the accounting considerations stated, exchange differences for fiscal years 2015 and 2014 accounted for gains of ARS 40 million and ARS 307 million, respectively.

Inflation

Historically, the Argentine economy has exhibited significant volatility, characterized by periods of high inflation.

 

The CNV, through General Resolution No. 441, mandated that as from March 1, 2003 all financial statements should be stated in nominal currency. If inflation accounting were reinstated, financial statements would have to be stated in constant currency.

In 2014 and 2013, consumer price indexes, according to statistics from the INDEC (National Institute of Statistics and Census), reflected an inflation of 23.9% and 10.9%, and wholesale price indexes rose 28.3% and 14.7%, respectively.

The INDEC published statistics until October 2015. The Statistics Emergency was declared through issuance of Decree No. 55/2016 and the use of certain alternative indicators was suggested in the absence of INDEC's reports. Considering INDEC's statistics until October and adding up suggested statistics produced by the General Bureau of Statistics and Census of the City of Buenos Aires for the months of November and December, the consumer price index reflected an inflation of 18.6% and the wholesale price index rose 15.7% in fiscal year 2015.

Inflation could also adversely affect comparability between the different periods presented in this report.

7.1.2. Regulations of the Energy Industry in Argentina

In the context of sustained increase in commodity prices until the global financial crisis that erupted in 2008 third quarter, over the past several years the Argentine government has imposed a series of regulations, particularly focused on the energy sector, aimed at easing the impact of inflationary pressures resulting from such scenario and securing energy supply to the domestic market.

Natural Gas

In 2007, the Argentine government and producers signed a Natural Gas Producers Agreement, the main goals of which were to secure supply of the domestic demand for gas and the gradual recovery in prices in all the market segments.

As regards the first goal, the agreement established domestic market supply commitments for each producer. The above agreement was approved by Resolution No.599/07 of the Secretary of Energy (SE) and provided for successive maturities for each segment, with the residential supply commitment expiring last in 2011. As a result, each segment's market share was uniformly distributed among producers and regulated prices remained low for the above mentioned segments.

In addition, the above resolution established that on December 31, 2009 natural gas producers' commitments to supply the CNG and power plant market segments would terminate. However, the SE decided to extend those supply commitments until the end of 2011.

As regards the second goal, the gradual recovery in prices, the power plant segment experienced the highest increase. In the case of the residential segment, however, prices did not increase significantly, this having a negative impact on natural gas sales during the life of the Agreement.

Regarding the CNG segment, in August 2012 the SE, through Resolution No. 1,445, set a new price relating to natural gas for CNG services of ARS 0,4945 per cubic meter, accounting for an estimated increase of 300%, and instructed to invest any additional proceeds in the development of conventional gas resources.

Concerning Resolution No.599/07 of the SE which expired on December 31, 2011, the Argentine government provisionally extended, through SE Resolution No.172/2011, the gas allocation rules set under SE Resolution No. 599/07 until substitute measures are adopted, meaning the continuation of the sales mix of Petrobras Argentina.

In January 2007, through Resolution No. 1,886, the SE confirmed that hydrocarbon exports are contingent upon adequate satisfaction of domestic demand and that exports sales have to be authorized on a case-by-case basis by the Argentine Executive Branch.

Within the scope of the long-term gas supply agreements entered into between the governments of Argentina and Bolivia whereby a gas price of USD 5 per million British thermal unit (MMBtu) was initially established subject to adjustment pursuant to a formula based on international price references for gas and its by-products, gas imports were placed under the responsibility of ENARSA. In order to avoid the impact of this rise on domestic consumers, the Argentine government required that the increase in import gas prices be passed through to exports, through the rise in export taxes. This was implemented in August 2006 through Resolution No. 534/2006 issued by the Ministry of Economy and Production, whereby the tax rate on natural gas exports was increased to 45% based on the price for gas from Bolivia of USD 5 /MMBtu. In March 2008, the Ministry of Economy and Production increased the tax rate to 100%, which rate was applied on the highest price for natural gas imports into Argentina, either gas imports from Bolivia or regasified liquefied natural gas (LNG) imports.

In September 2008, through Resolution No.1070/08 issued by the SE, the Argentine government approved a Natural Gas Producers Agreement to reduce the price of 10 kg. butane cylinders. This agreement resulted in an increase in natural gas prices of 15% for residential users, 8% for CNG and 13% for electricity generation. The reduction in LPG sales price is financed with producers' contributions, originally equivalent to 65% of the price increase resulting from the above Resolution, and subsequently equivalent to 100% as from December 2008. Later on, under Resolution No.1,417/08, an 80% increase was imposed on the price applicable to a sector of the R3 Residential segment as from November 2008. The Natural Gas Producers Supplementary Agreement approved by Resolution No. 1070/08 issued by the SE was renewed for the years 2010, 2011, 2012, 2013, 2014 and 2015. During 2015 the Argentine governmet, through Resolution No. 72/15 issued by the SE, discontinued the way to subsidize residential LPG consumption by means of increases in the price for producers, and implemented a subsidy on cylinder final users.

In March 2015, the Argentine Executive Branch issued Decree No. 470/2015, subsequently implemented by Resolutions No. 49/2015 and No. 70/2015 issued by the SE. Through these actions, the Argentine government created the New Stabilization Program to replace the Price Stabilization Agreement entered into in September 2008 between producers and the government. Through the New Stabilization Program, a reference price was agreed to secure supply to low-income residential users and producers agreed to supply LPG at a set price (lower than market price) and with a defined share for each producer. In addition, such Program provided for a compensation to be paid to producers by a trust created for such purpose.

In addition, Resolution No. 792/2015 issued by the SE on March 16, 2015 replaced Resolution No. 36/2015. Such Resolution provided for an adjustment and increase of export parity prices for LPG sales in the domestic market for those customers not falling within the scope of the New Stabilization Program.

In addition, a Trust Fund was created (Decree No.2,067/08) to cover natural gas imports required to secure supply of the domestic market. The resulting expenses will be borne by users of the transportation and/or distribution regulated services, by natural gas processing companies and by gas consumers receiving gas directly from producers without using natural gas transportation or distribution systems.

In October 2010, through Resolution I-1,410 issued by ENARGAS, the natural gas delivery method was modified, placing a priority on the supply of the residential and CNG segments' demand. As a result, each distribution company was able to request volumes on a daily basis above volumes committed under the Natural Gas Producers Agreement (Resolution No. 599/2007 issued by the SE). This was the only method to request natural gas from producers for the residential segment after expiration of the Agreement in December 2011. In December 2011, the Argentine government, through Resolution No. 172/2011 issued by the SE, temporarily extended the terms of the Producers Agreements on a unilateral basis, and thus allowed ENARGAS to continue using gas producers' share established in such Agreement.

In November 2011, through Resolution No. 1,982 issued by ENARGAS, the amount to be received by the Trust Fund created under Decree 2,067/08 was increased as from December 2011 consumptions, and the consumer base falling within the scope of the resolution was broadened. Subsequently, Resolution No. 1,991 issued by ENARGAS provided a detail of large consumers falling within the scope of such resolution and the procedure to request for exclusion, if applicable. Consumption of natural gas at Bahía Blanca Refinery in connection with oil refining activities and at Cóndor and Barda Las Vegas plants in connection with natural gas processing fell within the scope of the above resolution.

Law No. 26,741 passed in May 2012 declared of public interest and a priority objective of the Republic of Argentina the achievement of self-sufficiency in hydrocarbons supply as well as hydrocarbon exploration, exploitation, industrialization, transportation and marketing activities. In addition, fifty one per cent (51%) of YPF S.A.'s and Repsol YPF Gas S.A.'s assets were declared of public interest and subject to expropriation.

Under Decree No. 1,277 passed in July 2012, the Argentine Executive Branch approved the regulations for implementation of Law No. 26,741 and issued the Rules of the Argentine Hydrocarbon Sovereignty regime. These rules establish a Hydrocarbon Investment Plan designed to seek maximization of investments and sustainability of the activity in the short, medium and long term. The Strategic Planning and Coordination Commission for the National Hydrocarbons Investment Plan is created under such Decree. In addition, certain sections of Decrees No. 1,055/89, 1,212/89 and 1,589/89 were repealed. Those sections provided for the free availability of hydrocarbons produced in concession areas granted, the free commercialization in the domestic and foreign markets and the freedom to set prices. The Company has complied with all applicable reporting requirements.

In February 2013, the Strategic Planning and Coordination Commission for the National Hydrocarbons Investment Plan issued Resolution No. 1/2013 whereby the Excess Natural Gas Injection Incentive Program was created. Under such program, producers were required to submit their Projects for Increase in Total Natural Gas Injection for a maximum period of 5 years, aimed at increasing production and achieving higher activity and employment levels in the sector. A price of 7.50 USD/MMBTU was established for natural gas Excess Injection, with penalties involving LNG imports in the case of non-compliance with committed volumes. The Company submitted its project but finally did not participate in the Program.

In turn, in November 2013, through Resolution No. 60/2013, the Commission created the Natural Gas Injection Incentive Program for Companies with Reduced Injection. Producers were required to submit projects to increase natural gas production levels no later than March 31, 2014. Such program was directed to companies without previous production or with a maximum injection limit of 3.5 MMm3/d and included price incentives in the case of production increases and penalties involving LNG imports in the case of non-compliance with committed volumes. Moreover, companies participating in the Program mentioned in the preceding paragraph and meeting the relevant requirements may request termination of participation in such program and inclusion in this program.

In March 2014, Resolution No. 60/2013 is amended by Resolution No. 22/2014 issued by the Commission, whereby the deadline for submission was extended through April 30, 2014, and the previous maximum injection limit was increased to 4.0 MMm3/d.

Also in March 2014, under Resolution No. 226/2014 the SE implemented the Program for the Rational Use of natural gas, whereby subsidies to producers who participate in the Plan adopted under CPCEPHIH Resolution No. 1/2013 are reduced through implementation of a new price schedule for the residential and CNG segments. The program encourages a reduction in consumption applicable to residential users providing the benefit of maintaining the tariff in the case of a reduction higher than 20% compared to the previous year, or applying a partial increase (50% of the increase applied to users who do not reduce consumption) in case the yoy drop in consumption ranges between 5% and 20%. In case there is no reduction in consumption, the new price schedule for the residential segment is in stages, with a first stage as from April 1, 2014, a second stage as from June 1, and finally a third stage as from August 1, with average increases of 150%, 300% and 500%, respectively. Moreover, the southern area of the country is left outside (due to weather conditions) the price increase provided under the price schedule, specifically users in the area of Camuzzi Gas del Sur or a sub-distribution company. As regards the CNG sector, the schedule provides for rises of 24%, 36% and 48% for each application stage of price increase variations.

In August 2014, the Ministry of Economy and Public Finance, through Resolution No. 139/2014, introduced new changes to Resolution No. 60/2013 issued by the Commission, including, among others, elimination of the previous maximum injection limit and fixing of two annual registration periods. The Company made a presentation to request participation in this Program and was registered in the same under Resolution No. 13/2015 issued by the Secretary of Economic Policy and Development Planning of the Ministry of Economy and Public Finance.

In October 2014, through Resolution No. 231/2014, the Commission determined that changes in the price relating to natural gas for CNG consumption will be made on a monthly basis in the same percentage as changes to be made in the average price for high grade gasoline above 93 RON, and will be published on the Web page of the SE.

In December 2015, under Decree No. 272/2015 issued by the new Argentine government, the Strategic Planning and Coordination Commission for the National Hydrocarbons Investment Plan was dissolved, some sections of Annex I to Decree No. 1277/2012 related to the above Commission's duties were repealed and the Commission's functions were transferred to the Ministry of Energy and Mines.

Export Withholding Taxes

The Public Emergency Law No. 25,561 established a withholding tax regime on hydrocarbon exports. The taxes withheld are deducted from the sales price.

In order to secure domestic supply and discourage exports, the Ministry of Economy and Production issued Resolution No.394/07, effective November 2007, which provided the application of an incremental withholding tax rate to crude oil exports.

 

In October 2014, through Resolution No. 803/14, the Ministry of Economy and Finance changed the withholding tax rate on hydrocarbon exports according to a specific price and rate schedule, with percentages ranging from 10% to 13%.

Resolution No. 1077/14 issued by the Ministry of Economy and Public Finance repealing Resolution No. 394/2007 and amendatory Resolution No. 803/14 became effective on January 1, 2015. Such Resolution provided that when the International Price is below USD 71 per barrel the applicable tax rate will be 1% and when the International Price is above or equal to USD 71 per barrel, an incremental tax rate will be applied.

Electricity Generation

With the enactment of the Public Emergency Law, in 2002 the Argentine government implemented the pesification of dollar-denominated prices in the Wholesale Electricity Market ("WEM") and set a cap on prices that could be charged for gas used in electric power generation. As a result of this regulation, electricity prices no longer reflected total generation costs. This discrepancy led to the gradual depletion of the Stabilization Fund (Fondo de Estabilización), causing an increasing deficit which prevented CAMMESA (Compañía Administradora del Mercado Eléctrico S.A.) from normally settling accounts with market agents.

In an effort to reduce the Stabilization Fund deficit, the Argentine government made successive contributions to the fund and reinstated seasonal adjustments, recognizing the increased costs resulting from the recovery of natural gas prices in the determination of wholesale spot prices. Subsequently, the SE created an investment fund called FONINVEMEM I (Fund for the Investment Needed to Increase the Supply of Electricity in the Wholesale Market) for the purpose of encouraging WEM creditors to participate in investments directed to increasing the available supply of electric power generation in Argentina.

In subsequent years, a set of regulations was implemented for the recovery of generators' margins, collection of amounts owed by the Wholesale Electricity Market and reshaping of the electrical system as a whole.

In 2006, the Energía Plus program was created under Resolution No. 1281/06. Such Resolution provided that new investments as from issuance of the resolution could be subject to agreements with Large Users in the WEM including a tariff different from that established in the spot market.

In November 2010, an agreement was entered into between generators and the SE to start reshaping of the WEM and comply with Resolution No.1,427/2004. Pursuant to this agreement, thermal generators started to receive a higher price for the monthly available power based on their availability. In addition, higher operation and maintenance costs were recognized according to the fuel used for generation. Generators, in turn, had undertaken to continue with their investment plans in maintenance works and make new investments with sales proceeds with maturity dates to be defined and not falling within the scope of Resolution No. 724/08. As from 2012, the Agreement was terminated.

In March 2013, the SE approved Resolution No. 95/2013 involving changes in the compensation scheme for WEM Generators, Co-generators and Self-generators except for Plus Generators, Binational Hydroelectric Generation and Nuclear Generation, among others. The following changes are applicable to Generators adhering to this new scheme:

i.- Changes in the compensation of generation companies according to their production scale and technology.

ii.- Payment of fixed and variable non-fuel costs and an additional compensation: payment of the latter two items is subject to the generation of each power plant, with a portion of the additional compensation being applied to a trust to finance works in the electricity sector.

iii.- Temporary suspension of agreements between private parties, in connection with both electric power and fuels and related products, that will be managed by CAMMESA.

In May 2014, the SE issued Resolution No.529/2014 which provided for an adjustment in prices applicable under SE Resolution No. 95/2013 and introduced the following changes:

i.-Created an incentive for thermal generation prices in the most critical months for demand, improving the compensation of generation companies with high availability.

ii.- Created a new compensation item called "Compensation for non-recurring maintenance". Such compensation is accrued and only paid to generation companies performing maintenance works on the current equipment to support or increase availability.

In July 2015, and retroactive to February, Resolution No. 482/2015 issued by the SE provided for an adjustment in the compensation established under Resolution No. 529/2014 and the incorporation of the following compensation items, broken down by production scale and technology:

i.- Resources for FONINVEMEN 2015-2018 investments, to be allocated to generators participating in investment projects approved by the SE.

ii.- Incentives for electric power production and operational efficiency.

Regulation of Utilities

The enactment of the Public Emergency Law in 2002 significantly altered the economic and financial scenario faced by Argentine utility companies.  In particular, the size of the devaluation impact, in a context of fixed revenues as a consequence of the pesification of tariffs, affected the economic and financial position of said companies, including their ability to satisfy certain loan agreement provisions.

The Public Emergency Law provided for the pesification of tariffs for utility services and the elimination of indexation clauses applicable to these tariffs. In addition, the Argentine Executive Branch was authorized to renegotiate contracts with utility companies. The UNIREN (Utilities Contract Renegotiation and Analysis Committee) was created to provide assistance in the utilities renegotiation process.

Pursuant to Law No. 27,200, passed in December 2015, the term to renegotiate contracts for public works and utilities was extended through December 31, 2017.

On April 7, 2014, through Resolution No. I-2852 ENARGAS approved tariff schedules applicable to Natural Gas Transportation utility services provided by TGS effective April 1, 2014. Tariff schedules provide for an increase in stages: an 8% increase as from April 1, 2014, an accumulated 14% increase as from June 1, 2014 and an accumulated 20% increase as from August 1, 2014.

This increase will be allocated to an investment plan to be implemented by TGS in connection with works in its transportation system to secure quality levels of natural gas transportation services according to the guidelines on the Regulatory Framework for the natural gas industry.

On June 5, 2015, through Resolution No. 3,347 ENARGAS approved increases in the tariff schedules applicable to Natural Gas transportation utility services effective May 1, 2015. These increases represent for TGS a temporary increase of 44.3% in the price for natural gas transportation services and of 73.2% in the Charge for Access and Use.

These temporary increases are intended to cover operation and maintenance costs and the investments required for the regular supply of natural gas transportation services until TGS and the Argentine government reach an agreement for the comprehensive renegotiation (the "Comprehensive Agreement") of the natural gas transportation license which was initialed by TGS in October 2011. As of the date of these financial statements, there is no certainty as to the execution date of the comprehensive agreement.

These increases are a partial recognition of the previous administrative claims filed by TGS. That is the reason why TGS will continue taking appropriate actions to protect its rights, including any actions required to execute the Comprehensive Agreement (see Note 17.1.5 to the consolidated financial statements).

Restructuring of CIESA's debt

On July 13, 2012, CIESA, Grupo Pampa and the Company entered into a settlement agreement whereby all parties involved waived all claims, title and interest under the lawsuits before the New York State Courts and terminated the same and whereby CIESA paid off all the Financial Debt. (See Note 17.1.4 to the consolidated financial statements).

Pursuant to the above mentioned agreement and the resolutions adopted at CIESA's Board of Directors' Meeting held on October 23, 2012, on January 2, 2013 CIESA gave notice to CNV of full payment of Corporate Bonds, and on May 30, 2013 CIESA withdrew from the Public Offering and Listing System.

7.1.3. Migration of operating agreements in Venezuela

Within the framework of the oil contract renegotiation process started by the Venezuelan government, in August 2006 we signed the pertinent agreements in order to effect migration of operating agreements into mixed companies, in which the Venezuelan government was entitled to a 60% ownership. (See Note 17.2 to the consolidated financial statements).

The new operating conditions derived from migration of operating agreements had an adverse impact on the recoverable value of our assets in Venezuela. The recoverability of these investments is highly sensitive to crude oil price volatility, to economic, social and regulatory changes in Venezuela and, particularly, to the business plans to be implemented to develop mixed companies' reserves.

7.1.4. Commodity Prices

Our results of operations and cash flows are exposed to volatility in international prices, mainly crude oil and oil related product prices.  

International prices for crude oil have fluctuated significantly over the last years. Changes in crude oil prices usually entail changes in the price for oil related products.  

In 2015, Brent crude oil from the United Kingdom and reference of world crude oils continued its fall started in July 2014 which took prices down to USD 53 per barrel at the end of the first quarter of 2015. Recovery in oil prices as from that moment could not be sustained and as from mid-May oil prices resumed their downward slide, with prices at USD 35 per barrel at year- end.

7.1.5 Oil and gas production in Argentina

Oil and gas reserves in Argentina have followed a downward trend in recent years. According to official data from the SE, proved oil and gas reserves dropped by 9% in the 2009-2014 period. In 2015, oil production accumulated as of November averaged 532 thousand barrels per day, with no significant changes compared to 2014. Gas production rose 2% to 117.8 million cubic meters per day.

Within this context, the Company's oil and gas reserves in Argentina declined by 12% in 2015. The Company's oil equivalent production dropped by 14% in 2015 mainly due to the sale of interest in Santa Cruz I, Santa Cruz I Oeste and Santa Cruz II areas, all of them in the Austral basin, and to a lesser extent, the natural decline of mature fields in Argentina.

The Company's business plan provides for exploration investments in Argentina.

Due to risks inherent to exploration activities, the Company's Management cannot assure you that this downward trend in our Argentine reserves will be reversed.

7.1.6. Operations in Ecuador

As from 2006 the Ecuadorian government implemented far-reaching tax and regulatory reforms in connection with hydrocarbon activities, which involved material changes in the conditions set forth at the time of execution of participation agreements (see Note 30 to the consolidated financial statements).

These changes have materially modified the conditions set forth at the time of execution of participation agreements, adversely affecting profitability prospects on projects, with the consequent negative impact on our assessment of investment recoverability.

Pursuant to the provisions in Section 9 of the Amendatory Agreements, the Ecuadorian State must compensate contractors an amount equivalent to unamortized investments at closing of each fiscal year, at an annual adjustable rate considered reasonable for this type of projects in Ecuador, and a term was determined for the Company and the Ecuadorian State to agree on settlement of the agreement. The settlement made by the Ecuadorian State in March 2011 does not comply with the procedure to determine the settlement price established in the Amendment Agreements by the parties concerned, which procedure may not be unilaterally modified. Therefore, the Company sent a notice to the Ecuadorian State informing on the existence of a dispute under the terms of the Treaty for the Promotion and Reciprocal Protection of Investments entered into between Argentina and Ecuador. This implies the opening of a negotiation period prior to a possible arbitration.

Since no agreement was reached with the Ecuadorian State, on June 21, 2013 EcuadorTLC S.A., Cayman International Exploration Company and Teikoku Oil Ecuador, members of the Consortium, submitted to the Ecuadorian State a notice of dispute under the terms of the Amendatory Agreements and informed thereby their decision to submit the matter to international arbitration, according to the Arbitration Rules of the United Nations Commission on International Trade Law.

Finally, on February 26, 2014 a request for arbitration against Ecuador was submitted under the before mentioned terms. On October 13, 2015 the Tribunal issued Procedural Order No. 2, in which it rejected a request for bifurcation requested by the defendants. The defendants will present its defense to the application and objections to the Court on or before the May 21, 2016.

As of December 31, 2015, the Company recorded ARS 698 million to be recovered from the Ecuadorian State as provided in the Amendatory Agreements, in the Other current receivables line (Note 15 to the consolidated financial statements). Such amount does not include calculation of the adjustment provided for in such agreements, since the Company considers that it is not possible to determine with certainty the applicable adjustment rate.

7.1.7. Changes in E&P asset and concession portfolio

On January 31, 2014, the Company signed an agreement with YPF S.A. for the sale of its entire interest in Puesto Hernández Joint Venture (UTE) in which the Company was the operator and held a 38.45% interest. This transaction represented early termination of the Joint Venture (UTE) agreement.

On December 30, 2014, the Legislative Body of the Province of Río Negro ratified the agreement entered into with the Provincial Executive Branch to extend for a 10-year term the concessions the Company holds in that province: 25 de Mayo - Medanito, Jagüel de los Machos and Río Neuquén, where the Company acts as operator, and the Entre Lomas area concession, operated by PELSA.

On March 30, 2015, the Company signed a purchase and sale agreement with CGC for the sale of its entire interest in the Austral basin in Argentina, including interest in the concessions operated under the Joint Ventures (UTE) of Santa Cruz I, Santa Cruz I Oeste, Glencross and Estancia Chiripá, and in assets related to Santa Cruz II.

In August 2015, the Province of Río Negro granted PELSA the Exploitation Concession for Lote Jarilla Quemada, which was part of Agua Amarga Exploration Area. PELSA is a company controlled by Petrobras Argentina with a 58.88% equity interest.

On September 7, 2015 the Province of La Pampa took possession of La Pampa portion of Jagüel de los Machos area, after expiration of the concession on such area on September 6.

In October and November 2015, in compliance with Section 5.2 of the respective association agreements, the Company reported Enarsa 1 and Enarsa 3 partners its decision not to participate in the conversion of such agreements into exploration permits under Section 30 of Law No. 27,007.

In August 2015, the Province of Neuquén approved assignment of 50% of the Company's interest in Parva Negra Este area to ExxonMobil Exploration Argentina S.A.

In September 2015, as regards the exploration permit for Chirete, in which the Company acted as operator and had a 100% interest, the Province of Salta approved assignment of operations and of 50% of the rights and obligations to High Luck Group Limited.

7.2. Analysis of the Consolidated Results of Operations

(in millions of pesos, except where otherwise noted)

The following table sets out the Company’s results of operations for the three–month periods and fiscal years ended December 31, 2015 and 2014:

Analysis for fiscal years ended December 31, 2015 and 2014:

Net income : Net income attributable to the Company’s shareholders increased 395, or 86.2%, to 853 in 2015 from 458 in 2014.

Sales : Sales increased 1,217, or 5.9%, to 21,955 from 20,738 in 2014. This rise is mainly attributable to increases of 1,138, 617 and 73 in the Gas and Energy, Refining and Distribution and Petrochemicals business segments, respectively, partially offset by a decline in the Oil and Gas Exploration and Production business segment. Intercompany sales totaled 9,721 in 2015 and 9,214 in 2014. Most of these sales were attributable to the Oil and Gas Exploration and Production, Refining and Distribution and Gas and Energy business segments

Gross profit: Gross profit for 2015 increased 153, or 2,4%, to 6,401 from 6,248. This rise is mainly attributable to an increase of 227 in the Gas and Energy business segment, partially offset by declines of 204 and 129 in the Oil and Gas Exploration and Production and Petrochemicals business segments, respectively. Results from intercompany transactions improved during the year under review mainly due to changes in the refinery’s crude oil production levels.

Administrative and selling expenses : Administrative and selling expenses rose 505, or 20.9%, to 2,921 from 2,416 in 2014, mainly as a consequence of increases of 278, 208 and 51 in the Refining and Distribution, Oil and Gas Exploration and Production and Corporate business segments, respectively.

Exploration expenses: Exploration expenses charged to income totaled 148 in 2015 and 70 in 2014. See “Oil and Gas Exploration and Production”.

Other operating expenses, net : Other operating expenses, net improved 656, or 84.2%, and totaled losses of 123 and 779 in 2015 and 2014, respectively. This rise is mainly attributable to the Oil and Gas Exploration and Production segment which accounted for an improvement of 570.

Share of net loss of equity-accounted investees: Share of net loss of equity-accounted investees accounted for a reduced loss of 445 to 1,290 from 1,735 in 2014, mainly attributable to a reduced loss of 620 in the Oil and Gas Exploration and Production business segment, partially offset by declines of 133 and 42 in the Refining and Distribution and Gas and Energy business segments, respectively

Operating income : Operating income improved 671 to 1,919 from 1,248 in 2014. This improvement is mainly attributable to increases of 857 and 195 in the Oil and Gas Exploration and Production and Gas and Energy business segments, respectively Conversely, operating income for the Refining and Distribution and Petrochemicals business segments declined 372 and 115, respectively.

Financial results: Financial results accounted for a loss of 53 in 2015 compared to a gain of 72 in 2014. The decline for the year under review mainly derives from reduced exchange gains, partially offset by an improvement in net interest as a result of higher interest rate on financial investments in 2015.

It should be highlighted that both fiscal years were positively impacted by the effects of the depreciation of the Argentine peso against the US dollar on a net monetary asset position in foreign currency throughout 2014 and during a large part of 2015, with a stronger impact in 2014 as a consequence of a greater position in such fiscal year, partially offset by larger depreciation of the peso in 2015 compared to 2014, 53% and 32%, respectively.

Income tax: Income tax charge for 2015 and 2014 accounted for losses of 971 and 742, respectively, in line with improved results for the year under review.

Income tax effective rate increased in both fiscal years. During the year under review this increase was attributable to a higher deferred tax loss as a consequence of the effects of the larger devaluation of the Argentine peso for translation of operations with a functional currency other than the Argentine peso, and in 2014 such rise derived from impairment of investment in OCP, with losses not generating the corresponding tax shield.

7.2.1. Analysis of Operating Income

7.2.1.1. Oil and Gas Exploration and Production

Operating income: Operating income for the Oil and Gas Exploration and Production business segment increase 857, or 117%, to 1,592 from 735 in 2014.

Operating income for this business segment is broken down as follows:

(In millions of pesos)

Sales: In 2015 sales for this business segment decreased 104, or 1%, to 10,449 from 10,553 in 2014.

Argentina

In 2015 sales attributable to operations in Argentina decreased 30, or 0.3%, to 10,331 from 10,361 in 2014, primarily due to the fact that positive effects of the improvement in gas average sales prices were offset by a decline in oil and gas sales volumes, which averaged 67.4 thousand boe per day in 2015 and 77.7 thousand BOE per day in 2014. Lower oil and gas volumes in the year under review are primarily attributable to the sale of assets in the Austral basin in the first quarter of 2015. It should be pointed out that the start of production of new gas and oil wells in the Neuquén basin allowed to offset the natural decline of mature fields.

Crude oil sales decreased 890, or 10.8%, to 7,364 from 8,254 in 2014, mainly due to a 15.1% decline in sales volumes, partially offset by a 5% rise in the average sales price to ARS 647 per barrel from ARS 616 per barrel. Sales volumes totaled 31.2 thousand barrels in 2015 and 36.7 thousand barrels in 2014.

Gas sales increased 884, or 43.7%, to 2,906 from 2,022, mainly due to a 63.1% rise in the sales price to ARS 36.7 per Mcf from ARS 22.5 per Mcf as a result of the implementation of the Stimulus Program Injection Natural Gas for Business with Reduced injection ( Programa de Estímulo a la Inyección de Gas Natural para Empresas con Inyección Reducida) and, to a lesser extent, an improvement in average prices due to the higher proportion of gas plus sold. Daily gas sales volumes totaled 216.9 Mcf and 246.1 Mcf, in 2015 and 2014, respectively.

Outside of Argentina

Total sales volumes for operations outside of Argentina decreased 74, or 38.5%, to 118 from 192, mainly due to operations in Bolivia.

Gross profit: Gross profit for this business segment decreased 204, or 5.8%, to 3,330 in 2015 from 3,534. Margin on sales was 31.9% and 33.5% in 2015 and 2014, respectively, mainly derived from operations in Argentina.

In 2015, gross profit attributable to operations in Argentina decreased 174, or 5%, to 3,280 from 3,454, with similar margins on sales in both quarters, 31.7% in 2015 and 33.3% in 2014, primarily due to the fact that the recovery in sales prices was offset by the rise in production costs and the decline in sales volumes.

Gross profit for operations outside of Argentina dropped 30, or 37.5%, to 50 from 80, with a gross margin on sales of 42.4% and 41.7%, respectively.

Administrative and selling expenses : Administrative and selling expenses increased 51, or 9.8%, to 571 in 2015 from 520 in 2014. This increase is primarily attributable to recognition of inflation in expenses for the year under review.

Exploration expenses :Exploration expenses charged to income rose 78, or 111.4%, to 148 in 2015 from 70 in 2014, and are attributable to operations in Argentina. Expenses for both fiscal years were attributable to geological and geophysical expenses and abandonment of onshore exploration wells.

Expenses for unsuccessful wells totaled 83 in 2015 and 11 in 2014.

Other operating income (expense), net : Other operating income (expense), net accounted for a gain of 191 in 2015 compared to a loss of 379 in 2014. The gain recorded in 2015 is primarily attributable to the sale of assets in the Austral basin and reassessment of ship or pay liabilities in Ecuador, accounting for profits of 674 and 303, respectively. These effects were partially offset by impairment of fields in Argentina and Bolivia and discontinuance of operations at Jagüel de los Machos, accounting for losses of 635 and 121, respectively. The loss recorded in 2014 is mainly attributable to charges for environmental remediation (basically due to extension of concessions in Río Negro), idle capacity, contingencies, impairment of fields in Bolivia, of 166, 150, 95 and 94, respectively, offset by a gain of 181 derived from the sale of interest in Puesto Hernández Joint Venture ( UTE ).

Share of net loss of equity-accounted investees : Share of net loss of equity-accounted investees accounted for losses of 1,210 in 2015 and 1,830 in 2014, mainly attributable to higher losses of 464 and 162 in 2014 from impairment of investment in OCP and in Mixed companies in Venezuela, respectively.

7.2.1.2. Refining and Distribution

Operating income: Operating income for the Refining and Distribution business segment decreased 372 to 40 in 2015 from 412 in 2014.

Operating income for this business segment is broken down as follows:

(In millions of pesos)

Sales : Sales for the Refining and Distribution segment rose 617, or 5.4%, to 12,093 in 2015 from 11,476 in 2014, mainly due to increased refined product sales of 1,055, basically derived from higher sales volumes, partially offset by a 438 drop in crude oil sales.

In 2015, Bahía Blanca Refinery processed 28,704 oil barrels per day, accounting for a 94.1% of its installed capacity, with the processed volume being 6% higher compared to previous year, mainly due to the scheduled shutdown for maintenance works performed in 2014, which resulted in reduced availability of refined products and increased crude oil sales to third parties in 2014.

In 2015, total sales volumes of refined products rose 154 thousand m ³ , or 8.3%, to 2,011 thousand m ³ from 1,857 thousand m ³ in 2014. Fiscal year 2014 was impacted by the above mentioned shutdown for maintenance works and increased demand in the year under review.

In 2015, sales volumes of diesel oil, gasoline, fuel oil and IFOs and other oil related products totaled 865 thousand m ³ , 564 thousand m ³ , 399 thousand m ³ and 183 thousand m ³ , respectively. In 2014, sales volumes of diesel oil, gasoline, fuel oil and IFOs and other oil related products totaled 784 thousand m ³ , 491 thousand m ³ , 394 thousand m ³ and 188 thousand m ³ , respectively.

The drop in crude oil sales derives from the combined effect of reduced sales volumes and a decline in average sales prices, in line with the drop in international prices. Sales volumes of crude oil totaled 124 thousand m ³ and 220 thousand m ³ in 2015 and 2014, respectively.

Gross profit: Gross profit for this business segment was similar in both fiscal years and totaled 1,305 in 2015 and 1,308 in 2014, with a margin on sales of 10.8% in 2015 and 11.4% in 2014.

Administrative and selling expenses : Administrative and selling expenses increased 278, or 28.8%, to 1,242 in 2015 from 964 in 2014, mainly as a consequence of higher selling expenses, basically maintenance expenses related to the Company’s own network, inland and ocean freight, taxes and labor costs.

Other operating income (expense), net : Other operating income (expense), net accounted for a gain of 13 in 2015 and a loss of 29 in 2014.

Share of net profit (loss) of equity-accounted investees: Share of net profit (loss) of equity-accounted investees is attributable to equity interest in Refinor, which accounted for a loss of 36 in 2015, compared to a gain of 97 in 2014, mainly as a consequence of a sharp drop in volumes and prices for fuels directed to the export market, in addition to a strong decline in LPG sales prices, in line with the drop in international reference prices. In 2015 crude oil volumes processed dropped by 38% due to reduced volumes coming from Bolivia.

Additionally rich gas production was reduced because of lower wealth of gas from Bolivia. Added to this international market prices, which started to decline significantly impacted LPG prices and the Virgin Naphtha export.

7.2.1.3. Petrochemicals

Operating income: Operating income for the Petrochemicals business segment decreased 115, or 22.7%, to 390 from 505 in 2014.

Operating income for this business segment is broken down as follows:

(In millions of pesos)

Sales : Sales for this business segment rose 73, or 1.6%, to 4,509 in 2015 from 4,436 in 2014, primarily due to increases in the catalytic reformer plant operations, partially offset by a decline in styrenic products.

Revenues from the catalytic reformer plant operations rose 263, or 17%, to 1,811 from 1,548 in 2014, mainly as a consequence of the combined effect of a 9.8% improvement in average sales prices and a 6.6% rise in sales volumes to 353.1 thousand tons in 2015 from 331.3 thousand tons in 2014. This rise is mainly attributable to increased exports of intermediate gasoline and higher volumes of aromatic varieties at a domestic level.

Styrenic products declined 190 to 2,698 from 2,888 in 2014, mainly as a consequence of a 7.3% decrease in average sales prices, in line with the drop in international reference prices, partially offset by a 0.8% increase in sales volumes to 170.4 thousand tons in 2015 from 169 thousand tons in 2014.

Performance of the main styrenic products was as follows:

a) Styrene sales volumes dropped by 2.6% to 69.1 thousand tons in 2015, basically due to a decline in exports directed to Chile and Brazil.

b) Polystyrene and Bops (bi-oriented polystyrene) sales volumes rose 13.8% to 66.5 thousand tons in 2015, mainly due to an increase in domestic sales.

c) Synthetic rubber sales volumes totaled 34.8 thousand tons, accounting for a 12.1% drop compared to 2014, mainly due to a decline in exports directed to Brazil.

Gross profit: In 2015 gross profit for this business segment decreased 129, or 15.9%, to 681 from 810 in 2014, with a drop in margin on sales to 15.1% in 2015 from 18.3%, mainly attributable to the decline in marketing margins as a result of the drop in international reference prices.

Administrative and selling expenses :Administrative and selling expenses were similar in both years and totaled 221 and 216 in 2015 and 2014, respectively.

Other operating expenses, net : Other operating expenses, net accounted for losses of 70 in 2015 and 89 in 2014.

7.2.1.4. Gas and Energy

Operating income: Operating income for the Gas and Energy business segment increased 195, or 35%, to 752 from 557 in 2014.

Operating income for this business segment is broken down as follows:

(In millions of pesos)

Gross profit: Gross profit for the Gas and Energy business segment rose 227, or 32.9%, to 918 in 2015 from 691 in 2014, mainly in Electricity Generation operations.

Administrative and selling expenses :Administrative and selling expenses decreased 37, or 24.3%, to 115 in 2015 from 152 in 2014, mainly as a consequence of the recovery of doubtful accounts in hydrocarbon marketing and transportation operations in 2015.

Other operating income (expense), net : Other operating income (expense), net accounted for a loss of 7 compared to a gain of 20 in 2014.

Share of net loss of equity-accounted investees: Share of net loss of equity-accounted investees accounted for losses of 44 and 2 in 2015 and 2014, respectively, mainly attributable to equity interest in CIESA, which was adversely affected by the strong devaluation of the Argentine peso on a net borrowing position in foreign currency.

Electricity Generation

Operating income: Operating income for electricity generation operations increased 213, or 44.4%, to 693 in 2015 from 480 in 2014.

Sales: Sales for electricity generation increased 273, or 19.3%, to 1,685 from 1,412 in 2014, mainly due to an improvement in average sales prices, basically due to implementation of Resolution No. 482 in 2015, and, to a lesser extent, increased sales volumes in the year under review. In this respect, sales volumes attributable to Genelba, Pichi Picún Leufú, Genelba Plus and Ecoenergía power plants totaled 6,968 Gwh in 2015 and 6,638 Gwh in 2014. Higher sales volumes in the year under review derive from scheduled shutdowns for major maintenance works at Genelba and Genelba Plus Power Plants and higher water supply at Pichi Picún Leufú in 2015.

In 2015, Genelba Power Plant, Genelba Plus Power Plant, Pichi Picún Leufú Complex and EcoEnergía Power Plant achieved reliability levels of 99%, 100%, 100% and 96%, respectively. These levels are similar to those recorded in 2014, thus evidencing the excellent performance of our power plants.

Gross profit: In 2015, gross profit increased 186, or 35%, to 717 from 531 in 2014 and margin on sales attributable to all power plants rose to 42.6% in 2015 from 37.6% in 2014. The improvement in the year under review is mainly attributable to the before mentioned improvement in prices and, to a lesser extent, increased delivery by Pichi Picún Leufú and Genelba Power Plants.

Marketing and Transportation of Gas

Operating income: Operating income for the marketing and transportation of gas operations increased 18, or 22.8%, to 97 in 2015 from 79 in 2014.

Sales: Sales revenues increased 888, or 36.9%, to 3,296 from 2,408 in 2014, mainly as a result of a rise in revenues from gas sales.

Revenues from gas sales rose 891, or 37%, to 3,294 from 2,403 in 2014, mainly due to a 51% increase in average sales prices.Sales volumes totaled 230.1 Mcf in 2015 and 253.7 Mcf in 2014. The improvement in average sales prices is primarily attributable to the implementation of Stimulus Program Injection Natural Gas for Business with Reduced injection ( Programa de Estímulo a la Inyección de Gas Natural para Empresas con Inyección Reducida) in 2015 and, to a lesser extent, an improvement in rates for the residential and generation companies segments.

Gross profit: Gross profit totaled 201 in the year under review and 160 in 2014, with similar margins on sales of 6.1% and 6.6% in 2015 and 2014, respectively.

Analysis for the three-month periods ended December 31, 2015 and 2014:

Net expense : Net expense attributable to the Company’s shareholders accounted for losses of 932 and 1,042 in 2015 quarter and 2014 quarter, respectively.

Sales : Sales rose 392 to 5,916 from 5,524 in 2014 quarter, mainly in the Gas and Energy segment, basically due to an improvement in average sales prices, partially offset by lower sales revenues in the Oil and Gas Exploration and Production segment as a consequence of lower oil and gas sales volumes, offset by an improvement in average sales prices for gas.

Gross profit : Gross profit was similar in both quarters, 1,435 in 2015 quarter and 1,431 in 2014 quarter, with an improvement in the Gas and Energy segment attributable to a recovery in natural gas average prices and a decline in the Refining and Distribution and Petrochemicals business segments, derived from a decline in marketing margins attributable to the drop in international reference prices.

Administrative and selling expenses : Administrative and selling expenses totaled 794 in the quarter under review and 711 in 2014 quarter.

Exploration expenses :Exploration expenses are attributable to geological and geophysical expenses and onshore operations in Argentina and totaled 99 in 2015 quarter and 30 in 2014 quarter.

Other operating expenses, net : Other operating expenses, net accounted for losses of 512 in 2015 quarter and 479 in 2014 quarter. Higher expenses in the year under review are mainly attributable to impairment of fields in Argentina and Bolivia. These effects were partially offset by lower environmental remediation charges, mainly due to the extension of concessions in Río Negro in 2014 quarter, and reassessment of ship or pay liabilities in Ecuador in the quarter under review.

Share of net loss of equity-accounted investees: Share of net loss of equity-accounted investees reflected a reduced loss of 259 and totaled 1,260 in 2015 quarter and 1,519 in 2014 quarter.This variation mainly derives from recognition in 2014 quarter of higher losses of 168 and 132 from equity in earnings of in OCP and Mixed Companies, respectively.Conversely, in 2015 quarter equity in earnings of CIESA/TGS accounted for a higher loss of 34 derived from the effect of the devaluation in 2015 quarter on the dollar-denominated debt of such companies.

Operating expenses : Operating expenses improved 78 and reflected a loss of 1,230 in 2015 quarter compared to a loss of 1,308 in 2014 quarter, mainly due to reduced losses from share of net loss of equity-accounted investees, partially offset by higher operating expenses, administrative and selling expenses, exploration expenses and the improvement in gross profit.

Financial results: Financial results accounted for a gain of 3 in 2015 quarter compared to a loss of 108 in 2014 quarter, mainly due to improved results from assets due to their higher yield.

Income tax: Income tax charge accounted for gains of 206 in 2015 period and 424 in 2014 period. Lower gain for the quarter under review mainly derives from higher loss on deferred tax liabilities of 257 attributable to translation differences for operations with a functional currency other than the Argentine peso.

7.3 Liquidity and Capital Resources

We closely monitor liquidity levels in order to secure compliance with our obligations and the Business Plan. Along these lines, and as a guiding principle, financial solvency is the basis on which sustainable development of our businesses is built.

Pursuant to these strategic guidelines, we seek to:

* Design a capital structure in line with industry standards adaptable to the financial markets in which we operate.

* Maintain a sufficient liquidity level –invested in financial assets with high credit quality - to support compliance with our obligations.

* Establish a debt maturity profile consistent with estimated cash generation.

* Efficiently manage borrowing costs.

Adhering to these guidelines enables us to treat financial management as a key element in the value-creation process. The highlights during 2015 were the following:

* Strict compliance with all financial obligations, maintaining a level of indebtedness of approximately USD 300 million in the year under review.

* Continued implementation of the Capital Expenditures Plan.

The most significant factors which may affect our cash flow from operating activities are: fluctuations in prices for crude oil and oil related products, fluctuations in production levels and demand for our products, fluctuations in margins in the Refining and Distribution and Petrochemicals business segments, changes in regulations, such as taxes, taxes on exports, changes in royalty payments and price controls, fluctuations in exchange and interest rates, oil and gas reserves replacement capacity, etc.

Analysis of Liquidity and Capital Resources

The table below reflects our statements of cash flow for fiscal years ended December 31, 2014 and 2013.

Cash

As of December 31, 2015 and 2014, cash and cash equivalents were 2,229 and 2,278, respectively.

Our goal is to maintain a cash reserve invested in short-term securities with high credit quality. We predominately invest in money market mutual funds, overnight deposits and term deposits.

Decree No. 1,722/2011 established that all foreign currency proceeds from exports of crude oil and oil related products, natural gas and liquefied gas must be negotiated within the local foreign exchange market. Under the terms of this Decree, Petrobras Argentina is required to exchange into local currency 100% of its goods and services export proceeds.

Operating activities

Net cash from operations decreased 407, or 8.8%, to 4,239 from 4,646 in 2014, mainly as a result of increased income tax payments and higher business expenses in line with the rise in sales, which effects were partially offset by an improvement in gross profit in the year under review.

Investing activities

Cash used in investing activities totaled a net cash application of 4,620 in 2015 and 3,430 in 2014.

The 1,190 increase in cash application is mainly due to higher capital expenditures, partially offset by increased cash from divestments, as detailed in the table below:

Capital expenditures increased 1,621, or 42.1%, to 5,474 from 3,853, as shown in the table below:

 - Oil and Gas Exploration and Production

Capital expenditures in the Oil and Gas Exploration and Production segment totaled 5,079 and 3,460 in 2015 and 2014, respectively.

In both years, capital expenditures were mainly focused on improving the basic production curve and on exploration and development of non-conventional reserves for shale oil and shale gas. Main expenditures included well drilling, expansion of secondary recovery projects and expansion of surface facilities and compression systems. Capital expenditures were mainly focused on seismic surveys and drilling in Argentina.

During 2015 Petrobras Argentina’s investment plan involved drilling of 42 producing and injection wells and repair of 23 wells in the Neuquén basin. In addition, 4 onshore exploration wells were drilled with a view to obtaining data and assessing productivity in Vaca Muerta formation and in Agrio formation.

 - Refining and Distribution

Capital expenditures in the Refining and Distribution segment totaled 191 and 188 in 2015 and 2014, respectively.

In 2015, investments in Bahía Blanca Refinery were focused mainly on safety and environmental matters, legal compliance and optimization and revamping of the different refinery areas. In addition, investments at Dock Sud and Caleta Paula Plants were associated with operational improvements related to logistics and tank revamping works.

 - Petrochemicals

In the Petrochemicals segment, capital expenditures totaled 119 and 73 in 2015 and 2014, respectively.

In 2015, Petrobras Argentina’s investments were mainly directed to works related to the General Scheduled Shutdown performed at Puerto General San Martín complex involving the Styrene, Ethylbenzene, PGSM Ethylene and San Lorenzo Ethylene Plants, the Power Plant and the waste water treatment plant. In addition, investments were made in connection with the Scheduled Shutdown of the Rubber Unit, prior to the Gasoline Reforming Unit Shutdown to be performed in 2016.

 - Gas and Energy

In the Gas and Energy segment, capital expenditures totaled 65 and 97 in 2015 and 2014, respectively.

The investment made in 2015 and 2014, were mainly attributable to major maintenance the Genelba combined cycle.

Cash from divestments totaled 791 and 373 in 2015 and 2014, respectively.

Cash in 2015 is mainly attributable to collection of proceeds from the sale of assets in the Austral basin in March 2015. Cash in 2014 is mainly attributable to collection of proceeds from the sale of interest in Puesto Hernández Joint Venture ( UTE ) in January 2014.

Financing activities

Net cash used in financing activities totaled 233 and 412 in 2015 and 2014, respectively, as detailed in the table below:

Pursuant to the resolutions adopted at the General Shareholders’ Meetings held on March 19, 2015 and March 27, 2014, the Company paid cash dividends in the amount of 137 and 116 in 2015 and 2014, respectively. Moreover, dividends paid to non-controlling interest of 26 and 61 in 2015 and 2014, respectively, are included.

7.4. Description of Indebtedness

Almost all the financial debt of the Company and related companies is denominated in U.S. dollars.

As of December 31, 2015 and 2014, the Company’s indebtedness totaled 3,971 and 2,679, respectively, as shown in the table below:

As of December 31, 2015 corporate bonds for an aggregate nominal value of USD 300 million were outstanding under the Global Program due May 2008.

In addition, in August 2013, the CNV authorized a new Global Corporate Bond Program for a maximum principal amount at any time outstanding of USD 500 million or its equivalent in other currencies, maturing within a 5-year term or the maximum term that may be established by any future applicable regulation.

The following represents our debt maturity profile as of December 31, 2015:

On June 9, 2005, under Decree No. 616/05 the Argentine Executive Branch provided that any cash inflow to the domestic market derived from foreign loans to the Argentine private sector shall have a maturity for repayment of at least 365 days as from the date of the cash inflow. In addition, 30% of the amount must be deposited with domestic financial institutions. This deposit must be made in U.S. dollars, have a term of 365 days and be non-interest bearing. In addition, it must be non-transferable, be registered and cannot be used as security or collateral in connection with other credit transactions. Export and import financing and primary public offerings of debt securities listed on self-regulated markets are exempt from the foregoing provisions.

By Communication " A" No. 5,850 of the Central Bank on December 17, 2015 the remaining term was reduced for financial loan inflows, from 365 days to 120 days and was zero percent lace established in Decree No. 616/05.

This Decree may limit our ability to finance our operations through new loans granted by HQ, its subsidiaries outside of Argentina or any other kind of foreign financial loans.

Cross Default Clauses

Our outstanding bonds and other financial indebtedness include cross default provisions whereby the Trustee, as instructed by the bondholders representing at least 25% of the related outstanding capital, in the case of corporate bonds or the lender, as the case may be, may declare all the amounts owed due and payable if any debt of ours or our significant subsidiaries is accelerated or not paid when due, provided that those due and unpaid amounts exceed the higher of USD 25 million or 1% of Petrobras Argentina’s equity upon those maturities, and that the default has not been defeated or cured within the legal and/or contractual terms that may be applicable.

In addition, our outstanding bonds and other financial indebtedness include covenants that set out obligations which, if defaulted and provided the default has not been defeated or cured within the applicable legal and/or contractual terms, may also cause the acceleration of debt.

As of the date of these financial statements, Petrobras Argentina has complied with all terms and conditions related to its financial indebtedness.

Class S Corporate Bonds include a covenant whereby in the event a change of control occurs (as defined therein), the Company is required to make an offer to Class S bondholders to repurchase the Bonds at a purchase price equal to 101% of the outstanding face value, plus accrued and unpaid interest at the repurchase date.

7.5. Future capital requirements

We estimate that our capital requirements relating to our investment plan, financial debt payment obligations, dividend payments and working capital will be financed by cash from operations and, to a lesser extent, by new indebtedness and asset divestments.

Our level of investments will depend on a variety of factors, many of which are beyond our control. These include the future price evolution of the commodities we sell, the behavior of energy demand in Argentina and in regional markets, the existence and competitive impact of alternative projects, the enforcement of regulations and changes in applicable taxes and royalties and the political, economic and social situation prevailing in the countries where we operate.

- Oil and Gas Exploration and Production

Our 2016 investment plan is in line with reserve replacement and production goals in the Neuquén Basin in Argentina, as a crucial step in securing our sustainable growth.

The Company will continue efforts to develop oil and gas reserves through well drilling, delimitation of reserves, extension of secondary recovery projects and expansion of related surface facilities .

Along these lines, and by using cutting-edge technology in the country, the Company will go forward with exploration study and investment programs aimed at attaining new findings at conventional and non-conventional oil and gas reservoirs.

- Refining and Distribution

In 2016, investments will be mainly focused on operational efficiency and reliability improvement for refining facilities as a whole and maintenance of Petrobras’ gas station network.

- Petrochemicals

In 2016, the Company will continue to make investments on maintenance, reliability and legal compliance and a scheduled plant shutdown for maintenance works at Puerto General San Martín Gasoline Reforming unit will be performed.

- Gas and Energy

In the Gas and Energy business segment, we will continue working to secure self-supply of gas and, at the same time, develop profitable marketing alternatives.

8. Summarized Balance Sheet and Income Statement Structure

9. Statistical Data

10. Listed Price of the Company’s Shares

As from September 2012, the price of the Company’s shares reflects the effects of the capital increase resolved by the Company’s Shareholders’ Meeting, as a result of which the number of outstanding shares doubled.

11. Board of Directors’ Proposal

Approval of Financial Statements :

In compliance with Section 234 of the Business Associations Law, we inform that the financial statements for the year ended December 31, 2015 will be submitted to the next Shareholders’ Meeting for approval.

Allocation of retained earnings:

In compliance with applicable legal provisions, the Company’s Board of Directors proposes the General Shareholders’ Meeting that retained earnings as of December 31, 2015 amounting to 853 be allocated as follows:

The General Shareholders’ Meeting will discuss and finally resolve on the allocation of retained earnings and balances of the Reserve for future investments and Reserve for future dividends.

Marcos Benício Pompa Antunes

Representative Director

Annex I: Corporate Governance Code 2015

In compliance with Section 1 of Chapter I, Title IV of the 2013 Revised Text (the “Rules”) of the Argentine Securities Commission (“CNV”), the Corporate Governance Code (hereinafter “Corporate Governance Code”) of Petrobras Argentina S.A. (“PESA” and/or the “Company”) is attached to this Annual Report as an Exhibit, as identified as Exhibit IV to the Title mentioned above, for fiscal year ended December 31, 2015.

PRINCIPLE I:  DISCLOSE THE RELATION BETWEEN THE ISSUER, THE ECONOMIC GROUP HEADED BY IT AND/OR OF WHICH IT IS PART, AND ITS RELATED PARTIES

Recommendation I.1: Ensure disclosure by the Management Body of the policies applicable to the relation of the Issuer with the economic group headed by it and/or of which it is part, and with its related parties.

Recommendation fulfilled.

The Company carries out transactions with related companies which are disclosed on the Financial Statements, according to the provisions of the International Accounting Standards issued by the International Accounting Standards Board (“IASB”). In addition, the Company lists in the Financial Statements the companies over which it exercises control, joint control and significant influence. For these transactions, the Company has an “Internal Standard for Transactions between Related Parties” which is consistent with the provisions of Sections 99 subsection a), 109 and 110 and 72 and 73 of Capital Market Law No. 26,831 (“CML”) and Section 14, Chapter III of the Rules issued by the CNV and the regular practices of PESA with respect to these transactions.  The purpose of this internal standard is to provide a reference framework to outline the elements to be considered as well as the procedures to be followed when the Company enters into transactions with related parties. To this end, it defines the terms related parties and relevant amount according to the rules in place and sets out the procedures to be followed in case of: (i) recurrent or specific transactions that exceed or are expected to exceed the Relevant Amount; and (ii) transactions that do not exceed the Relevant Amount but may entail a conflict of interest.

Recommendation I.2: Ensure that mechanisms are in place to prevent conflicts of interest.

Recommendation fulfilled.

The Company has a “Code of Corporate Conduct and Ethics” (see VIII.1) and "Irregularities and Conflict of Interest Reporting Guidelines" (see VIII.2 y VIII.3) that allow to identify, handle and solve conflicts of interest.

The Code is available on the web page of the Company.

Recommendation I.3: Prevent the inappropriate use of privileged information.

Recommendation fulfilled.

The Company has internal policies in place to prevent the inappropriate use of privileged information by all employees. The purpose of these policies is to define and standardize the treatment of information that adds value to its competitiveness and may have an impact on its financial performance, its market share, its image or its relations with interested parties, and they create a regulatory framework to ensure an effective protection of the Company’s information.

In addition, there is an internal rule intended to: i) regulate the classification of information according to criticality, ii) define the classification structure, provide guidance on competency development and iii) define the responsibilities outlined in the Information Security Policy. This rule is in turn supplemented by a set of rules that provide guidance on the different ways to treat information according to its degree of criticality (Public, Corporate, Reserved, Confidential and Secret Information).

PRINCIPLE II: LAY THE FOUNDATIONS FOR A SOUND MANAGEMENT AND OVERSIGHT OF THE ISSUER

Recommendation II. 1: Ensure that the Management Body assumes the management and oversight of the Issuer and its strategic guidance.

II.1.1 The Management Body approves:

II.1.1.1 The strategic or business plan, as well as the performance goals and annual budgets,

Recommendation partially fulfilled.

According to the provisions in the General Companies Law, as amended (“GCL”) and the Corporate Bylaws, the Board is the highest instance of corporate management and representation, and is consequently empowered to carry out, within the scope of the Company’s corporate purpose, any legal act or transaction of administration and disposition, upon any title whatsoever, except for those acts and transactions falling exclusively within the scope of the General Shareholders’ Meeting as provided for under the GCL or the Corporate Bylaws.

In this respect, the Board approves the strategic and business plan guidelines and the annual budget and the organizational performance goals.  As regards the annual budget, the Board approves the premises used and the breakdown of investments, as well as the consolidated production and other business volumes, the income and cash flow statements.

In addition, the Board approves management goals which are also used for the Variable Compensation Program applicable to the Company’s Managers and supervisory staff and for the Bonus Program. The specific targets for achieving each management goal are in line with annual budget allocations approved by the Board.

The Compensation Committee created by the Board regularly follows up and reviews all aspects related to such programs.

 

II.1.1.2 the investment policy (investments in financial assets and capital expenditures), and the financing policy,

Recommendation fulfilled.

The Board has set up a method whereby it acts directly or through delegation in the Management Committee or the different Departments according to the investment and funding goals.

The Company has in place policies on investment in financial assets and funding policies. These policies have been approved by the Management since, as aforesaid, the Board mainly operates as a management, supervisory and control body which has delegated the management of the day-to-day business of PESA to certain Managers appointed under the terms of Section 270 of the GCL. Likewise, the Board approves the investment budget and the annual financial budget at the time of approving the annual budget.

II.1.1.3 the corporate governance policy (fulfillment of the Corporate Governance Code),

Recommendation fulfilled.

The Board approves the corporate governance policy, supported by the interaction of a set of its own Codes and Policies, as adopted by the Board itself, in line with the rules in place as to corporate governance issued by the CNV, the Securities and Exchange Commission (“SEC”) and self-regulated markets where the Company is listed, inclusive of the  Code of Corporate Conduct and Ethics, the Irregularities and Conflict of Interest Reporting Guidelines, the Market Policies and Practices Code, the Guidelines on Personal Loans to Directors and Executives, the Management Committee Regulations, the Market Reporting and Disclosure Procedure and the Audit Committee Regulations.

II.1.1.4 the policy on selection, evaluation and remuneration of first-line managers,

Recommendation partially fulfilled.

The Management Body of the Company approves the Human Resources Policy of the Company. It also has the Compensation Committee as an advisory body, which is composed of three (3) of its members, as described in VII.1.   

II.1.1.5 the policy on allocation of responsibilities to first-line managers,

Recommendation fulfilled.

The Board mainly operates as a management, supervisory and control body and has delegated the management of the day-to-day business of PESA to certain Managers appointed under the terms of Section 270 of the GCL, defining the roles and responsibilities of each position.

Said managers form the Management Committee, directly report to the Board and are liable to the Company and third parties for their performance to the same extent and the same manner as Board members. It is not the Executive Committee prescribed in Section 269 of the GCL and Section 11 of the Corporate Bylaws.

II.1.1.6 the oversight of succession plans for first-line managers,

Recommendation partially fulfilled.

As mentioned in the preceding paragraph, the Human Resources Management conducts the aforesaid oversight.    

II.1.1.7 the corporate social responsibility policy,

Recommendation fulfilled.

The Management Body approves the Corporate Social Responsibility Policy whose main guidelines are: a) corporate actions aimed at ensuring that corporate governance is committed to ethics and transparency in the relationship with stakeholders; b) sustainable development and investment aimed at carrying on business and activities with social responsibility, adopting commitments aligned with the UN Global Compact principles, and looking for sustainability in social investments for an acceptable fruitful insertion of the communities; c) human rights, diversity and workforce commitment, respecting and supporting internationally recognized human rights, the promotion of decent work (supporting the eradication of child and slave labor and degrading work) and the respect for the human and cultural diversity of its workforce, fostering its commitment to the social responsibility of the Company.  

II.1.1.8 the comprehensive risk management, internal control and fraud prevention policies,

Recommendation fulfilled.

The Management Body approves policies on risks, internal control and fraud prevention.

Since fiscal year 2006, the Company has assessed the effectiveness of its Internal Control environment, focusing on financial reporting, as per the integrated method issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and, based on that assessment and these criteria, has concluded that it is effective.

As regards fraud prevention, as its controlling shareholder, the Company is implementing the Corruption Prevention Program (PPPC) aimed at preventing, detecting and correcting any situation which may jeopardize its reputation and image. The Program is based on PESA’s Code of Ethics. The implementation of different internal regulations to complement existing available tools for the prevention and detection of fraud and corruption is currently under review.

Likewise, disclosures are made to the Audit Committee of all significant deficiencies and material weaknesses, if any, in the design or operation of internal control over financial reporting, which are reasonable likely to affect the Company’s ability to record, process, summarize and report financial information, as well as of any fraud or potential fraud involving the management or employees having a significant role in the Company’s internal control over financial reporting.   

II.1.1.9 the policy of continuous training for members of the Management Body and first-line managers.

Recommendation partially fulfilled.

The Board delegated the planning of the policy to the Management Committee and its implementation to the Human Resource Management.

 

The Company offers its executives several training programs and possibilities. These can take place in house or at different domestic and international educational institutions and Business Schools. Non-executives participate in guidance and support activities so as to have the most suitable tools for decision-making. Particularly, the Annual Action Plan for Audit Committee members provides for training and updating of rules and regulations. This is reflected on meeting records.

II.1.2 If deemed appropriate, add other policies applied by the Management Body that have not been mentioned, and describe the main features.  

There are no policies that have not been mentioned that we consider relevant to mention and describe.

II.1.3 The Issuer has a policy to ensure availability of relevant information required for decision making by the Management Body and a direct communication channel with managers, on an equal and symmetric basis for all its members (external and independent executives) and in a timely manner so as to enable a detailed analysis of contents. Explain.

Recommendation fulfilled.

The Company ensures the availability of relevant information for decision making by the Management Body. In this regard, Section 9 of its Corporate Bylaws establishes that notice of Board meetings must be given in writing to all Board members not less than five days before the date of the meeting.

The Corporate General Secretary is responsible for giving notice of meetings of the Management Body, as well as for the availability of the information related to such meetings. The General Secretary is available for consultation by the members of the Management Body on the matters to be dealt with at Board meetings.

II.1.4 The matters submitted for consideration of the Management Body are accompanied by an analysis of the risks associated with the decisions that may be adopted, taking into account the business risk level considered acceptable by the Issuer. Explain.

Recommendation fulfilled.

All matters submitted for the consideration of the Board of Directors are accompanied by an analysis of the risks associated with the decisions that may be adopted. For this purpose, each responsible area submits, where applicable, its evaluation and opinion on matters falling within its field of competence, in order to assess all risks associated with the decision, taking into consideration the Company’s acceptable level of risk.

Recommendation II.2: Ensure an effective business Management Control

The Management Body verifies:

II.2.1 compliance with the annual budget and the business plan,

Recommendation fulfilled.

The Board has developed a system to control budget deviations and, in case of budget deviations, it intervenes directly or through the Management Committee or the different Departments or Executive Managers, depending on the extent of the deviations.

On a regular basis or when there are budget deviations that must be analyzed by the management body, the Management submits the annual budget compliance issue to it.  

Likewise, the Management shares and reviews on a monthly basis the budget control report and the outlook, and if issues that must be dealt with by the Management Committee are identified in the review, they are sent to the Management Committee for consideration.   

Budget Control is focused on the tracking of the most important economic, financial and operational variables in the Company, such as, for example:  Price and Volume, Statements of Income and Cash Flow, Investments, Yield on Capital Employed, Sales, Fixed Expenses, Working Capital Investment, Production and Charges. In turn, a tracking of these indicators is conducted to show their Monthly, Year-to-date and Full Year variation.

II.2.2 the performance of first-line managers and achievement of goals set for them (targeted level of profits compared to actual level of profits, rating, quality of financial reporting, market share, etc.).

Describe the main features of the Management Control policy of the Issuer detailing the techniques used and the frequency of the monitoring done by the Management Body.

Recommendation fulfilled.

The tracking of first-line managers’ performance goals is reviewed by the Management and regularly submitted to the Compensation Committee, which is a committee composed of Board members (see answer to item VII.1.1). Likewise, on a semi-annual basis, this committee submits a report of its work to the Board.

The Chief Executive Officer, in his Report on the Company’s businesses, provides the Board with relevant information to assess the achievement of the goals set for First-line Managers.

Management Control is based on actual information from the Company’s accounting records and the Annual Business Plan approved by the Board of Directors. This control covers the main economic, financial and operational variables, both at the Company’s consolidated level and by business segment. It includes control over results, balance of assets and liabilities, source and application of funds, financial position, investment in property, plant and equipment and working capital, profitability, operational, financial, quality, safety and environmental indicators. Budget deviation analysis is performed on a monthly, year-to-date and full year basis with the best projections available for the months not yet elapsed.

Recommendation II.3: Disclose the performance appraisal method used by the Management Body and its impact.

II.3.1 All members of the Management Body comply with the Corporate Bylaws and, where applicable, with the operating Regulations of the Management Body. Detail the main provisions of the Regulations. Indicate the degree of compliance with the Corporate Bylaws and the Regulations.  

Recommendation fulfilled.

Board members thoroughly comply with the Corporate Bylaws. It is worth mentioning that the Company’s Management Body does not have operating regulations.

II.3.2 The Management Body presents the results of operations taking into account the goals set at the beginning of the period, so that the shareholders can assess the degree of compliance with such goals which include financial and non-financial aspects. In addition, the Management Body presents a diagnosis on the degree of compliance with the policies mentioned in Recommendation II, items II.1.1. and II.1.2.

Detail the key aspects of the assessment made by the General Shareholders’ Meeting in connection with the degree of achievement of set goals and the degree of compliance with the policies mentioned in Recommendation II, items II.1.1 and II.1.2 by the Management Body, indicating the date of the Meeting at which the assessment was submitted.

Recommendation partially fulfilled.

The Board presents the results of operations in the Annual Report, which is reviewed and approved by the Shareholders’ Meeting at the time of considering and deciding on the matters contemplated in subsections 1 and 2 of Section 234 of the GCL.

Taking into account that the Management is in charge of ensuring compliance with the policies detailed in items II.1.1 and II.1.2, the Board does not make a diagnosis of the degree of compliance with these policies. The appropriateness of making a diagnosis will be considered in the future.  

Recommendation II.4: The number of external and independent members must represent a significant share of the members of the Management Body.

II.4.1 The share of external and independent executive members (as defined by the regulations of this Committee) of the Management Body bears a relationship to the capital structure of the Issuer. Explain.

Recommendation fulfilled.

Section 9 of the Corporate Bylaws, as approved by the Shareholders’ Meeting held on January 30, 2009, sets forth that the Company will be managed by a Board composed of nine (9) regular Directors who are elected for a three-year term and renewed by thirds each year. In turn, the Shareholders’ Meeting may appoint a number of alternate members that may be equal or lower than the number of regular directors in order to fill any vacancy, and determine the order of priority.

The Board is currently composed of nine (9) regular Directors and eight (8) alternate Directors, of which three (3) regular Directors and two (2) alternate Directors are independent, according to the parameters set in the Rules.

The Board considers that currently the number and qualifications of its members match the complexity level of the Company’s decision-making processes and the size of its operations. If circumstances changed and if deemed convenient, the Board may bring the issue to the Shareholders’ Meeting for modification, as it was done in the past. The Board also considers that the current number of Independent Directors match corporate structure.

II.4.2 During the current year, at a General Meeting, the shareholders adopted a policy of maintaining the share of independent members at no less than 20% of the total number of members of the Management Body.

Provide a description of the key features of such policy and any shareholders’ agreement, allowing us to understand the manner in which the members of the Management Body are designated and their term of office. Indicate if the independence of the members of the Management Body was questioned during the course of the year and if there were abstentions due to conflicts of interest.

Recommendation fulfilled.

The Shareholders’ Meeting is responsible for appointing and setting the share of Independent Directors over the total number of Directors as per applicable rules. The Company does not have a specific policy aimed at keeping a share of Independent Directors over the total number of Board members but, as a regular practice, the number of Independent members of the Board is enough to complete the Audit Committee.

On the other hand, the Corporate Bylaws sets forth that the Board shall be composed of nine (9) regular members who are elected for a three (3)-year term and renewed by thirds. The Bylaws also establish that the Audit Committee shall be composed of three (3) members, elected from among the Regular Directors, the majority of which must be independent. However, as PESA has an American Depositary Shares program and is therefore subject to SEC oversight, all Committee members are independent in order to meet SEC’s requirements. In this regard, three (3) out of the nine (9) members of the Board (who serve on the Audit Committee) are independent.

There are no shareholders agreements regarding the designation of Board members. The independence of Board members was not questioned during the course of the recent year.

Recommendation II.5: Ensure that rules and procedures of nomination and selection of members of the Management Body and first-line managers are in place.

II.5.1 The Issuer has an Appointment Committee:

Recommendation not fulfilled.

The Company does not have an Appointment Committee and does not consider it necessary to have one because the functions of such committee, within the scope of the rules in force, are effectively in the hands of the Board of Directors with the support of the Management Committee, the Executive Management of Legal Affairs, the Human Resource Management and the General Secretary.

For the aforesaid reasons, items II.5.1.1 to II.5.1.5 are not applicable.

II.5.2 If there is an Appointment Committee:

For the reasons mentioned in II.5.1, items II.5.2.1 to II.5.2.7 are not applicable.

II.5.3 If deemed appropriate, add policies implemented by the Appointment Committee of the Issuer that have not been mentioned in the preceding item.  

For the reasons mentioned in II.5.1, this item is not applicable.

Recommendation II.6: Evaluate the convenience of having members of the Management Body and/or statutory syndics and/or Surveillance Board members performing functions in different Issuers.

Recommendation not fulfilled.

The Board considers that, to the extent that its members and/or the Statutory Syndics duly fulfill their duties, it is not necessary to impose limits to their participation in the Board of Directors or Statutory Syndic Committees of other companies.

Recommendation II.7: Ensure the Training and Development of the members of the Management Body and first-line managers of the Issuer.

II.7.1 The Issuer has continuous Training Programs in accordance with the needs of the Issuer for the members of the Management Body and first-line managers. These programs include matters relating to their functions and responsibilities, comprehensive business risk management, know-how of the business and its regulations, corporate governance dynamics and corporate social responsibility. In the case of members of the Audit Committee, programs include international accounting standards, auditing standards, internal control rules and capital market specific regulations.

Describe the programs implemented throughout the year and their degree of compliance.

Recommendation partially fulfilled.

The Management Committee, by delegation from the Management Body, defines the training guidelines and strategies and the Master and Postgraduate programs sponsored by the Company. These programs are comprehensively managed and are available for all employees of the Company, including first-line Managers.  

The Company offers its executives several training programs and possibilities. These can take place in house or at different domestic and international educational institutions and Business Schools. Non-executives participate in guidance and support activities so as to have the most suitable tools for decision-making. Particularly, the Annual Action Plan for Audit Committee members provides for training and updating regarding rules and regulations. This is reflected on meeting records.

II.7.2 The Issuer encourages members of the Management Body and first-line managers, by means other than those mentioned in II.7.1, to undertake continuous training to supplement their education and so add value to the Issuer. Indicate the manner in which this is done.

Recommendation fulfilled.

The Company considers that the programs mentioned in item II.7.1 are sufficient to provide continuous training for the members of the Management Body and first-line managers.

PRINCIPLE III: ENSURE THAT AN EFFECTIVE POLICY IS IN PLACE FOR THE IDENTIFICATION, MEASUREMENT, MANAGEMENT AND DISCLOSURE OF THE BUSINESS RISK

Recommendation III: The Management Body must have a comprehensive business risk management policy in place and monitor its proper implementation.

III.1 The Issuer has comprehensive business risk management policies in place (to ensure achievement of strategic, operational, financial, financial reporting goals, compliance with laws and regulations, etc.). Provide a description of the most important features of these policies.

Recommendation partially fulfilled.

The Board regularly reviews and assesses corporate risks, according to the Company’s activities and countries where the Company operates, so as to prevent any difficulty and/or leverage opportunities.  The Corporate Internal Control System is supported by Policies established by the Management Committee as well as Systems and Procedures implemented by qualified personnel. This Internal Control System is designed to ensure achievement of the Company’s goals, securing efficiency of operations, information reliability and compliance with laws, regulations and policies in general.

Likewise, the risks are then presented and assessed within the scope of the Audit Committee in compliance with its Annual Action Plan, with special focus on: (a) regulatory matters that may have a material impact on the Company, (b) insurance and insurable risks policies, (c) allocation of responsibilities for environmental matters and remediation, (d) matters that may lead to controversial interpretations and have a material adverse effect on the Company and (e) the updating of exchange rate risk policies and their application.

III.2 There is a Risk Management Committee within the Management Body or the General Management. Inform of the existence of procedure manuals and describe the main risk factors that are specific to the Issuer or its business and the mitigation actions implemented. In the absence of such Committee, describe the oversight role of the Audit Committee with respect to risk management.

Also indicate the degree of interaction between the Management Body or its Committees and the General Management of the Issuer in the field of comprehensive business risk management.

Recommendation partially fulfilled.

The statements contained in Recommendation III.1 apply here.

III.3 There is an independent function within the General Management of the Issuer that implements the comprehensive risk management policies (function of the Risk Management Officer or equivalent). Specify.  

Recommendation not fulfilled.

There is no independent function of Risk Management Officer or equivalent. The Company will consider the possibility of creating such function in the future.   

III.4 The comprehensive risk management policies are constantly updated pursuant to the recommendations and recognized methods in this field. Indicate which.

Recommendation partially fulfilled.

As aforesaid (see II.1.1.8), since fiscal year 2006, the Company has assessed the effectiveness of its Internal Control environment, focusing on financial reporting, as per the integrated method issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and, based on that assessment and these criteria, has concluded that it is effective.

III.5 The Management Body discloses the results of the risk management oversight carried out jointly with the General Management in the Financial Statements and the Annual Report. Specify the main points of the disclosures made.

Recommendation fulfilled.

The note “Financial and equity risk management” to the Financial Statements of the Company discloses information on risk management goals and policies, commodity price risks, exchange rate risks, interest rate risks, liquidity risk, credit risk, equity management, financial instruments by categories, fair value of financial instruments, and fair value hierarchy.

PRINCIPLE IV: SAFEGUARD INTEGRITY IN FINANCIAL REPORTING WITH INDEPENDENT AUDITS

Recommendation IV: Ensure the transparency and independence of the functions of the Audit Committee and the External Auditor.

IV.1 When the Management Body selects the members of the Audit Committee taking into account that a majority must be independent, it evaluates the convenience of having it chaired by an independent member.  

Recommendation fulfilled.

According to the provisions of the CML, companies making public offering of their shares and securities must create an Audit Committee that will be formed by three (3) or more members of the Board, the majority of which must be independent. Thus, on May 21, 2003 the Board approved the implementation process as required by CNV General Resolution No. 400/02. In compliance with the above resolution, on March 19, 2004 the General Regular Shareholders’ Meeting approved, among other measures, the addition of a section to our Bylaws regarding the structure and operation of the Audit Committee. In addition, on May 7, 2004, the Audit Committee approved its Internal Regulations. The Audit Committee approves the Action Plan for the current fiscal year on an annual basis. The Board as a whole nominates the members of the Audit Committee, as per section 109 of the CML, the Rules and Section 9 bis of the Corporate Bylaws.

As mentioned in recommendation II.4.2, the Audit Committee is currently composed of three (3) regular members and two (2) alternate members, and they are all independent. It should be highlighted that the Board prioritizes, as a guideline for the appointment of the Audit Committee Chair, having a Financial Expert at that function, for the close link between this qualification and the Committee’s functions.

IV.2 There is an internal audit function that reports to the Audit Committee or the Chairman of the Management Body and is responsible for the evaluation of the internal control system. Indicate if the Audit Committee or the Management Body make an annual evaluation of the internal audit performance and the degree of independence in their professional work, with this meaning that the professionals serving such function are independent of the other operational areas and also meet the independence requirements with respect to controlling shareholders or related entities with significant influence on the Issuer.

Also specify if the internal audit function operates in accordance with the International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors (IIA).  

Recommendation fulfilled.

The Company has an Internal Audit division that reports to the Audit Committee and is responsible for the evaluation of the internal control. On an annual basis, the Audit Committee evaluates the performance of this division and its degree of independence.

All works are carried out in accordance with international standards. It should be pointed out that in 2013 the Company obtained the International Certificate of Quality Assurance in Internal Audit that certifies compliance with the best international practices in Internal Audit. This certificate was issued by the Argentine Institute of Internal Auditors ( Instituto Argentino de Auditores Internos de Argentina ) that is a member of the Institute of Internal Auditors, which certified the Company’s compliance with the highest international standards in this field.

IV.3 The members of the Audit Committee annually evaluate the qualifications, independence and performance of the External Auditors designated by the Shareholders’ Meeting. Describe the main aspects of the procedures used for the evaluation.  

Recommendation fulfilled.

On a quarterly basis, the Audit Committee holds a meeting with the External Auditors in which the latter set out the results of their work in connection with the Financial Statements of the Company. On an annual basis, the members of the Committee evaluate the performance and independence of the auditors and enquire into the matters they deem appropriate.

It is pointed out that whenever the Board makes a proposal as to the appointment of External Auditors to be submitted before the Shareholders’ Meeting, the Audit Committee issues a report on that regard, as per the rules in force.

Additionally, the Audit Committee includes in its Annual Management Report an item indicating whether it has become acquainted with any relevant issue to be disclosed in relation to the External Auditors appointed by the Shareholders’ Meeting for the fiscal year regarding their independence, and provides its opinion about the planning and performance of the external audit in the fiscal year.

IV.4 The Issuer has a policy on turnover of  members of the Statutory Syndic Committee and/or the External Auditor; and in the case of the External Auditor, if the turnover includes the external audit firm or only the individuals.

Recommendation partially fulfilled.

Regarding turnover of the Statutory Syndic Committee’s members, Section 12 of the Corporate Bylaws sets forth that the members of the Statutory Syndic Committee will hold office for one year, and that they may be reelected.

Regarding turnover of External Auditors, the Company complies with the Rules.  It should be pointed out that in the last decade, the Company has replaced its External Audit firm three times.

PRINCIPLE V: RESPECT THE RIGHTS OF SHAREHOLDERS

Recommendation V.1: Ensure that the shareholders have access to information of the Issuer.

V.1.1 The Management Body promotes holding of regular informative meetings with shareholders simultaneously with the release of interim financial statements. Explain indicating the number and frequency of the meetings held throughout the year.

Recommendation fulfilled.

The Company meets the periodic reporting requirements outlined in the Rules and Regulations of the Buenos Aires Stock Exchange (“BCBA”). Under these reporting requirements, the Company discloses all the corporate information considered relevant for Shareholders to be updated.  In addition to the information that must be disclosed to the BCBA and the CNV under the reporting and legal requirements, the Company discloses all the information considered relevant directly to the Shareholders in a transparent and precise manner.

Additionally, the Company has an exclusive investor assistance division (Investor Relations Management) that is in close contact with the Shareholders to inform them on the Financial Statements and the changes in the Company’s business segments, and is permanently available to the Shareholders upon the occurrence of any relevant event.

V.1.2 The Issuer has reporting mechanisms for investors and a special division for handling their queries. In addition, it has a website that shareholders and other investors can visit, that provides an access link to establish contact among them. Detail.

Recommendation fulfilled.

As stated in Recommendation V.1.1, the Company meets the periodic reporting requirements outlined in the Rules and in the BCBA Regulations. Under these reporting requirements, the Company discloses all the corporate information considered relevant for Shareholders to be updated. The Company currently has an Investor Relations Management in charge of responding Shareholders’ questions and queries. Likewise, the Company issues quarterly press releases reporting the Company’s results of operations, among other information, to Shareholders in general, corporate bodies and the regulatory authority.

On the other hand, the Company has a website (www.petrobras.com.ar) that includes a regularly updated section (“For Investors”), devoted exclusively to investors. For more information on the webpage, see Recommendation VI.1.

Recommendation V.2: Promote the active participation of all shareholders.

V.2.1 The Management Body takes actions to promote the participation of shareholders at General Shareholders’ Meetings. Explain, differentiating the actions required under the law from those voluntarily offered by the Issuer to its shareholders.

Recommendation fulfilled.

The Board takes all actions as required under the law to promote attendance and participation of all Shareholders at General Shareholders’ Meetings so as to ensure the exercise of their rights.

V.2.2 The General Shareholders’ Meeting has operating Regulations that ensure that information is made available to shareholders sufficiently in advance for decision making. Describe the main provisions of such regulations.

Recommendation not fulfilled.

The Company does not consider it necessary to have operating regulations for Shareholders’ Meetings, as it complies with all legal requirements regarding the holding of meetings. Likewise, it makes available to the Shareholders all the information required by law within the prescribed time limits.

V.2.3 The mechanisms implemented by the Issuer to facilitate minority shareholders to propose items for the agenda of General Shareholders’ Meetings pursuant to the rules in force are applicable. Explain the results.

Recommendation fulfilled.

There is no factual or bylaw impediment for minority Shareholders to propose items for the agenda of Shareholders’ Meetings. However, up to the date hereof, no minority Shareholder has proposed agenda items in accordance with the rules in force.

V.2.4 The Issuer has policies to promote the participation of the most significant Shareholders, such as institutional investors. Specify.

Recommendation not fulfilled.

The Company understands that it is not necessary to have additional policies to promote the participation of the most significant Shareholders, as it complies with all legal requirements for the giving of notice of meetings to all shareholders without distinction, as stated in Recommendation V.2.1.

V.2.5 At Shareholders’ Meetings where nominations of members of the Management Body are proposed, the following information is disclosed before voting: (i) each candidate’s position on the adoption or not of a Corporate Governance Code; and (ii) the grounds supporting such position.

Recommendation not fulfilled.

At present, the Company does not disclose in advance each candidate’s position on the adoption of a Corporate Governance Code. The possibility of adding this recommendation will be considered in the future.

Recommendation V.3: Ensure the one share–one vote principle.

The Issuer has a policy that promotes the one share-one vote principle. Indicate the changes in the ownership structure of outstanding shares broken down by class during the last three years.

Recommendation fulfilled.

The Company promotes the one share-one vote principle pursuant to the provisions of Section 5 of the Corporate Bylaws, that establish that all shares of the Company are Class “B” common shares entitled to one vote per share and having a nominal value of one peso (n/v AR$1) each.  It is pointed out that although the Corporate Bylaws contemplates the possibility of issuing preferred stock with or without voting rights, as of the date hereof, such option has not been exercised.

There were no changes in the ownership structure of outstanding shares and classes during the last three years.

Recommendation V.4: Establish mechanisms to protect all shareholders from takeovers.

The Issuer adheres to the System for Binding Public Offering. Otherwise, explain if the bylaws provide for other alternative mechanisms, such as tag along or others.

Recommendation fulfilled.

The Company, at the General Regular and Special Shareholders’ Meeting held on July 8, 2003, decided not to adhere to the Optional Statutory System for Binding Public Offering (Section 17 of the Corporate Bylaws), given the lack of history and that non-adhesion does not prevent voluntary exercise or future adhesion. There are no alternative mechanisms provided for in the bylaws as their non-inclusion in the bylaws does not prevent their use in the future.

Without prejudice to the foregoing, under the provisions of Section 90 of the CML, the System for Binding Public Offering applies to all listed companies, including those which under the previous system had opted to be excluded from it, as in the case of PESA, as stated above.

Recommendation V.5: Increase the percentage of outstanding shares.

The Issuer has a dispersion of ownership of common shares of at least 20 per cent. Otherwise, the Issuer has a policy to increase the market share dispersion.

Indicate the share dispersion as percentage of the capital stock of the Issuer and its changes during the last three years.

Recommendation fulfilled.

At present, the majority Shareholder holds 67.2% of the capital stock, and the remaining percentage is listed on BCBA and the New York Stock Exchange.

It should be pointed out that the capital stock structure has not been substantially modified during the last three (3) years.

Recommendation V.6: Ensure that there is a transparent dividend policy.

V.6.1 The Issuer has a dividend distribution policy included in the Corporate Bylaws and approved by the Shareholders’ Meeting that sets forth the conditions for the distribution of cash or stock dividends. If so, indicate criteria, timing and conditions to be satisfied for the payment of dividends.

Recommendation partially fulfilled.

Dividend declaration, amount and payment schedule are subject to approval by the General Regular Shareholders’ Meeting. The Board, on an annual basis, evaluates the feasibility of making a proposal to the General Regular Shareholders’ Meeting for the distribution of retained earnings. That is put together by considering the Bylaws and other variables, including the results of operations, future capital requirements and financial conditions and availability of funds.

Additionally, the Company explains its dividend policy as an item on the Annual Report, of which this Code is part as an Exhibit. That policy describes the procedure used to make the proposal.

V.6.2 The Issuer has documented procedures for preparing the proposal for the allocation of retained earnings to the creation of legal, statutory or optional reserves, allocation to a new fiscal year and/or the payment of dividends.

Explain such procedures and specify the Minutes of the General Shareholders’ Meeting in which the (cash or stock) distribution was approved or not approved, if this is not contemplated in the Corporate Bylaws.

Recommendation fulfilled.

After having made an assessment of the legal requirements and the Company’s financial and business situation, the Management prepares and submits to the Board of Directors a proposal for the allocation of retained earnings that is included in the Annual Report approved by the Management Body. Then, the Shareholders’ Meeting considers and resolves the allocation of earnings.  

At the Shareholders’ Meeting held on March 19, 2015 (Minutes No. 2518), it was resolved (a) in connection with retained earnings as of December 31, 2014, to allocate (i) to the “Legal Reserve” account the amount of ARS 22,906,731; and (ii) to the “Optional Reserve for Future Investments” account the amount of ARS 435,227,887 and (b) in connection with balances accumulated as of such date, it was resolved (i) to release from the “Optional Reserve for Future Investments” account the amount of ARS 3,853,354,000; (ii) to allocate ARS 3,716,354,000 to be added to the balance of the above mentioned reserve, which amount added to the allocation of retained earnings as of December 31, 2014 in the amount of ARS 435,227,887, makes a total balance of ARS 5,730,643,696; and (iii) to allocate ARS 137,000,000 to the “Reserve for Future Dividends” account, the total balance of which being ARS 1,296,161,111.

As regards the “Reserve for Future Dividends” it was resolved to authorize the Board to determine the amount and timing of its distribution until the date of the Regular Shareholders’ Meeting that will deal with the year ended December 31, 2015.

PRINCIPLE VI: MAINTAIN A DIRECT AND RESPONSIBLE RELATIONSHIP WITH THE COMMUNITY

Recommendation VI: Disclose to the community matters concerning the Issuer and establish a direct communication channel with the company.

VI.1 The Issuer has an updated public website that not only provides relevant information on the company (Corporate Bylaws, economic group, composition of the Management Body, financial statements, Annual Report, among other things) but also allows users in general to convey their concerns.

Recommendation fulfilled.

The Company has a public website (www.petrobras.com.ar), which provides updated, separated and sufficient information so that its stakeholders, be they shareholders, prospective investors, customers or the public in general, can easily access to the information contained therein. This website additionally gives users the possibility of conveying their concerns and/or comments through the Contact Center and these concerns and comments are taken into account and considered by the Company.

The Company ensures that the information conveyed by electronic media responds to the highest standards of confidentiality and integrity aimed at data preservation and recording.

VI.2 The Issuer publishes a Report on Social and Environmental Responsibility on an annual basis which is audited by an independent External Auditor. If any, indicate its legal or geographic scope and the place where it is available. Specify the rules or initiatives that have been adopted in order to implement its corporate social responsibility program (Global Reporting Initiative and/or UN Global Compact, ISO 26.000, SA8000, Millennium Development Goals, Foretica SGE 21, AA 1000, Equator Principles, among others).

Recommendation partially fulfilled.

Since 2010, the Company prepares an annual Social and Environmental Report which is approved and promoted by the Management. This report is available at the website of PESA ( www.petrobras.com.ar - Responsabilidad Social y Ambiental ) and presents the results of operations and the relationship with stakeholders in Argentina.

The report is based on and structured according to the principles of the UN Global Compact, of which the Company is a signatory.

People from different areas of the Company form part of the operative group whose purpose is to identify and analyze material information for stakeholders, as well as to review the qualitative and quantitative results of the cycle covered by the report.  For the time being, the report is not subject to external audit. This matter could be considered in the future by the Company.

PRINCIPLE VII: REMUNERATE FAIRLY AND RESPONSIBLY

Recommendation VII: Set clear policies on compensation of members of the Management Body and first-line managers, with special focus on the establishment of conventional or bylaw thresholds depending on the existence or non-existence of profits.

VII.1 The Issuer has a Compensation Committee:

Recommendation fulfilled.

The Company has a Compensation Committee set up by the Board at the meeting held on October 6, 2006.

VII.1.1 composed of at least three members of the Management Body, the majority of which are independent,

Recommendation partially fulfilled.

The Compensation Committee is composed of three (3) regular Directors who are designated by the Board from among its members. At least one of the members of the Compensation Committee must be independent. At present, only one of its members is independent.

VII.1.2 chaired by an independent member of the Management Body,

Recommendation fulfilled.

At present, the Compensation Committee is chaired by the independent member.

VII.1.3 whose members are duly qualified and experienced in the field of human resource policies,

Recommendation fulfilled

The members of the Compensation Committee are duly qualified and experienced in Human Resources to carry out their duties. Likewise, for better discharge of its duties, the Committee has the assistance of the Company’s Human Resource Manager.

VII.1.4 which holds meetings at least twice a year,  

Recommendation fulfilled.

The Compensation Committee meets at least semi-annually, since that is the frequency with which it must report to the Board on the results of its performance.

VII.1.5 whose decisions are not necessarily binding on the General Shareholders’ Meeting or the Surveillance Board but only of a consultative nature regarding the compensation of the members of the Management Body.

Recommendation fulfilled.

The primary function of the Committee is to assist the Board in the performance of its duties of guidance and direction of the Company, in compensation-related matters. Therefore, as it provides assistance functions, its decisions are not binding.

VII.2  If there is a Compensation Committee, it must:

VII.2.1  ensure that there is a clear relationship between the performance of key employees and their fixed and variable compensation, taking into account the risks assumed and managed,

Recommendation fulfilled.

The functions of the Compensation Committee include the power to propose to the Board performance goals for Employees, including variable compensation and other incentives, as applicable.

VII.2.2 ensure that the variable portion of the compensation of members of the Management Body and first-line managers is linked to the medium and/or long term performance of the Issuer,

Recommendation fulfilled.

In addition to what is stated in VII.2.1, the Compensation Committee oversees the administration of variable compensations and their relation with the performance of the Company.

VII.2.3 assess the competitive position of the Issuer’s policies and practices against the compensations and benefits offered by comparable companies, and recommend or discourage changes,

Recommendation fulfilled.

The Compensation Committee assesses the competitive position of the Company’s policies and practices against the compensations and benefits offered by comparable companies.

VII.2.4 define and communicate the policy on retention, promotion, dismissal and suspension of key employees,

Recommendation fulfilled.

The functions of the Compensation Committee include the power to assess the efficiency of the talent retention and key employees’ dismissal process.

VII.2.5 provide guidelines for determining the pension plans of the members of the Management Body and first-line managers of the Issuer,

Recommendation not fulfilled.

The functions of the Compensation Committee do not include the provision of guidelines for determining the pension plans of the members of the Management Body and first-line managers. The possibility of including them in the functions of the Compensation Committee will be considered in the future.

VII.2.6 regularly report to the Management Body and to the Shareholders’ Meeting on the actions taken and the matters discussed at their meetings,

Recommendation partially fulfilled.

The Compensation Committee is a standing internal body of the Board that reports to the Board at least on a semi-annual basis.

VII.2.7 ensure the attendance of the Chairman of the Compensation Committee at the General Shareholders’ Meeting where compensations of the Management Body are approved, so that he/she may explain the Issuer’s policy on compensation of the members of the Management Body and first-line managers.

Recommendation fulfilled.

The Chairman of the Compensation Committee in his/her capacity as Regular Director, attends the Annual Shareholders’ Meeting where compensation of the Board is approved, including performance fees, salaries and other compensation for the performance of technical and administrative tasks. During the meeting, the Chairman of the Compensation Committee is available to respond to shareholders' queries as to the general management of the Company’s affairs, including compensation-related matters. The Human Resource Manager also attends the Annual Shareholders’ Meeting to assist in HR-related matters.

VII.3 If deemed appropriate, mention the policies applied by the Compensation Committee of the Issuer that have not been mentioned in the preceding item.  

There are no relevant policies that have not been mentioned.

VII.4 If there is no Compensation Committee, explain the manner in which the functions described in VII. 2 are performed within the Management Body.

As the Company has a Compensation Committee, this item is not applicable.

PRINCIPLE VIII: PROMOTE CORPORATE ETHICS

Recommendation VIII: Ensure ethical behavior in the Issuer.

VIII.1 The Issuer has a Code of Corporate Conduct. Describe the main provisions and say if it is subject to public disclosure. This Code is signed at least by the members of the Management Body and first-line managers. Indicate if its application to suppliers and customers is encouraged.

Recommendation fulfilled.

The Company has a Code of Corporate Conduct and Ethics which sets forth integrity and transparency guidelines and standards that must be observed by all Company’s employees, irrespective of their position or function, and by all persons carrying out works at the Company for a limited period of time or any specific work. The Code is signed by all the employees of the organization, including first-line managers.

The Code of Corporate Conduct and Ethics is based on principles of honesty, dignity, respect, loyalty, dedication, efficiency, transparency and awareness as a guide for the behavior of the people to whom it applies. In this way, the Company intends to respond to growing levels of competitiveness, profitability and social responsibility, with the latter including the valuing of employees, health, safety, environment and contribution to the regions where it operates.

The Code of Corporate Conduct and Ethics is available at the website of the Company.

VIII.2 The Issuer has mechanisms in place for the reporting of unlawful or unethical behavior, either in person or electronically, ensuring that the information conveyed responds to the highest standards of confidentiality, integrity and information preservation and recording. Indicate if the report reception and evaluation service is provided by personnel of the Issuer or by external independent professionals to ensure greater protection for reporters .

 

Recommendation fulfilled.

The Company has the Ombudsman’s Office as an independent channel for the reporting of irregularities and conflicts of interest in the fulfillment of the Code of Ethics and the rules and policies thereunder, in an atmosphere of respect, seriousness and confidentiality.  The Ombudsman’s Office has a system called “Reporting of Irregularities and Conflicts of Interest” which permits electronic reporting in addition to additional mechanisms involving direct and personal contact, such as: interview, postal mail, telephone or e-mail.

The office ensures the confidential and integral handling of the information that must be either transferred, considered and disposed of or recorded and kept on file. The reporting reception and evaluation service is exclusively limited to the Ombudsman Office which is composed of personnel of the Company.

The Ombudsman’s Office reports directly to the Audit Committee and is independent from the Company’s maximum authority.  

VIII.3 The Issuer has policies, processes and systems for the handling and disposition of the reports mentioned in item VIII.2. Describe their main aspects and indicate the degree of involvement of the Audit Committee in the disposition of reports particularly those associated with matters of internal control over financial reporting and the conduct of the members of the Management Body and first-line managers.

Recommendation fulfilled.

The Ombudsman’s Office has processes and systems in place for the handing and disposition of the reports mentioned in the previous paragraph. These processes and systems are governed by the following basic principles: (i) Integrity: acting in an independent and impartial manner; (ii) Confidentiality: preserving privacy and respect of persons, information and documents generated during the investigation; (iii) Equality: promoting the inclusion and access of all people to the reporting system; and (iv) Cooperation: promoting cooperation, empathy and participation in the solution of differences and controversial opinions.

Likewise, these policies pursue the appropriate referral to levels with investigation and decision making powers, ensuring that all resources have been used to attain the fairest and most adequate solution.

As regards the involvement of the Audit Committee, it is worth noting that this Committee receives periodic reports on the information related to matters under investigation, especially those related to accounting, auditing and internal control matters, and those related to significant conflicts of interests involving external auditors, the management of the Company and the controlling shareholder. The Committee may evaluate these reports with the assistance of the Ombudsman’s Office in carrying out analysis and investigations and may seek assistance from external advisors. The Financial Expert has complete unrestricted access to the “Irregularities and Conflict of Interest Reporting System” operated by the Ombudsman’s Office. Likewise, the Ombudsman holds a meeting with the Committee at least once a year in order to submit all reports received together with different statistical reports and the conclusions thereof.

PRINCIPLE IX: DEEPEN THE SCOPE OF THE CODE

Recommendation IX: Encourage the inclusion of good governance provisions in the Corporate Bylaws.

Recommendation fulfilled.

The Corporate Bylaws fulfill the requirements established under the GCL, the Rules and Listing Regulations of the BCBA and include provisions on the composition and functions of the Board of Directors, the Audit Committee and the Statutory Syndic Committee.

The Bylaws also include certain provisions of the Corporate Governance Code, particularly those associated to preventing conflict of interest in Directors' voting, and do not include any provision that prevents any recommendation not specifically included from actually being followed.

However, the Board may consider the convenience and occasion of including other good corporate governance provisions in the future.

CONSOLIDATED FINANCIAL STATEMENTS

as of December 31, 2015

PETROBRAS ARGENTINA S.A.

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2015

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

(Stated in millions of Argentine pesos)

The accompanying Notes 1 to 36 are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

(Stated in millions of Argentine pesos)

The accompanying Notes 1 to 36 are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF DECEMBER 31, 2015, 2014 AND 2013

(Stated in millions of Argentine pesos)

The accompanying Notes 1 to 36 are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

(Stated in millions of Argentine pesos)

a) Balances due to business combination of companies under common control (Note 2.6.8)

b) Note 27.

c) Note 17.7.

d) As required by the Shareholders’ Meeting of March 21, 2013.

e) As required by the Shareholders’ Meeting of March 27, 2014.

f) As required by the Shareholders’ Meeting of March 19, 2015.

The accompanying Notes 1 to 36 are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

(Stated in millions of Argentine pesos)

The accompanying Notes 1 to 36 are an integral part of these consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AS OF THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

(Stated in millions of Argentine pesos, except as otherwise indicated)

1. General information

1.1. The Company

Petrobras Argentina is a corporation (sociedad anónima) with its main office located in the Autonomous City of Buenos Aires, Argentina.

Petrobras Argentina’s shares are listed on the Buenos Aires Stock Exchange. Its ADS, each of them representing 10 Class B common shares of Petrobras Argentina, are listed on the NYSE.

The Company is not subject to the Optional Statutory System for Binding Public Offering.

1.2. Business of the Company

Petrobras Argentina’s business is mainly focused on the energy sector, specifically in oil and gas exploration and production, refining and distribution, petrochemical activities, electricity and sale and distribution of hydrocarbons. Petrobras Argentina S.A. holds operations in Argentina, Bolivia, Ecuador and Venezuela. The Company’s fiscal year ends on December 31 of each year.

In these consolidated financial statements, Petrobras Argentina and its subsidiaries are jointly referred to as “the Company”, “the Group” or “PESA”.

The Board of Directors approved the issuance of these consolidated financial statements (hereinafter “financial statements”) on March 3, 2016.

1.3. Controlling Group

Petrobras Participaciones S.L. is the immediate parent company of Petrobras Argentina, with an ownership interest of 67.2%.

Petrobras Participaciones S.L. is a subsidiary of Petróleo Brasileiro, a Brazilian company whose business is focused on exploration, production, refining, sale and transportation of oil and its byproducts in Brazil and abroad.

2. Basis of presentation

2.1. Statement of compliance

These financial statements have been prepared in accordance with IFRS as issued by the IASB.

2.2. Summary of the significant accounting policies

Significant accounting policies adopted in the preparation of these financial statements are described below, which have been consistently applied in these financial statements.

These accounting policies have been applied consistently by all Group companies.

Disclosure of prior periods’ presentation has been adjusted to achieve comparability with the current period.

2.2.1. New accounting standards and interpretations issued by the IASB effective as of December 31, 2015 and adopted by the Company

Annual improvements to IFRSs – 2010-2012 and 2011-2013 Cycles

Application of improvements to IFRSs issued did not have an impact on the results of operations or financial position of the Company; however, additional information regarding the aggregation criteria for operating segments made by the Company was disclosed in Note 2.5.

2.2.2. New accounting standards and interpretations issued by the IASB that are not effective as of December 31, 2015, and have not been early adopted by the Company

IAS 1 “Presentation of Financial Statements”

In December 2014, the IASB amended IAS 1 “Presentation of Financial Statements” providing a new guidance for the presentation of Financial Statements. The amendments are effective for annual periods beginning on or after January 1, 2016. Earlier application is permitted.

The Company believes that the application of the same will not impact significantly on the presentation of financial statements.

IAS 27 “Separate Financial Statements”

In August 2014, the IASB amended IAS 27 “Separate Financial Statements”. The amendments allow the use of the equity method to account as it is described in IAS 28 for investments in subsidiaries, joint ventures and associates and are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted.

The Company uses the equity method to account for investments in subsidiaries, joint ventures and associates in the preparation of the separate financial statements according to Technical Resolution No. 26 issued by the FACPCE. Therefore, the application of the amendment will not impact the results of operations or the financial position of the Company.

IFRS 9 “Financial Instruments”

In July 2014, the IASB issued a new version of IFRS 9 “Financial Instruments” which supersedes previous versions and sets out new requirements for the classification and measurement of financial assets and liabilities, effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted.

The Company is currently analyzing the impact of the application of IFRS 9. However, it is estimated that its application will not have a significant impact on the results of operations or the financial position of the Company.

IFRS 15 “Revenues from contracts with Customers”

In May 2014, the IASB issued IFRS 15 “Revenues from contracts with Customers”, later, in September 2015, amended the effective date for annual periods beginning on or after January 1, 2018. Earlier application is permitted.

It addresses the principles for recognizing revenue and establishes the requirements for reporting about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

The basic principle implies the recognition of revenue that represent the transfer of goods or services to customers at an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services.

The Company is currently analyzing the impact of IFRS 15. However, it is estimated that this standard will not significantly impact the results of operations or the financial position of the Company.

Improvements to IFRSs – 2012-2014 Cycle

In September 2014, the IASB published amendments to the IFRSs that are applicable for periods beginning on or after January 1, 2016. Earlier application is permitted.

The Company estimated that these amendments will not have an impact on the results of operations or the financial position of the Company.

2.3. Consolidation and interests in other companies

2.3.1. Investments in related companies

2.3.1.1. Subsidiaries

Subsidiaries are entities over which the Company exercises control as a consequence of their exposure or rights to variable returns and their ability to influence them through its power to direct the relevant activities, including generally a shareholding of more than half of the voting rights.

Subsidiaries are fully consolidated as from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases.

Since the functional currency of some subsidiaries is different from the functional currency of the Company, exchange gains or losses arise from intercompany operations. Those exchange results are included in “Financial results” in the Consolidated Statement of Income.

The accounting policies of subsidiaries have been changed as deemed necessary for consistency with the accounting policies adopted by the Company.

Petrobras Argentina has consolidated line by line its financial statements with those of companies over which it exercises control.

For consolidation of subsidiaries, the amount of the investment and the share in their profit or loss and cash flows are replaced by the aggregate assets, liabilities, income (loss) and cash flows of such subsidiaries, while the non-controlling interest is reflected separately. The intercompany receivables, payables and transactions within the consolidated group are eliminated in the consolidation. The unrealized intercompany gains or losses from transactions within the consolidated group have been completely eliminated.

2.3.1.2. Interest in joint arrangements

A joint arrangement is a contractual agreement whereby two or more parties engage joint control. Joint control exists only when decisions relating to the relevant activities require the unanimous consent of the parties sharing control.

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities, relating to the arrangement.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

2.3.1.2.1. Joint ventures

Investments in joint ventures are initially recognized at cost and are subsequently measured under the equity method.

As of December 31, 2015, 2014 and 2013, the Company exercises joint control over CIESA.

The intercompany gains or losses from transactions between the Company and entities under joint control are eliminated proportionally to the Company’s interest in such companies.

The accounting policies of entities under joint control were changed as deemed necessary for consistency with the accounting policies adopted by the Company.

The carrying value of investments in joint ventures, which is considered a cash-generating unit, is assessed for impairment when facts or changes in circumstances indicate that the book value could not be recoverable and, if applicable, an impairment loss is recorded.

2.3.1.2.2. Joint operations

The Company recognizes its proportionate interest in the joint operations assets, liabilities, revenues, costs and expenses related to its participation in joint operations in different consortia and joint operations for exploration and production of hydrocarbons.

2.3.1.3. Associates

Associates are entities over which the Company has significant influence but not control, generally representing a shareholding of between 20% and 50% of the voting rights. Investments in associates are initially recognized at cost, including goodwill recognized at the acquisition date and subsequently measured under the equity method.

The intercompany gains or losses from transactions between the Company and associates are eliminated proportionally to the Company’s interest in such companies.

The accounting policies of associates have been changed as deemed necessary for consistency with the accounting policies adopted by the Company.

The carrying value of investments in associates, each of which is considered a cash-generating unit, is assessed for impairment when facts or changes in circumstances indicate that the book value could not be recoverable and, if applicable, an impairment loss is recorded.

2.3.1.4. Business combination

 

The Company applies the acquisition method to account for business combinations. The acquisition cost is determined as the fair value of the assets transferred, equity instruments issued and debt assumed at acquisition date. Costs directly attributable to acquisition are charged to income as incurred.

A non-controlling interest in the acquired company is measured at fair value at acquisition date or on the basis of the proportional value of net assets acquired. The excess of acquisition cost and the non-controlling interest amount in the acquired company over net identifiable assets is recorded as goodwill. If this amount is lower than fair value of net assets acquired, the difference is recognized in the Consolidated Statement of Income.

Business combinations between companies under common control are accounted for considering the book value of the acquired company in the holding company. The difference between the price paid and the carrying amount mentioned before is recorded in equity ("Other" Note 2.6.8). The transaction costs are expensed in the period in which they accrue.

2.3.2. Financial information

In preparing these financial statements, the financial information of companies over which the Company exercises control, joint control and associates as of December 31, 2015, 2014 and 2013, or the best available financial information as of those dates, adapted to an equal period of time, was used. Adjustments have also been considered.

2.4. Translation of foreign operations

The main considerations of translation into presentation currency are shown below.

2.4.1. Functional and presentation currency

The financial information of PESA’s entities was prepared in their functional currency, that is, the currency of the primary economic environment in which the entity operates.

The functional and the presentation currency of Petrobras Argentina’s financial statements is the Argentine peso. The Company has evaluated and concluded that the date of the financial statements are not met the conditions set out in IAS 29 "Financial reporting in hyperinflationary economies" to consider Argentina as a hyperinflationary economy. These conditions include the cumulative inflation for the last three years approaches or exceed 100%. At the date of issuance of these financial statements, this pattern, measured as the variation in the rates published by the National Institute of Statistics and Censuses price it is not reached. Therefore, these financial statements have not been restated.

2.4.2. Outstanding balances and transactions

Foreign currency transactions are remeasured into the functional currency using the exchange rates prevailing at the date of the transaction.

Foreign exchange gains and losses resulting from settlement of such operations or from remeasurement at year-end of monetary assets and liabilities denominated in foreign currency are recognized in the Consolidated Statements of Income, except for cash flow or net investment hedges that qualify for exposure as “Other comprehensive income” (Note 2.6.8).

2.4.3. Subsidiaries and associates

The results and financial position of subsidiaries and associates that have a different functional currency from  PESA’s presentation currency are translated into the presentation currency as follows:

- the assets and liabilities are translated using the closing exchange rate;

- the gains or losses are translated using the exchange rates prevailing at the date of the transactions.

The results from the remeasurement process into the functional currency are recorded in line “Financial results” of the Consolidated Statement of Income.

The results from the remeasurement process into the functional currency to presentation currency transactions are recognized in “Other Comprehensive Income”. When an investment is sold or disposed of, in whole or in part, the related exchange differences are recognized in the Consolidated Statement of Income as part of the gain/loss on the sale or disposal.

2.5. Operating Segments Reporting

The Company has adopted IFRS 8 - Segment Reporting, which states that those business segments are identified on the basis of internal reports about components of the Company reviewed regularly by the Board Committee, chief operating decision maker in order to allocate resources and evaluate their performance.

In segmentation the Company considers transactions with third parties and intercompany operations, which are valued as defined by internal transfer prices between segments, with verification methodologies based on market parameters.

In the aggregation of segments, Management of the Company has primarily considered the nature of the regulatory framework of the Energy Industry in Argentina and product integration in the Company’s production process.

The Company’s business is mainly focused on the energy sector, basically through its activities relating to oil and gas exploration and production, refining and distribution, petrochemicals and gas and energy. Accordingly, the identified operating segments are as follows:

(a) Oil and Gas Exploration and Production, composed of Company’s participation in oil and gas blocks and its interest in Oleoductos del Valle S.A., OCP, direct and indirect interest in mixed companies in Venezuela and PELSA, consolidate company as of June 1, 2012.

(b) Refining and Distribution, including Company’s own operations in Bahía Blanca refinery and gas stations network, Company’s equity interest in Refinería del Norte S.A. and commercialization of oil produced in Argentina, which is transferred at market prices from the Oil and Gas Exploration and Production operating segment. Aggregation of refining and distribution segments responds primarily to the confluence of a common strategy in line with vertical integration of the Company’s operations according to industry regulations aimed at ensuring the supply of the domestic market.

(c) Petrochemicals, includes styrenics operations and catalytic reformer plant operations developed in Argentina.

(d) Gas and Energy, comprising Company’s own operations relating to the sale of gas produced in Argentina and gas and liquefied petroleum gas brokerage activities, its interest in TGS, the electricity generation activities of Genelba Power Plant and of Pichi Picún Leufú Hydroelectric Complex, and its interest in Enecor. Aggregation of gas and energy segments responds primarily to the confluence of a common strategy to maximize profitability and ensure self-supply.

The liquids obtained from the processing of oil and gas are produced in the business segments of Exploration and Production of Oil and Gas, Refining and Distribution and Petrochemicals. Until the year ended December 31, 2013, the sales of these products was on the segment Gas and Energy, and from January 1, 2014, such sales were decentralized in each of the segments where they are produced.

(e) Assets and operating income related to the Central Service Structure, includes those that are not attributable to any other operating segment and intercompany eliminations are collectively shown.

In the Central Service Structure includes common costs to individual business segments, among others, management fees, tax on financial transactions, financial liabilities and interest income tax, which are incurred by the Company in the ordinary course of its operations and control economy that are managed from the central structure and not reappropriate between operating segments.

2.6. Basis of measurement

The main measurement criteria used in the preparation of these financial statements are as follows:

2.6.1. Financial instruments

2.6.1.1. Classification of financial assets

The Company classifies its financial assets as follows:

Financial assets at fair value through profit or loss

This category includes financial assets acquired or held for trading or sale in the short term or those so designated by Management. Gains and losses derived from changes in fair value are recognized in the Consolidated Statement of Income.

Within this category, the Company has mutual funds which are measured at the fair value of those funds at each reporting date.

Loans and Receivables

Loans and receivables are non-derivatives financial instruments with fixed or determinable payments that are not quoted in an active market. They are initially recognized at fair value plus any directly attributable transaction cost. After initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less impairment loss, if applicable. Gains and losses derived from the use of the interest method are recognized in the Consolidated Statement of Income under “Financial Results”.

Also, the fair value of current bank and financial debt does not differ significantly from their carrying amount as of December 31, 2015, 2014 and 2013.

Within this category, the Company has time deposits, loans to several associate’s companies, other investments, trade receivables, other receivables, accounts payable and loans.

2.6.1.2. Impairment of financial assets

The Company assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired and if so, an impairment charge is recorded under “Other operating income (expense)”.

In the years ended December 31, 2015, 2014 and 2013, impairment charges of financial assets related to the allowance for doubtful accounts are indicated in Note 14.

2.6.1.3. Cash and cash equivalents

Cash and cash equivalents include cash on hand, term deposits and other short-term highly liquid investments with original maturities of three months or less, subject to an insignificant risk of change in value.

Bank overdrafts are accounted for within “Loans” in current liabilities in the Consolidated Statement of Financial Position. For purposes of the cash flow statement, bank overdrafts are part of the cash equivalents.

2.6.1.4. Trade receivables and accounts payable

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, net of an allowance for doubtful accounts, if applicable.

The amortized cost of trade receivables, other receivables, other long-term investments, accounts payable and other payables approximates to its fair value.

An allowance for doubtful accounts is recognized when there is objective evidence that the Company will not be able to collect its receivables at their original maturities or for the full amount. To the recognition of allowance for doubtful accounts, the Company evaluates different factors, including the customers’ credit risk, historical trends and other relevant information. This evaluation may require future adjustments if economic conditions substantially differ from the assumptions made. The amount of the allowance is the difference between the book value of the asset and the present value of the estimated future cash inflow, discounted at the effective interest rate. The asset is presented net of the allowance for doubtful accounts, if applicable. The loss from doubtful accounts is recognized in the Consolidated Statement of Income under “Administrative and selling expenses”.

Accounts payable are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method.

2.6.1.5. Accounting for derivative financial instruments

Derivative financial instruments are measured at fair value, determined as the amount of cash to be collected or paid to settle the instrument as of the measurement date, net of any prepayment collected or paid.

Changes in the measurement of derivative financial instruments designated as effective cash flow hedges are recognized under “Other comprehensive income” in “Equity” (see Note 2.6.1.7). Changes in the measurement of derivative financial instruments that do not qualify for hedge accounting or are not designated as hedges are recognized in the Consolidated Statement of Income under “Financial results”.

As of December 31, 2015, the Company maintains derivative financial instruments of USD 48; gains of 59 derived of the use of derivative financial instruments during 2015 were recognized in the Consolidated Statement of Income under “Financial Results”.

As of December 31, 2014 and 2013, the Company did not maintain relevant derivative financial instruments, and no significant charges were recorded in results for this type of operations in the fiscal years then ended.

2.6.1.6. Loans

Loans are initially recognized at fair value net of incurred transaction costs. Subsequently, they are carried at amortized cost using the effective interest method. Any difference between the proceeds (net of transaction costs) and redemption value is recognized in the Consolidated Statement of Income throughout the life of the loans using the effective interest method.

The loans are classified as current liabilities unless the Company has the right to defer settlement of the liability by at least twelve months following the reporting date.

2.6.1.7. Hedge Accounting

A hedge qualifies for hedge accounting only if at the inception there is formal designation and documentation of the hedging relationship and the risk management objective and the strategy for undertaking the hedge.

Hedging relationships are of three types: (i) fair value hedge: a hedge of the exposure to changes in fair value of the total or identified portion of a recognized asset or liability or an unrecognized firm commitment, that is attributable to a particular risk; (ii) cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction; and (iii) hedge of a net investment in a foreign operation:  a hedge of the amount of the entity’s interest in the net assets of that operation.

If a relationship qualifies for fair value hedge accounting, the gain or loss from remeasuring the hedging instrument and the hedge item at fair value shall be recognized in profit or loss.

If a relationship qualifies for cash flow hedges accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognized in other comprehensive income; and shall be reclassified to profit or loss as in the same period which the hedged cash flows affect profit or loss. The ineffective portion of the gain or loss on the hedging instrument shall be recognized in profit or loss.

A hedge is considered effective when originally, as in the rest of life, its changes offset from eighty and a hundred twenty five percent change in the opposite direction of the hedged item. In this regard, the Company excludes the specific component attributable to time value of an option in the measurement of the effectiveness of the instruments that qualify for hedge accounting.

In case the hedging instrument expires or is sold, terminated or exercised, or no longer meets the criteria for hedge accounting or the entity revokes the designation, the cumulative gain or loss that has been recognized in other comprehensive income shall remain separately in equity until the forecast transaction occurs. If the forecast transaction is no longer expected to occur, the cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income shall be reclassified to profit or loss.

If a relationship qualifies for hedge of a net investment in a foreign operation accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognized in other comprehensive income and shall be reclassified to profit or loss on the disposal or partial disposal of the foreign operation. The ineffective portion shall be recognized in profit or loss.

As of December 31, 2015, 2014 and 2013, the Company has designated a significant portion of its debt (mainly long-term debt) in dollars (non-derivative financial instruments) as hedging instruments of the net investment in foreign operations (activities that are based or conducted in a different country or currency) to reflect the natural hedge effect over changes in the exchange rate between a significant portion of the debt denominated in dollars and the entity’s interest in the net assets of those operations.

2.6.2. Other receivables and payables

Other receivables and payables have been initially recognized at fair value and subsequently measured at their amortized cost using the effective interest method. In addition, “Other receivables” includes, among others, advances to suppliers measured on the basis of the amounts actually disbursed.

2.6.3. Inventories

This line item includes crude oil stock, raw materials, work in progress and finished products relating to the Refining and Distribution, Petrochemicals and Gas and Energy business segments.

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average price method . The cost of inventories includes expenditure incurred in purchases and production and other necessary costs to bring them to their existing location and condition. In case of manufactured products and production in process, the cost includes a portion of indirect production costs, excluding any idle capacity (slack).

The net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs to make the sale.

The assessment of the recoverable value of these assets is made at each reporting date, and the resulting loss is recognized in the Consolidated Statement of Income when the inventories are overstated.

2.6.4. Property, plant and equipment

2.6.4.1. General principles

Property, plant and equipment, except as indicated below, is measured following the cost model. Any expenditure subsequent to the original recognition of the asset is added as a component of the asset only when the expenditure improves its condition and it is probable that future economic benefits, in excess of the originally assessed ones, will be generated by such asset or when the expenditure relates to recognize a major repair or overhaul of the asset which is conducted to allow the continued use of the asset, provided: (i) such expenditure is allocated to the replacement of the component parts of the asset, (ii) the useful life of such component parts has been calculated based on their own wear and tear or depletion and (iii) it is probable that future economic benefits will flow as a result of the expenditure.

The cost of work in progress whose construction will extend over time includes, if applicable, the computation of financial costs accrued on loans granted by third parties and other pre-production costs, net of any income obtained from the sale of commercially valuable production during the launching period. In 2015, 2014 and 2013 no borrowing costs were capitalized.

Property, plant and equipment related to foreign operations have been translated into the functional currency at historical exchange rates, and they have been translated into pesos at the closing exchange rates.

2.6.4.2. Oil and gas exploration and production activities

The Company uses the successful efforts method of accounting for its oil and gas exploration and production activities. This method involves the capitalization of: (i) the cost of acquiring properties in oil and gas exploration and production areas; (ii) the cost of drilling and equipping exploratory wells that result in the discovery of commercially recoverable reserves; (iii) the cost of drilling and equipping development wells, and (iv) the estimated asset retirement obligations.

According to the successful efforts method of accounting, exploration costs, excluding exploratory well costs, are expensed during the period in which they are incurred. Drilling costs of exploratory wells are capitalized until it is determined that proved reserves exists and they justify the commercial development.  If reserves are not found, such drilling costs are expensed. Occasionally, an exploratory well may determine the existence of oil and gas reserves but they cannot be classified as proved when drilling is complete.  In those cases, such costs continue to be capitalized insofar as the well has allowed determining the existence of sufficient reserves to warrant its completion as a production well and the Company is making sufficient progress in evaluating the economic and operating feasibility of the project.  

The initial estimated asset retirement obligations in hydrocarbons areas, discounted at a risk adjusted rate, are capitalized in the cost of the assets and depreciated using the units of production method.  Additionally, a liability at the estimated value of the discounted amounts payable is recognized. Changes in the measurement of asset retirement obligations that result from changes in the estimated timing, amount of the outflow of resources required to settle the obligation, or the discount rate, are added to, or deducted from, the cost of the related asset. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognized immediately in profit or loss.

2.6.4.3. Depreciation

The Company depreciates productive wells, machinery and camps in the oil and gas production areas according to the units of production method, by applying the ratio of oil and gas produced to estimated proved developed oil and gas reserves. The acquisition cost of property with proved reserves is depreciated by applying the ratio of oil and gas produced to estimated proved oil and gas reserves. Acquisition costs related to properties with unproved reserves is valued at cost with recoverability periodically assessed on the basis of geological and engineering estimates of possible and probable reserves that are expected to be proved over the life of each concession.

The Company’s remaining items of property, plant and equipment are depreciated by the straight-line method based on estimated useful lives, as detailed below:

The depreciation method is reviewed at each year-end. If expectations differ from previous estimates, adjustments are made prospectively at closing of each year, if applicable.

 Petrobras Argentina depreciates, using the straight-line method, each significant component of the assets not related to oil and gas production areas that: (i) is identifiable as an independent component with a significant cost in relation to the total value of the asset, and (ii) has an operating useful life that differs from another significant part of the same asset.

2.6.4.4. Impairment of non–financial assets

The carrying value of property, plant and equipment does not exceed their recoverable value. The Company’s Management assesses the recoverability of property, plant and equipment items whenever events or changes in circumstances (including significant decreases in the market value of assets, in the prices of the main products sold by the Company or in oil and gas reserves, as well as changes in the regulatory framework for the Company’s activities, significant increases in operating expenses, or evidence of obsolescence or physical damage) indicate that the carrying amount may not be recoverable. The book value of an asset is adjusted down to its recoverable value if its carrying amount exceeds the latter.

From a regulatory standpoint, recoverable amount is defined as the higher of fair value less costs of disposal and value in use, the latter is defined as the addition of the discounted expected net cash flows that arise as a direct result of the use and eventual final disposition of the assets. For that purposes, among other elements, the assumptions that represent the best estimate made by Management of the economic conditions that will prevail throughout the useful life of the assets are considered.

Discount rates used to calculate the value in use are the respective WACC. For each asset or cash generating unit a specific WACC was determined which considered the business segment and the country conditions where the operations are performed.  

In subsequent periods, the reversal of the impairment charge is evaluated if there are changes in the assumptions used to determine the asset recoverable value. In such a case, the book value of the asset or cash generating unit is written up to the lower of: a) the book value that the asset or cash generating unit would have had if the impairment had never been recognized; and b) its recoverable value.

As of December 31, 2015, 2014 and 2013, the Company recognized an impairment charge of 635, 94 and 11 on property, plant and equipment (Note 19), respectively.

2.6.5. Labor costs liabilities

Labor costs liabilities are accrued in the periods in which the employees provide the services that trigger the consideration.

The cost of defined contribution plans is periodically recognized in accordance with the contributions made by Petrobras Argentina.

For purposes of determining the estimated cost of post-retirement benefits granted to employees, the Company has used actuarial calculation methods, making estimates with respect to applicable demographic and financial variables. The amount recognized as liability attributable to such benefits represents the addition of the present value of the obligation, net of the present value of the assets of the plan, with which the obligations will be settled.

Actuarial gains and losses are recognized in “Other comprehensive income” and costs of services provided in the past in the consolidated statement of income.

2.6.6. Taxes payable

2.6.6.1. Income tax

Income tax expense for the year comprises current and deferred tax and is recognized in the Consolidated Statement of Income, except to the extent it relates to items recognized in the Consolidated Statement of Comprehensive Income. In this case, the corresponding tax effect is also recognized in such statement.

The current income tax expense is calculated on the basis of the tax laws in force or in process of enactment at the reporting date in the countries where the Company’s subsidiaries operate and generate taxable income. The Company’s management periodically evaluates criteria adopted in tax returns as regards situations in which applicable tax regulation is subject to interpretation and sets up provisions where appropriate.

The Company accounts for the deferred tax balance using the liability method, which establishes the determination of net deferred tax assets and liabilities on the basis of temporary differences between the accounting and tax measurement of assets and liabilities. Temporary differences result in the recognition of tax assets and liabilities when their future reversal decreases or increases the taxes to be determined, without affecting the compensation of the pertinent amounts. The Company recognizes deferred tax assets if, and only if, it is considered probable that there will be sufficient future taxable profit against which the tax loss could be used.

Deferred assets and liabilities are measured at the tax rate that is expected to be applicable in the period when the asset will be realized or the liability settled, on the basis of the tax rates in force or in process of enactment at the reporting date.

Deferred tax assets and liabilities are offset by company if there is a legally enforceable right to set off tax assets and liabilities and if the deferred income tax is related to the same tax authority.

The deferred tax assets and liabilities are stated at their nominal value.

Income tax rates prevailing at year-end in Argentina, Venezuela, Ecuador, Bolivia and Spain are 35%, 50%, 22%, 25% and 28%, respectively. Additionally, payment of Bolivian-source income to beneficiaries outside Bolivia is levied with a 12.5% withholding income tax.

2.6.6.2. Minimum presumed income tax

In Argentina, the minimum presumed income tax is supplementary to income tax, since while the latter is levied on the taxable income for the year, the minimum presumed income tax is a minimum tax levied on the potential income of certain productive assets at the rate of 1%, so that the Company's final liability will be equal to the higher of both taxes. However, if the minimum presumed income tax exceed the calculated income tax in any given year, such excess may be applied to reduce any excess of income tax over the minimum presumed income tax in any of the ten succeeding years.

In the years ended December 31, 2015, 2014 and 2013, income tax expenses were higher than minimum presumed income tax. Therefore, the Company only recorded income tax expense.

2.6.6.3. Hydroelectric royalties

For the operation of Pichi Picún Leufú Hydroelectric Complex, the Company pays hydroelectric royalties of 12% of the amount resulting from applying the rate for the bulk sale to the power sold under the terms of Section No. 43 of Law No. 15,336, as amended by Law No. 23,164. In addition, the Company is subject to a monthly license fee payable to the Federal Government for the use of the power source equivalent to 0.5% of the same basis used for the calculation of the hydroelectric royalty.

2.6.6.4. Withholdings on exports of hydrocarbons

The Public Emergency and Exchange System Reform Law No. 25,561 established the creation of a system of withholdings on exports of hydrocarbons for five years from March 1, 2002, which was subsequently extended for five years by Law No. 26,217. The effect of such withholdings is deducted from the respective selling prices.

Crude Oil  

Effective since November 2007, Resolution No. 394/07 issued by the Ministry of Economy and Production established a new method for calculating withholdings on exports of crude oil, and gave equivalent treatment to certain oil related products. This amendment results in the application of a variable export withholding based on a formula that considers the international price of crude oil and a cut-off price by product. Under this method, when the international (quoted) price of crude oil exceeds USD 60.90 per barrel, an increasing withholding rate is set for crude oil exports that results in a price cap of USD 42 per barrel of standard-quality crude oil. When the international price of crude oil dips below USD 45 per barrel, the regulations call for the authorities to determine a new applicable withholding rate within 90 days. The same rules apply to exports of refined products such as gasoline, fuel oil and lube oils, for which different cut-off and reference prices were defined. On January 3, 2013 the Ministry of Economy and Public Finance, by Resolution No. 01/13, proceeded to modify the methodology for the calculation of taxes on exports of crude oil by increasing the reference value at USD 80 per barrel and cutoff value at USD 70 per barrel.

In October 2014, through Resolution No. 803/14, the Ministry of Finance amended Resolution No. 394/07 and modified the withholding tax on hydrocarbon exports linking the rate (ranging from 10% to 13%) to a specific price schedule.

On January 1, 2015 Resolution No. 1,077/14 of the Ministry of Economy and Public Finance came into effect. This resolution supersedes Resolution No. 394/07 as amended by Resolution No. 803/14 and provides that for so long as the International price of crude oil is less than USD 71 per barrel the withholding tax rate shall be 1%, and incremental tax rates will apply for so long as the international price of crude oil is equal or higher than USD 71 per barrel.

In December 2015, through Resolution No. 160/15, the Ministry of Production established a 0% rate on exports of derivative products, such as rubber, styrene, polystyrene, bops and toluene.

Natural gas

In March 2008, the Ministry of Economy and Production issued Resolution No.127/08 which, in connection with natural gas, amended Resolution No. 534/06, whereby a 45% withholding rate was established on the price of the gas imported from Bolivia, and imposed a 100% withholding on natural gas exports, considering for valuation purposes the highest price set for natural gas under the applicable agreements for natural gas imports into Argentina. In addition, pursuant to such resolution, the methodology for calculating withholdings on exports of crude oil, under Resolutions No. 394/07 and No. 1/13, was also applied to LPG. During 2015, the Argentine government issued some measures for the LPG market. Resolution 60/15 reduced withholding tax on LPG exports from 45% to 1% and Resolution SE No. 792/15  updated and increases export parity prices for which the LPG is sold in the local market to customers who are not reached by the New Stabilization Program.

2.6.6.5. Foreign Exchange Regime – Obligation to exchange into local currency 100% of foreign currency proceeds from exports of crude oil and oil related products

Decree No. 1,722/2010 dated October 25, 2011 reestablished the obligation that all foreign currency proceeds from exports of crude oil and oil related products, natural gas and liquefied gas must be negotiated in the local exchange market regulated by BCRA.

The decree therefore makes it mandatory for Petrobras Argentina to exchange into local currency 100% of the proceeds of its exports of goods and services in Argentine.

2.6.6.6. New regulations for hydrocarbon activities in Argentina.

Law No. 26,741 issued in May 2012 declared of public interest and a state priority in the Republic of Argentina the achievement of self-sufficiency in hydrocarbons supply and the activities of hydrocarbon exploration, exploitation, industrialization, transportation and marketing. In addition, YPF S.A.’s and Repsol YPF Gas S.A.’s assets were declared of public interest and subject to expropriation in a fifty one per cent (51%).

By means of Decree No. 1,277 issued in July 2012, the regulations for the implementation of Law No. 26,741 was approved and Rules of the Argentine Hydrocarbon Sovereignty regime were issued, which established the creation of the Commission of Planning and Strategic Coordination of the National Hydrocarbon Investments Plan (the "Commission”) under the Ministry of Economic Development Policy and Planning of the Ministry of Economy and Finance, as well as the National Hydrocarbon Investment Register (the “Register") . Decree No. 1,277/12 established the obligation of Argentine companies in the oil and gas industries to present to the Commission an annual investment plan of exploration and exploitation. The Commission is required to design a Hydrocarbon National Investment Plan, which seek to maximize investment and sustainability of the industry in the short, medium and long term. In addition, Decree No. 1,277 also derogated certain sections of Decrees No. 1,055/89, No. 1,212/89 and No. 1,589/89 that provided for the free availability of hydrocarbons produced in concession areas granted, the free commercialization in the domestic and foreign markets and the freedom to set prices.

The Company has complied with all applicable periods information requirements.

In February 2013, by Resolution No. 1/2013, the Commission created the "Incentive Program Injection Natural Gas Surplus ( Programa de Estímulo a la Inyección Exedente de Gas Natural)” , companies can participate enrolling in the Register and submitting projects to increase the total volume of natural gas to be injected into the domestic market during the proposed period. Once the project is implemented, it provides: a) compensation for injection based on surplus at a price of 7.5 USD / MBTU and b) a fine in the case of the company during a specified period, has not managed to increase production volumes committed. In order to develop gas fields in Argentina, the Company formalized presentations required for the qualification of Resolution No. 1/2013 and so far the Commission has not issued.

Additionally, in November 2013, by Resolution No. 60/2013, the Commission created the “Stimulus Program Injection Natural Gas for Business with Reduced injection ( Programa de Estímulo a la Inyección de Gas Natural para Empresas con Inyección Reducida) ”. Producers had time to present their project to contribute to increase levels of natural gas production until March 31, 2014. The same is aimed at companies without previous production, or capped at 3.5 MMm3/day, with price incentives before increases production, and LNG import penalties if the companies do not comply with the committed volumes. Also, those companies that were program beneficiaries mentioned in the preceding paragraph and meet the conditions thereof, can request the termination of its participation in that program and its incorporation into the present. Resolution No.60/2013, as amended (Resolutions No. 22/2014 and No. 139/2014) established a price ranging between 4 USDUSD/MBtu and 7.5 USD/MBtu, according the higher production curve reached.

On January 30, 2015, registration of the Company to the mentioned program was admitted through Resolution No. 13/2015 issued by the Secretary of Economic Policy and Development Planning of the Ministry of Economy and Public Finance. During the third quarter of 2015, all additional filings required by such Committee were submitted and implementation of the program was approved with retroactive effect to July 1, 2014.

In October 2014, Law No. 27,007 was issued, amending Hydrocarborn Law No. 17,319, which defined and regulated the exploration and exploitation of unconventional hydrocarbons, introduced changes to the extension of concession terms, established a special royalty system and a system to promote hydrocarbon investments, and prohibited the creation of reserved areas in favor of state-owned corporations or corporations with private controlling interest. In addition, among its temporary provisions, the law granted a 90-day term to complete the negotiation process to extend existing concessions.

In February, 2015 the Commission issued Resolution 14/2015 creating the “Crude Oil Production Stimulus Program ( Programa de Estímulo a la Producción de Petróleo Crudo )” providing for export and/or production stimulus payment for registered companies subject to certain requirements. By Resolution 33/15, the Commission approved the General Regulation Program to Promote Production of Crude Oil.

Subsequently, through Resolution 123/15, the Commission approved the "Regulation of Procurement, sales and transfers of areas, Rights and Participation under the Incentive Program Injection Natural Gas Surplus Stimulus Program and the Gas Injection Natural Reduced injection for Business ".

By Decree 272/15, the PEN decided to dissolve the Committee of Strategic Planning and Coordination of the National Hydrocarbon Investment Plan created by the art. 2 of Regulation Regime Hydrocarbon Sovereignty approved as Annex I of Dec. 1277/12. The powers granted to the Commission shall be exercised by the Ministry of Energy and Mining. The Art. 5 of Decree 272 provides that acts adopted by the Commission in exercising its powers granted by the Regulation or other regulations retain their validity until the contrary is not provided by specific resolution of the Ministry of Energy and Mining.

The Company, through PELSA, has participated in the Petroleo Plus Program, which established certain incentives for producers. During the third quarter of 2015, Decree No. 1.330/2015 rendered such Program ineffective and ordered payment of pending incentives by means of Government Bonds BONAD 2018 and BONAR 2024.

2.6.7. Provisions and contingent liabilities

Provisions are liabilities of uncertain timing or amount, that are recognized when: a) the Company has a present obligation (legal or constructive) as a result of a past event, b) it is probable that an outflow of resources will be required to settle that obligation, and c) a reliable estimate can be made of the amount of the obligation.

Provisions are measured at the present value of the expenditures expected to be required to settle the present obligation, taking into account the best available information as of the date of the financial statements based on assumptions and methods considered appropriate. As additional information becomes available to the Company, estimates are revised and adjusted periodically. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability.

Contingent liabilities are: i) possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the entity; or ii) present obligations that arise from past events but it is not probable that an outflow of resources will be required to its settlement; or whose amount cannot be measured with sufficient reliability.

Contingent liabilities are not recognized. The Company discloses in notes to the financial statements a brief description of the nature of material contingent liabilities.

Contingent liabilities, whose possibility of any outflow in settlement is remote, are not disclosed unless they involve guarantees, in which case the nature of the guarantee is disclosed.

2.6.8. Equity accounts

Except as noted in “Retained earnings”, the activity in the Equity accounts reflects resolutions adopted by Shareholders in their meetings, or the effects of the laws or regulations in force.

Capital Stock

The capital stock consists of contributions made by shareholders represented by shares and capitalization of retained earnings, and comprises outstanding shares at their nominal value issued under Argentine law.

Adjustment to capital stock

Capital stock accounts were restated in constant currency. The capital stock account was kept at nominal value and the adjustment arising from such restatement is shown under “Adjustment to capital stock”.

Capital stock adjustment is not distributable in cash or in goods but may be capitalized through issuance of shares. In addition, this balance may be used to compensate accumulated losses in accordance with the compensation method specified under “Retained earnings”.

Additional paid in capital from merger

This account was generated in January 2005 as a result of the merger of Eg3, PAR and Petrolera Santa Fe, whereby all assets, liabilities, rights and obligations of the absorbed companies were included in the Company’s equity and shares of the Company were issued based on the approved share exchange ratio.

Additional paid-in capital on sales of stock of parent

The account additional paid-in capital on sales of stock of parent was generated until 2010, as a result of the sale of shares of the Company, with sales values greater than their acquisition costs.

During the third quarter of 2010 and in compliance with the terms and conditions in section 220 of the LSC, the Company sold these treasury shares under the preemptive right provisions set forth in Sections 221 and 194 of the LSC, and subsequently transferred to Optimum Petrobras Trust the remaining shares of the Company (Note 23.4).

Legal reserve

Pursuant to the provisions of the LSC, the Company is required to set up a legal reserve by providing at least 5% of the aggregate amount of net income for the year, prior year adjustments, transfers of other comprehensive income to retained earnings and accumulated losses of prior years, when this aggregate amount exceeds zero until the legal reserve equals 20% of the sum of “Capital stock” and “Adjustment to capital stock” balances.

Reserve for future investments

The Company’s Shareholders’ Meeting allocates a specific amount to establish a special Reserve to develop the Company’s investment activities, which are focused on the oil and gas exploration and production business.

Future dividends reserve

It relates to the amount allocated by the Shareholders to set up a reserve for future dividends. In addition, the Shareholders delegated on the Company’s Board of Directors the determination of the date and amount of the dividend distribution until the following Shareholders’ Regular Meeting.

Other comprehensive income

It includes: i) the gain and loss from the remeasurement of foreign operations, net of foreign exchange differences arising from the indebtedness of the Company denominated in foreign currency designated as hedge of the net foreign investment; ii) actuarial gains and losses for defined benefit plans and the related tax effect (Note 27).

Unappropriated retained earnings

This account therefore includes retained earnings carried forward from prior years, amounts transferred from other comprehensive income and prior year adjustments resulting from the application of IFRS.

General Resolution No. 593/2011 issued by the CNV provided that Shareholders in the Meetings at which they should decide upon the approval of financial statements in which the Retained earnings account has a positive balance, should adopt an express resolution as to the allocation of such balance, whether to dividend distribution, capitalization, setting up of reserves or a combination of these. The Company’s Shareholders have complied with these requirements.

Distribution of dividends

The cash dividend is recognized as a liability in PESA's financial statements in the year in which they are approved by the shareholders of the Company.

Other items in Equity

The "Other" financial statement line corresponds to the amount generated by the acquisition of business combination of companies under common control determined as the difference between the carrying amount of assets and liabilities at the date of the transaction and the amount paid (see Note 2.3.1.4). Total distributable retained earnings are reduced by the balance of this item.

2.6.9. Basic and diluted earnings per share

Basic earnings per share are calculated by dividing the amount of income or loss attributable to Shareholders of the Company by the weighted average number of ordinary shares outstanding during the year.

Since the Company does not have preferred shares or debt convertible into shares, basic and diluted earnings per share are the same.

2.6.10. Revenue recognition

Revenues from the sale of crude oil, natural gas, petrochemical and refined products are recognized when the products are delivered. Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity.

Revenue from the sale of goods is recognized when all the following conditions have been satisfied:

(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

(b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

(c) the amount of revenue can be measured reliably;

(d) it is probable that the economic benefits associated with the transaction will flow to the entity; and

(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Revenues from oil and natural gas production in which the Company has a joint interest with other producers are recognized on the basis of the net working interest, regardless of actual assignment. Any imbalance between actual and contractual assignment will result in the recognition of an amount payable or receivable according to the actual share in production, whether above or below the production resulting from the Company’s contractual interest in the consortium.

The Company performs diesel oil and gasoline sale transactions with other refining companies in different geographical areas to optimize the logistics chain. These transactions are disclosed on a net basis in the Statement of Income.

Revenues arising from the rendering of services are measured at the fair value of the consideration received or receivable, taking into account the estimated amount of any discount, thus determining the net amounts. Revenues are recognized when all of the following conditions are satisfied:

(a) the amount of revenue can be measured reliably;

(b) it is probable that the economic benefits associated with the transaction will flow to the entity;

(c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; and

(d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

3. Critical accounting judgments and estimates

The preparation of the financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

 

The most significant estimates and assumptions are described below:

3.1. Oil and gas reserves

Reserves mean oil and gas volumes (in m3 of oil equivalent) that are economically producible, in the areas where the Company operates or has a (direct or indirect) interest and over which the Company has exploitation rights, including oil and gas volumes related to those service agreements under which the Company has no ownership rights on the reserves or the hydrocarbons obtained and those estimated to be produced for the contracting company under service contracts.  

There are numerous uncertainties in estimating proved reserves and future production profiles, development costs and prices, including several factors beyond the producer’s control. Reserve engineering is a subjective process of estimating underground accumulations involving a certain degree of uncertainty. Reserves estimates depend on the quality of the available engineering and geological data as of the estimation date and on the interpretation and judgment thereof.

Reserve estimates are adjusted when so justified by changes in the evaluation criteria or at least once a year. These reserve estimates are based on the reports of oil and gas consulting professionals.

The Company uses the information obtained from the calculation of reserves in the determination of depreciation of assets used in the areas of oil and gas, as well as assessing the recoverability of these assets (Notes 2.6.4.3., 2.6.4.4., 17.2 and 19).

3.2. Asset retirement obligations

Asset retirement obligations after completion of operations require the Company’s Management to estimate the number of wells, long-term well abandonment costs and the time remaining until abandonment. It is worth a mention that technology, costs and political, environmental and safety considerations constantly change and may result in differences between actual future costs and estimates.

Asset retirement obligations estimates are adjusted when it is justified by changes in the evaluation criteria or at least once a year.

3.3. Impairment of non-financial assets

For the purpose of assessing recoverability of non-financial assets, assets are grouped at the lower levels for which there are individually identifiable cash flows (cash generating units). For this purpose, each associated company and each jointly venture and jointly operations is considered a cash generating unit.

The methodology used for estimating the recoverable amount of assets mainly consists in determining the value in use.

3.4. Contingencies

The Company is subject to various claims, lawsuits and other legal proceedings that arise during the ordinary course of its business. The Company’s liabilities with respect to such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Periodically, the Company’s Management reviews the status of each contingency and assesses potential financial liability, applying the criteria indicated in note 2.6.7, for which elaborates the estimates mainly with the assistance of legal advisors.

Contingencies include outstanding lawsuits or claims for possible damages to third parties in the ordinary course of the Company’s business, as well as third party claims arising from disputes concerning the interpretation of legislation.

 The Company evaluates whether there would be additional expenses directly associated to the ultimate resolution of each contingency, which will be included in the provision if they may be reasonably estimated.

3.5. Environmental costs

The costs incurred to limit, neutralize or prevent environmental pollution are only capitalized if at least one of the following conditions is met: (a) such costs relate to improvements in safety; (b) the risk of environmental pollution is prevented or limited; or (c) the costs are incurred to prepare the assets for sale and the book value (which considers those costs) of such assets does not exceed their respective recoverable value.

Liabilities related to future remediation costs are recorded when, on the basis of environmental assessments, such liabilities are probable to materialize, and costs can be reasonably estimated. The actual recognition and amount of these provisions are generally based on the Company’s commitment to an action plan, such as an approved remediation plan or the sale or disposal of an asset. The provision is recognized on the basis that a future remediation commitment will be required.

The Company measures liabilities based on its best estimation of present value of future costs, using currently available technology and applying current environmental laws and regulations as well as the Company’s own internal environmental policies.

3.6. Employment benefit

Actuarial commitments with employee benefit plans are recognized as liabilities in the statement of financial position based on actuarial estimates revised annually by an independent actuary, using the projected unit credit method.

The present value of pension plan obligations depends on multiple factors that are determined according to actuarial estimates which are revised annually by an independent actuary, net of the fair value of the plan assets, when applicable. For this purpose, certain assumptions are used including the discount rate and wage growth rate assumptions.

4. Financial and non-financial equity risk management

4.1. Risk management objectives and policies

In performing its operations, the Company is exposed to some risks associated to the markets in which it operates.

The Company adopts an integrated risk management methodology, which is not focused on the individual risks of the operations of its business units but on a wider monitoring of risks affecting its entire portfolio.

The Company’s risk management strategy, in line with its business integration strategy, seeks to achieve a balance between profitability goals and its exposure to risk.

The Company and its subsidiaries are not engaged in or trade in derivative financial instruments for speculative purposes.

The Board of Directors establishes the policies for managing each of the risks set out below, which have been applied consistently in the years included in these financial statements:

4.1.1. Financial risks management

4.1.1.1 Exchange rate risks

The Company’s results of operations and financial position are sensitive to changes in the exchange rates between the currencies in which transactions are carried out and the functional currency of each subsidiary.

The Company is mainly exposed to changes in the peso exchange rate against the U.S. dollar. Petrobras Argentina’s exposure to currencies other than the US dollar is not significant.

The Company uses derivative financial instruments to mitigate the exchange rate risk. associated with exchange rates. During year 2015, the Company used derivative financial instruments; derived gains of 59 were recognized in the Consolidated Statement of Income under “Financial Results”. During the years 2014 and 2013, the Company used derivative financial instruments, which did not produce significant results.

 The carrying amounts of assets and liabilities denominated in foreign currencies at the end of each fiscal year are as follows:

(a) As of December 31, 2015 according to exchange rate released by the National Bank of Argentine.

(b) As of December 31, 2015 according to exchange rate released by the National Bank of Bolivia and Central Bank of Venezuela, respectively.

The Company has designated a significant portion of its debt as hedge of investment in foreign currency, as a consequence, the Company has a net liability financial position in foreign currency of USD 14 million as of December, 31, 2015 and a net asset financial position in foreign currency of USD 70 million and USD 124 million as of December 31, 2014 and 2013, respectively. Exchange differences generated by the debt designated as hedge are recognized in “Other comprehensive income” (see Note 2.6.1.7).

.

Exchange rate sensitivity analysis

Considering the net monetary position, investments in companies with dollar debts and investments with a functional currency other than Argentine peso December 31, 2015, Management estimated that for every increase or decrease in the exchange rate of 20% against the dollar US would result in:

- a gain or loss by "Foreign exchange" before taxes 36 respectively,

- an increase or decrease of 65 in "Other comprehensive income", respectively, for the conversion of transactions denominated in foreign currency, net debt designated as a hedge,

- a gain or loss of 70 "results valued under the equity method investments", respectively, for the shareholding in CIESA which has a net liability position in foreign currency,

- and a loss or gain of 180 in the "Income taxes", net of "attributable to non-controlling interests", respectively, for the conversion of operations with functional currency other than the weight.

This sensitivity analysis does not represent the inherent risk.

At December 31, 2014, Management estimated that for every increase or decrease in the exchange rate of 20% against the US dollar would result in: (i) a gain or loss "Foreign exchange" before taxes of 120, respectively; (Ii) an increase or decrease of 19 in "Other Comprehensive Income"; (Iii) a loss or gain of 85 "Share of profit of equity-accounted investees", respectively; and (iv) a loss or gain of 110 in the "Income taxes", net of "attributable to non-controlling interests", respectively.

At December 31, 2013, Management estimated that for every increase or decrease in the exchange rate of 20% against the US dollar would result in: (i) a gain or loss "Foreign exchange" before taxes of 160 respectively; (Ii) an increase or decrease of 130 in "Other comprehensive income", respectively; (Iii) a loss or gain of 75 "Share of profit of equity-accounted investees", respectively, and (iv) a loss or gain of 80 in the "Income taxes", net of "Profit attributable to the non-controlling interest", respectively.

4.1.1.2 Interest rate risks

Management of interest rate risk aims at reducing financial costs and the Company’s exposure to interest rate increases.

As of December 31, 2015, 2014 and 2013 approximately 99%, 98% and 90%, respectively, of our total financial debt was subject to fixed interest rates while the remaining portion was subject to variable interest rates. Information regarding the financing of the Company and related interest rates is included in Note 20.

During the years ended December 31, 2015, 2014 and 2013, Petrobras Argentina was not engaged in any derivative financial instruments to mitigate the risks of interest rate fluctuations.

Interest rate sensitivity analysis

As of December 31, 2015, 2014 and 2013 the Company’s debt subject to variable interest rates was 7, 48 and 220, respectively. Considering the low amount of debt in 2015, 2014 and 2013, the Company considers that is not currently exposed to a significant cash flow risk as a consequence of interest rate fluctuations.

4.1.1.3 Liquidity risk

The liquidity risk relates to the Company’s lack of sufficient funds to comply with all its economic, labor or business commitments.

The liquidity risk is associated with the Company’s ability to finance its commitments and carry out its business plans with stable sources of financing, as well as with the indebtedness level and the maturity profile of the financial debt.

The Company has a Liquidity Policy approved by the Board, which main principles are related to preserve capital and maintain immediate liquidity. As part of this policy, maintains availability of cash resources, other liquid financial instruments and uncommitted credit lines in sufficient volume to meet the maturities of financial and commercial obligations, plus a balance between short and long debt term.

The Company has a funding policy that provides guidelines to avoid concentration in funding sources and credit counterparties.

It also uses a methodology for the analysis and setting of credit limits when placing investments in different financial institutions and mutual funds in order to minimize any associated credit risk.

Liquidity rate

The Company’s liquidity ratio as of December 31, 2015, 2014 and 2013 is shown below:

Aging of financial liabilities

The tables below analyzes the Company’s future liabilities into relevant maturity groupings based on the remaining period at the statement of financial position to the contractual maturity date for the years ended December 31, 2015, 2014 and 2013. The amounts disclosed in the table are the contractual undiscounted cash flows and as a result they do not reconcile to the amounts disclosed on the statement of financial position except for short-term payables when discounting is not applied. The estimates are based on information available as each year end may not reflect actual amounts in the future and therefore are provided for illustrative purpose only.

(a) Corresponds mostly to less than three months.

4.1.1.4 Credit risk

The Company has a Credit Policy approved by its Board of Directors that establishes guidelines and criteria for granting loans to customers. The Company constantly performs credit evaluations of the financial ability of its clients to minimize the potential risk of doubtful accounts losses.

Credit risk represents the exposure to possible losses derived from the lack of compliance by commercial or financial counterparties with the obligations assumed with the Company. This risk mainly results from economic and financial factors or from a possible default of counterparty.

Credit risk is associated with trade receivables as well as with cash equivalents and cash in banks and financial institutions.

The Company, in the normal course of business and according to its credit policy, provides credit lines to a large client portfolio, in several industry sectors, including gas station operators, refiners, exporting companies, petrochemical companies, natural gas distribution companies, large electricity users and distribution companies, among others.

The allowance for doubtful accounts recognized by the Company represents its best estimate of probable losses in relation to trade receivables.

As of December 31, 2015 the Company’s trade receivables amounted to 3,289, of which 99% was due within one year and 1% was classified as non-current, and related to CAMMESA (an Argentine company engaged in buying electricity from power generation companies and selling it to distribution companies). Except for CAMMESA (which represents approximately 40% of total trade receivables), the Company does not have a significant credit risk concentration, such exposure being fragmented into a large number of customers and other counterparties. No other customer concentrates a significant percentage of total trade receivables.

Credit risk associated with cash and cash equivalents and other financial investments is limited by the policy to operate only with counterparties (bank institutions) with adequate credit ratings. The Company also has a liquidity policy in place.

4.1.1.5 Capital management

The main purpose of the Company’s capital management is to maintain a good credit rating and safe debt-to-equity ratios in order to sustain the Company’s business and maximize shareholders’ value.

In addition, Petrobras Argentina seeks to maintain a cash generation level by its operating activities to fund its investment plan and fulfill all its financial commitments. In the years ended December 31, 2015, 2014 and 2013, cash provided by operating activities amounted to 4,239, 4,646 and 2,778, respectively.

The Board of Directors of the companies over which Petrobras exercises significant influence or joint control establishes its own risk management policies.

Debt-to-equity ratio:

The Company’s debt-to-equity ratio as of December 31, 2015, 2014 and 2013 is as follows:

4.1.2 Non-Financial risks management

Commodity price risks

Petrobras Argentina’s operations are affected by a number of factors which are beyond the Company’s control, including the changes in the market price of its products, governmental regulations on prices, taxes and other charges, royalties and other factors.

In Argentina, the prices of energy products sector are mainly determined by local regulations. Fluctuations in international prices only partially affect the domestic market.

As of December 31, 2015, 2014 and 2013, Petrobras Argentina did not use derivative financial instruments to mitigate the risks associated with commodity price fluctuations.

4.2. Financial instruments by category

As of December 31, 2015, 2014 and 2013, the categories of financial instruments were as follows:

4.3. Fair value of financial instruments

The methods and assumptions used to determine the estimated fair value of each class of financial instrument are as follows:

- The carrying amount of cash, cash equivalents, accounts receivable and short-term debt are similar to their fair value because of the short-term maturity of these items.

- The fair value of investments in mutual funds was estimated on the basis of quoted market prices as of the reporting dates for identical assets in active markets and accordingly this fair value estimate was categorized as Level 1.

- The fair value of publicly offered long-term debt obligations was estimated on the basis of quoted market prices for such debt obligations as of the reporting dates (level 1) while for the rest of the long-term debt obligations, fair value was estimated on the basis of interest rates currently available to the Company for debt obligations with similar maturities (Level 2).

 The estimated fair value of long-term loans as of December 31, 2015, 2014 and 2013, valued at amortized cost, except for financial instruments whose book values above approximate fair values, are as follows:

4.4. Fair Value by hierarchy levels

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique.

A fair value measurement is for a particular asset or liability and therefore, shall take into account particular characteristics that would be taken into account by market participants, assuming that they act in their economic best interest.

Valuation techniques used by the Company maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

Fair value hierarchy categorizes into three levels the inputs to valuation techniques used and gives the highest priority to Level 1 inputs and the lowest priority to Level 3:

- Level 1: Observable inputs that are quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date;

- Level 2: Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly; and

- Level 3: Unobservable inputs for the asset or liability, that are develop by the Company using the best information available to reflect the assumptions that market participants would use.

If one or more relevant inputs were not based on observable market data, related financial instruments would be included in Level 3.

5. Information by segments

The Company prepares this information based on business segment criteria and also prepares relevant information by geographical area.

5.1. Business segments:

The business segments were defined according to the regular way in which management analyzes information in decision making, applying IFRS’s accounting policies. Transactions between business segments are conducted during the ordinary course of business at market terms and prices. The terms and conditions of these transactions are comparable to those offered by or obtained from non-related parties.

Below is detailed information on each business segment identified by the Company’s Management:

Other relevant information

(a) Includes 614 related to Incentive Program Natural Gas Injection for Business with Reduced Injection, created by Resolution No. 60/2013 of the Commission of Strategic Planning and Coordination of the National Investment Plan Hydrocarbon National Government.

5.2. Relevant information by geographical area

Below is information on assets, sales, operating income and equity in earnings of affiliates aggregated by geographical area:

 

(a) Entirely related to sales to third parties.

6. Cost of sales

The Company’s cost of sales and the relevant expenses charged to cost of sales are broken down as follows:

6.1. Expenses attributable to cost of sales

7. Administrative and selling expenses

8. Exploration expenses

8. Other operating expenses, net

(*) Corresponds to “Oil and Gas Exploration and Production” business segment

9. Financial results

10. Current and deferred income tax

The Company’s tax expense and deferred tax balances are as follows:

(a) It relates to the tax effect of exchange differences resulting from: (i) revaluation of net investments in foreign operations (with effect on deferred tax), and (ii) revaluation of indebtedness denominated in foreign currency designated as hedge for that investment (with effect on current tax).

(a) 47 in “Deferred Tax Assets” and (499) in “Deferred Tax Liabilities”.

(b) 7 in “Deferred Tax Assets” and (863) in “Deferred Tax Liabilities”.

(*) The Company management evaluates the recoverability of differences taking into account, inter alia, the projected business profits, tax planning strategies, temporariness of future taxable income taking into account the limitation period of carryforwards , future reversals of existing temporary differences and tax history of recent years. All available evidence, both positive and negative, properly weighted, is considered in the analysis.

Term reversal of deferred income taxes

The Company believes that the assets / deferred tax liabilities will be based upon estimates based on the realization of provisions and final resolution to future events.

The estimated timetable for recovery / reversal of assets / deferred tax liabilities as of December 31, 2015 is detailed in the following table:

The reconciliation of the income tax expense in the statements of income and the one that would result from the application of the prevailing income tax rate of the 35% to the income before taxes and the non-controlling interest is as follow:

(a) It corresponds mainly to the sale of equity investments.

The Company has the following unrecognized carryforwards in the financial statements, which can be used until the dates below:

Income tax assets and liabilities:

12. Earnings per share

Basic and diluted earnings per share attributable to the controlling company’s shareholders are calculated as follows:

There have been no transactions involving common shares or potential common shares between the year closing date and the presentation of these financial statements.

13. Cash and cash equivalents

Additional information about Cash Flows

The Company uses the indirect method which requires adjustments to net income for the year to calculate net cash provided by operations.

The main transactions that did not have an impact on cash and cash equivalent and were excluded from the statements of cash flow as of December 31, 2015, 2014 and 2013 are the following:

(a) Operations in 2015 correspond: 98 to “Gas and Energy” business segment, 77 to “Oil and Gas Exploration and Production” business segment and 50 to the rest of the business segments. Operations in 2014 and 2013 mainly correspond to “Oil and Gas Exploration and Production” business segment.

(b) Corresponds to “Oil and Gas Exploration and Production” business segment.

14. Trade receivables

a) The activity in the years ended December 31, 2015, 2014 and 2013, includes (42), (40) and (9) charged to "Administrative and selling expenses”.

b) As of December 31, 2015, 2014 and 2013 current trade receivables include an average of 13%, 8%and 4%, respectively of non-impaired past due, which do not exceed a period of 3 months.

15. Other receivables

a) Activity of (397), (182) and (140) in the years ended December 31, 2015, 2014 and 2013, respectively are shown in line “Other comprehensive income”.

b) As of December 31, 2015, 2014 and 2013 current receivables include an average of 2%, 9% and 4%, respectively of non-impaired credits that are past due and do not exceed a period of 3 months as of each year end.

16. Inventories

17. Investments in related companies

17.1. Investments in joint ventures

17.1.1. Distrilec

In the first quarter of 2013, the Company sold to Hidroelectrica Piedra del Águila S.A. and to La Plata Cogeneración S.A. all of its direct and indirect interests in PEDASA and PFB, for an amount of USD 35 million, with a loss of 34 shown under “Other operating expenses, net” (Note 9).

Through PEDASA and PFB, the Company held an indirect ownership of 48.50% in Distrilec, parent company of EDESUR.

17.1.2. CIESA

The shareholders of CIESA, the parent company of TGS, may not sell their Class “A” shares representing 51% of TGS ¢ s capital stock, without the prior authorization of the regulatory agency and the approval of the shareholders of CIESA.

17.1.3. Carrying value of the Company’s interests in CIESA

As of December 31, 2015, 2014 and 2013, the carrying value of the direct and indirect holding in CIESA was 441, 491 and 497, respectively.

The book value of this interest does not exceed its recoverable value.

17.1.4. CIESA indebtedness

Due to the Argentine macroeconomic situation, starting with the enactment of the Public Emergency Law, CIESA did not pay at maturity, in April 2002, both principal and the last interest installment, their notes issued in 1997 for a nominal value of USD 200 million, or the cap and collar of interest rate agreements.

As of April 2004, the shareholders and creditors of financial CIESA held a series of agreements, which, among other actions, planned certain shares transfer in order to provide the necessary flexibility to advance in restructuring CIESA’s financial debt. Thus, on September 1, 2005 entered into a Restructuring Agreement Financial Debt (Restructuring Agreement), which was subject to approval by the ENARGAS and CNDC, followed by legal claims before the Courts of New York from January 2009.

On May 10, 2011 CIESA entered into a Memorandum of Understanding with Pampa Energía S.A., Pampa Inversiones S.A. and Inversiones Argentina I Ltd. (Pampa Group), which also became the holder of the notes and on May 18, 2011, the parties to the CIESA Restructuring Agreement by which Pampa Group entered the agreement.

On October 5, 2011, by note No. 11,362, ENARGAS expressed no objections to the Settlement Regulatory Restructuring and said that the same may be enforced once the approval was obtained by the CNDC. As of the date of these financial statements, the authorization of the CNDC was not obtained.

On July 13, 2012, CIESA, Grupo Pampa and the Company entered into a settlement agreement whereby all parties involved waived all claims, title and interest under the lawsuit before the New York State Courts and terminated the same. As a result of the agreement, CIESA paid off all the financial debt by means of (i) the transfer to Pampa Group of 4.3% of TGS’s shares; (ii) the payment of approximately USD130 million; (iii) the release of the remaining financial debt, and (iv) execution of a fifth amendment to the Restructuring Agreement. It was agreed that upon obtaining the governmental approval, Grupo Pampa will receive shares representing 40% of CIESA’s capital stock which are held in trust by The Royal Bank of Scotland, Argentine Branch.

Pursuant to the Agreement referred to in this note and the resolutions adopted at CIESA’s Board of Directors’ Meeting held on October 23, 2012, on January 2, 2013 CIESA gave notice to the CNV of full payment of Corporate Bonds, and on May 30, 2013 CIESA was withdrawn from the Public Offering and Listing System.

17.1.5. Tariff situation of the public utility companies

17.1.5.1. General framework

The scenario after the enactment of the Public Emergency Law significantly changed the financial equation of the public utility companies, which were affected, among others, by the local currency devaluation, the pesification and the elimination of indexation clauses on rates.  

The Public Emergency Law provided for the conversion into Argentine pesos and the elimination of indexation clauses on public service rates, thus fixing them at the exchange rate of ARS 1 = USD 1. In addition, the Executive Branch was empowered to renegotiate those agreements entered into to provide public services, along the following criteria: (i) rates impact on economic competitiveness and revenue allocation, (ii) service quality and investment plans, to the extent that they were contractually agreed upon, (iii) users interest and access to services, (iv) the safety in the system involved, and (v) companies’ profitability.

On February 12, 2002, the Executive Branch of Government issued Decree No. 293/02 whereby it recommended that the Ministry of Economy and Production renegotiate the agreements executed with public utility companies. UNIREN was created in July 2003, which took over the work of the Renegotiation Commission and its aim is, among others, to provide assistance in the public works and services renegotiation process, to execute comprehensive or partial agreements, and to submit regulatory projects related to transitory rate adjustments.  

In December 2013, the Law No. 27,200 was issued, which extended the public works and services renegotiation term to December 2017.

17.1.5.2. TGS

Interim Agreement

After UNIREN had submitted to TGS several proposals for the tariff adjustment as provided for in the concession contract that TGS had deemed insufficient, in October 2008 TGS executed a provisional agreement with UNIREN, which provides for a 20 % tariff increase to be retroactively applied as from September 1, 2008 and for the application of the cash from such increase to an investment plan in the gas transportation system provided under the same agreement.

On December 3, 2009, the PEN issued Decree No. 1,918/09 ratifying the provisional agreement. As a result, TGS invoiced its clients the tariff increase once the ENARGAS will publish the new tariff schedule and will define the invoicing method of the retroactive increase. This administrative formality, however, has not been completed and considering the excessive delay, in August 2010, TGS sent a letter to ENARGAS requesting authorization to publish the tariff schedule including the 20% provisional tariff increase and the method for collection of the retroactive increase and the application of an interest rate in accordance with the payment terms to be defined. ENARGAS answered TGS that it had forwarded the background information and the tariff project to the SCyCG, wich is part of the MPFIPyS, in compliance with Resolution No. 2,000/2005 issued by the MPFIPyS.

On September 30, 2010, TGS filed an action for the protection of its constitutional rights (“acción de amparo”) under Section 43 of the National Constitution and Law No.16,986, against ENARGAS and SCyCG to seek implementation of the new tariff schedule, which he was accepted at justice.

On April 7, 2014 through Resolution No. I-2852 ENARGAS approved tariff schedules applicable to the Natural Gas Transportation public utility provided by TGS, effective since April 1, 2014. Tariff schedules provide for an increase in stages: an 8% increase since April 1, 2014, an accumulated 14% increase since June 1, 2014 and an accumulated 20% increase since August 1, 2014.

This increase will be allocated to an investment plan to be implemented by TGS in connection with works in its transportation system to secure quality levels of the natural gas transportation service according to the Regulatory Framework of the natural gas industry.

On June 5, 2015 through Resolution No. 3,347/15, additional Resolution I-2852, ENARGAS approved an increase in tariff schedules applicable to the Natural Gas transportation public utility effective since May 1, 2015. This increase represents a 44.3% temporary rise in the price for the natural gas transportation service and a 73.2% increase in Charge for Access and Use for TGS.

This temporary increase is intended to cover operation and maintenance costs and the investments required for the normal supply of natural gas transportation services until TGS and the Argentine government, reach an agreement for the comprehensive renegotiation of the natural gas transportation license initialed by TGS in October 2011. As of the date of these financial statements, there is no certainty as the period in which the Memorandum of Agreement will be subscribed and implemented by the State.

This increase is a partial recognition of the prior administrative claims filed by TGS. That is the reason why TGS will continue taking appropriate actions to protect its rights, including those actions necessary to execute the comprehensive renegotiation agreement.

Resolution No. 7 of the Ministry of Energy and Mining of Argentina ( B.O. 28.01.2016 ) repealed the Resolution 2000/2005 of MPFIPyS available to all tariff increase should be pre SCyCG intervention , depending on the agency.

Comprehensive Agreement

Early in October 2008, TGS received from UNIREN a proposal for a comprehensive renegotiation agreement (including the 20% initial tariff increase). In October 2011, TGS received a new proposal from UNIREN which was accepted by TGS, allowing UNIREN to initiate the relevant administrative procedure.

In October 2015, it was initialed by TGS and UNIREN a new version of the Act Comprehensive Agreement to incorporate as legal predecessor of the same, Resolution No.3,347. At the date of issuance of these financial statements there is no certainty regarding the time in which Act Comprehensive Agreement shall be subscribed and implemented by the State.

Investment CIESA / TGS

As of December 31, 2015 the book value of the investment in CIESA (TGS 's controlling shareholder) is 441 and represents about 2% of the total assets of Petrobras Argentina.

17.2. Investment in associates

(a) Included Petrokariña S.A., Petroritupano S.A., Petroven-Bras S.A. and Petrowayú S.A

(b) The activity for the years ended December 31, 2015, 2014 and 2013, includes (2,714), (921) and (580) charged to "Other comprehensive income" and (1,213), (1,342) and (520), charged to "Share of profit of equity accounted investments", respectively (see note 17.3).

For purposes of IFRS’s 12 requirements, the Company does not have significant investments in associates.

Investments in Mixed Companies in Venezuela

In April 2005, the MEP instructed PDVSA to review the thirty-two operating agreements signed by PDVSA affiliates with oil companies from 1992 through 1997. These instructions given by the MEP established that all the necessary measures should be taken by PDVSA to migrate all operating agreements effective at that time to mixed companies. In August 2006, the conversion operating agreements were signed, providing for that the equity interest of private partners in such mixed companies would be of 40%, with the remaining 60% to be held by the Venezuelan Government.

The companies Petroritupano S.A., Petrowayú S.A., Petroven-Bras S.A. and Petrokariña S.A. (collectively referred to as “mixed companies”) were organized as a result of migration of the operating agreements governing production activities in Venezuela in the Oritupano Leona, La Concepción, Acema and Mata areas, respectively.

The mixed companies have to sell to PDVSA all liquid hydrocarbons and the associated natural gas (when it is provided in the agreement), produced in the delimited area, according to a price formula associated with international benchmarks such as BRENT.

As of December 31, 2015, 2014 and 2013 the carrying value of the Company’s direct and indirect interest in the mixed companies, net of impairment charges, is 2,842, 2,667 and 3,078, respectively. The recoverability of the referred investments is highly sensitive to crude oil price volatility, to economic, social and regulatory changes and, particularly, to the resulting business plans to reserves development. In determining the recoverable value, the Company considered prices based on business plans (considering Brent crude oil price of USD 45 per barrel for 2015 converging to USD 71 in the long-term), production curves, transaction costs at market values and investment needs to develop the reserves of such companies. The effect of international prices in the estimated curve of hydrocarbon future sales and the effect of the increase of country risk in Venezuela in the discount rate used resulted in the recording of impairment losses of 1,213 in the year ended December 31, 2015. Discount rate used to measure recoverable value, (17.1% in 2015 and 15.47% in 2014), considers the type of asset involved, the business segment and the country where operations are conducted. As of December 31, 2015, 2014 and 2013 the Company maintains allowances for impairment on this asset of 9,094, 5,167 and 2,903, respectively.  

The Company performed a sensitivity analysis of the recoverable value relating to: i) discount rate: an increase or decrease of a 1% in discount rate, would imply a decrease of 5% or an increase of 6% in the recoverable value, respectively and ii) price of crude oil used: an increase or decrease of a 10% in the price, would imply an increase of 17% and a decrease of 20%, in the recoverable value, respectively.

Upon the execution of the pertinent agreements in connection with the migration of the operating agreements, in 2006, the Government of Venezuela recognized a divisible and transferable credit in favor of the private companies participating in the mixed companies in the amount of USD 88.5 million for Petrobras Argentina’s equity interest, which does not accrue interest and could be applied to the payment of acquisition bonds to be used in any new mixed ownership project for oil exploration and production activities, or licenses for gas exploration and production operations in Venezuela. Since projects for the use of the credit recognized had not materialized, the efforts to transfer such credit to third parties had not been successful, and other alternative uses of the credit was not anticipated, in 2007 the Company recorded an allowance for the full amount of the credit. As of December 31, 2015, 2014 and 2013 the Company maintains allowances for impairment on this asset of 1,153, 756 and 574, respectively (Note 15).

Impairment charge on investments in Oleoductos de Crudos Pesados (OCP) - Ecuador

As regards the interpretation conflicts between OCP and the Ecuadorian Tax Authorities, the Court of Justice issued rulings confirming the tax debt assessment in favor of the State, so OCP filed extraordinary actions for protection with the Constitutional Court. These actions were rejected by the Constitutional Court at the end of 2014.

OCP reports a deficit in its equity as of December 31, 2015 and 2014, however, considering that Petrobras Argentina has not taken on any commitment to provide capital contributions or financial assistance to OCP, the shares have been valued at zero, with a net loss of 464 having been recognized in the fiscal year 2014, after giving effect to the capitalization of a credit against OCP during 2014.

17.3. Share of net loss of equity accounted investees

(a) Includes an impairment, in “Oil and Gas Exploration and Production” business segment , of 1,213, 1,342 and 520 for the years ended December 31, 2015, 2014 and 2013.

17.4. Dividends collected

17.5. Information about interest in subsidiaries, associates, entities under joint control and other entities as of December 31, 2015

Changes in interest in related companies in fiscal years 2013 to 2015:

In the first quarter of 2013, the Company sold 100% of its interest in PEDASA, through which the Company held a 48.5% indirect interest in Distrilec and a 27.33% indirect interest in Edesur.

In fiscal year 2014, liquidation of Propyme S.G.R, in which the Company held a 48.56% direct and a 0.07% indirect interest, was approved.

In December 2014, the Company acquired the 5% direct interest PEISA held in Atalaya Energy S.R.L. and Canadian Hunter Argentina S.A. Consequently, as from that date the Company held a 100% direct interest in both companies, later merged and absorbed into PESA.

17.6. Relevant information

The table below shows the most relevant information from the statements of income and cash flows of PELSA, the subsidiary with material non-controlling interest.

Associates and joint arrangements

18. Other investments

19. Property, plant and equipment

Changes in property, plant and equipment

(a) Decreases on the category for the year ending "production wells, exploratory wells and oil and gas property" on December 31, 2013 includes 11 impairment Santa Cruz area II, charged in "Other operating expenses, net" (Note 9).

(b) Decreases on the category for the year ending "production wells, exploratory wells and oil and gas property" on December 31, 2014 includes 94 impairment Colpa and Caranda area, charged in "Other operating expenses, net" (Note 9).

(c) Decreases on the category for the year ending "production wells, exploratory wells and oil and gas property" on December 31, 2015 includes 635 impairment charges, corresponding 471 and 164 to El Tordillo and Colpa and Caranda areas, respectively, charged in "Other operating expenses, net" (Note 9).

Impairment of non-financial assets

The assessment of recoverability of El Tordillo and La Tapera – Puesto Quiroga areas resulted in the recognition of impairment losses of 471 as a result of the significant drop in margins related to increases in operating costs and lower domestic reference prices for oil sales (considering crude oil domestic price of USD 55 per barrel for 2016 converging to USD 69 in the long-term). The discount rate WACC amounted to 8.9% in 2015.

Furthermore, impairment losses of 164 were recognized in Colpa and Caranda area, reflecting the effect of international reference prices in the curve of future oil sales (considering Brent crude oil price of USD 45 per barrel for 2015 converging to USD 71 in the long-term) and deferment of development plan execution. The discount rate WACC amounted to 8.7% in 2015 and 8.3% in 2014.

The Company performed a sensitivity analysis of the recoverable value in El Tordillo and La Tapera – Puesto Quiroga areas regarding: i) discount rate: an increase or decrease of 1% in the discount rate would imply a decrease of 5% or 6% increase in the recoverable value, respectively and ii) price of crude oil used: an increase or decrease of 10% in the price would imply an increase of 20% and a 20% decrease in the recoverable value, respectively.

The Company performed a sensitivity analysis of the recoverable value in Colpa and Caranda area regarding: i) discount rate: an increase or decrease of 1% in the discount rate would imply a reduction of 33% or an increase of 36% in the recoverable value, respectively and ii) price of crude oil used: an increase or decrease of 10% in the price would imply an increase of 15% and a 18% decrease in the recoverable value, respectively. Considering the related net book value of 211, the mentioned effects, would not represent a significant impact in relation to the Company’s assets.

 

20. Financial loans

20.1. Global programs of non-convertible bonds

Global program of USD 2.5 million:

As of December 31, 2015 the following classes of bonds issued in May 2007, under this program remained outstanding: Class S, for a face value of USD 300 million, maturing in May 2017, at a 5.875% annual rate. Class S bonds are collateralized by a Standby Purchase Agreement provided by Petróleo Brasileiro, pursuant to which, in the event of failure to pay principal, interest and any other amount owed by Petrobras Argentina in connection with Class S bonds, Petróleo Brasileiro shall purchase the rights of bondholders to receive payments.

The proceeds from the bonds were used to refinance liabilities, increase working capital, and make capital expenditures in Argentina and capital contributions to associates.

Bond debt is presented net of the unaccrued portion of the issuance discounts and the incurred costs for such issuances.

Global program of USD 500 million:

The Extraordinary Shareholders of Petrobras Argentina held on March 21, 2013 approved the creation of a global program for the issuance of bonds for an outstanding maximum principal amounting to USD 500 million or its equivalent in any other currency, expiring within 5 years, or the maximum term that may be established by any applicable regulation in the future.

The creation of the program was authorized by Resolution No. 17,162 of the CNV of 15 Augusts 2013. No notes were issued as of the date of these financial statements.

20.2. Cross default clauses and others

Company’s outstanding bonds and other financial indebtedness include cross default provisions whereby the Trustee, as instructed by the bondholders representing at least 25% of the related outstanding capital, in the case of corporate bonds or the lender, as the case may be, may declare all the amounts owed to be due and payable if payment of any financial debt of the Company or their significant subsidiaries is accelerated or is not made when due, provided that those amounts exceed the higher of USD25 million or 1% of Petrobras Argentina’s shareholders’ equity upon those maturities, and that the default has not been defeated or cured within the applicable legal and / or contractual terms.

Company’s outstanding bonds and financial indebtedness include additional provisions whereby in case of unfulfilled and as long as the default was not defeated or cured within the applicable legal and/or contractual terms, might also cause an acceleration of the debt.  

As of the date of these financial statements, Petrobras Argentina has complied with all terms and conditions related to its financial indebtedness.

Under the documentation governing the Series S Notes, if a change of control (as defined therein) occurs, we must make an offer to repurchase from the holders any and all outstanding Series S Notes at a purchase price equal to 101% of the aggregate principal amount of such notes outstanding, plus any accrued and unpaid interest thereon, through the purchase date.

20.3. Composition

The breakdown of the financial debt as of December 31, 2015, 2014 and 2013, is as follows:

Loans activity

Activity in loans and financing during 2015, 2014 and 2013 are as follows:

Short and Long-term loans

The financial loans outstanding as of December 31, 2015, 2014 and 2013 are as follows:

The maturities of the long-term financial loans as of December 31, 2015, 2014 and 2013, are as follows:

21. Current Taxes payables

22. Provisions and contingent liabilities

 

Provisions that have been recognized in financial statements

a) Provision for Environmental remediation

The Company is subject to extensive environmental regulations in Argentina and in the other countries in which it operates. The Company’s management believes that its current operations are in compliance with applicable environmental requirements, as currently interpreted and enforced, including regulatory remediation commitments assumed. The Company has not incurred in any material environmental liabilities as a result of its operations. The Company undertakes environmental impact studies for new projects and investments and, to date, environmental requirements and restrictions imposed on these new projects have not had any material adverse impact on Petrobras Argentina’s business.

Activity in 2015, 2014 and 2013 fiscal years includes (169), (54) and (273) attributable to payments net of new charges, 29, 193 and 27 recognized in “Other operating expenses, net” (Note 9) and 134, 49 and 98 recognized in “Other Comprehensive Income”, respectively.

The Company has performed a sensitivity analysis relating to the discount rate. The 1% increase or decrease in the discount rate would not have a significant impact on the Company’s results of operations.

b) Asset retirement obligations

In accordance with the regulations applicable in the countries where the Company (directly or indirectly through subsidiaries) performs oil and gas exploration and production activities, the Company must incur costs associated with well plugging and abandonment. The Company has not pledged any assets for the purpose of settling such obligations.

The following table summarizes the activity in asset retirement obligations for the years ended December 31, 2015, 2014 and 2013:

The Company has performed a sensitivity analysis relating to the discount rate. The 1% increase or decrease in the discount rate would not have a significant impact on the Company’s results of operations.

c) Provision for legal proceedings

The Company (directly or indirectly through subsidiaries) is a party to several commercial, tax and labor proceedings and claims that arise in the ordinary course of its business. In determining a proper level of provision, the Company has considered its best estimate mainly with the assistance of legal and tax advisors.

 Activity in 2015, 2014 and 2013 fiscal years includes 9, 109 and 103 recognized in “Other operating income expenses, net” (Note 9) and (103), (126) and (58) attributable to disbursements for each year, respectively.

 The determination of estimates may change in the future due to new developments or unknown facts at the time of evaluation of the provision. As a consequence, the adverse resolution of the evaluated proceedings and claims could exceed the established provision.

Contingent liabilities that have not been recognized in financial statements

 

Material contingent liabilities considered as possible in the opinion of the Company and its legal and tax advisors, that have not been recognized in financial statements are as follows:

Tax Contingencies

Income tax

There are interpretation differences between the Company and the Argentine tax authorities in the criterion applied by the Company regarding the time of recording well abandonment expenses for income tax purposes. As of the date of these financial statements, the Tax Court has issued an unfavorable judgment against the Company for 2004, 2005 and 2006 periods which did not provide for payment of any tax because of the allocation of tax losses, that have not been  used or challenged, against these periods. The Management is analyzing the administrative and judicial steps that should be followed. It should also be noted that the interpretation differences are maintained by subsequent fiscal years, but these is not a final administrative or judicial decision. The Company believes that the resolution of these matters will not have a material adverse effect on the financial position of the Company.

Gross Income tax

The Company maintains interpretative differences with the AFIP and Argentinian provincial tax authorities related to taxes applicable to its oil and gas activity. The Company estimates that the outcome of these differences will not have significant adverse effects on the Company’s financial position or results of operations.

Arbitration Oil Combustibles SA ("OIL")

In December 2010, OIL and PESA have signed a contract committing itself to selling virgin naphtha and octanicas basis for a period of 15 years to PESA, called "Supply Framework Agreement".

In April 2015, the firm OIL initiated arbitration before the International Chamber of Commerce (ICC) against PESA, considering that by extraordinary and unforeseeable reasons the aforementioned Agreement became too onerous for Oil.

The management of the Company believes that in the state in which the arbitration is, it does not appear as likely that the outcome of this matter may have a significant adverse effect on the financial position or results of operations of the Company.

23. Social benefits and other payroll benefits

a) Included in line “Other Liabilities” on “Current Provisions”.

23.1. Defined contribution plan

Supplementary Pension Plan

In November 2005, Petrobras Argentina’s Board of Directors approved the implementation of a defined voluntary contribution plan for the employees who fulfill certain conditions. Through this plan, Petrobras Argentina makes contributions to a trust fund in an equal amount to the contributions made by the employees adhered to the plan, in conformity with a scheme defined for each salary level. The participating employees may make voluntary contributions exceeding those established in the mentioned scheme, which will not be considered for purposes of the contributions to be made by Petrobras Argentina.

In the years ended December 31, 2015, 2014 and 2013, Petrobras Argentina expensed of 25, 21 and 17, respectively, attributable to such benefit.

23.2. Defined benefit plan

Indemnity plan

This is a defined benefit plan for employees who fulfill certain conditions, and consists of granting, upon retirement, a one-month salary per year of service at the Company, with a minimum of six salaries, in conformity with a decreasing scale considering the years that the plan is in effect.

Compensatory fund

This is a defined benefit plan for employees of Petrobras Argentina who take part in the defined contribution plan effective at the time that joined the Company prior to May 31, 1995, and have reached a certain number of years of service. The benefit is based on the last computable salary and years of service of each employee included in the plan.

The plan is of a supplemental nature, so that the benefit received by the employee is represented by the amount determined under the provisions of this plan, after deducting benefits payable to the employee under the Supplementary Pension Plan and the public retirement system, in order to the aggregate benefit to each employee equals the one stipulated in this plan.

The plan calls for a contribution to a fund exclusively by Petrobras Argentina and without any contribution by the employees. The assets of the fund are contributed to a trust fund and invested in US dollar-denominated money market instruments in order to preserve the accumulated capital and obtain a return in line with a moderate risk profile. In addition, although there is no target asset allocation for the following years, funds are mainly invested in US government bonds, commercial papers rated A1 or P1, AAAm-rated mutual funds and time deposits in banks rated A+ or higher in the United States of America, in accordance with the Trust Agreement dated on March 27, 2002 entered with The Bank of New York Mellon, duly amended by the Permitted Investment Letter dated on September 14, 2006. The Bank of New York Mellon is the trustee and Towers Watson is the managing agent. In case there is an excess (duly certified by an independent actuary) of the funds to be used to settle the benefits granted by the plan, Petrobras Argentina will be entitled to choice to use it, in which case it may have to notify the trustee thereof.

During 2015, 2014 and 2013 the most relevant actuarial information on the defined-benefits pension plans are as follows:

(a) As of December 31, 2015, 2014 and 2013 the defined benefit obligation includes 254, 221 and 172 corresponding to the Compensatory Fund and 118, 87 and 63 for the Indemnity Plan, respectively.

Principal assumptions and sensitivity analysis

The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. Therefore, the presented analysis may not be representative of the actual change in the defined benefit obligation.

Benefit obligation are expected to be paid as follows:

23.3. Other employment benefit obligations

Company employees falling within the scope of certain collective bargaining agreements and meeting the relevant requirements are eligible to receive a certain number of salary pays, when they leave the Company upon retirement or disability.

During 2015, 2014 and 2013 the most relevant actuarial information on the defined-benefits as follows:

Principal assumptions and sensitivity analysis

The sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. Therefore, the presented analysis may not be representative of the actual change in the defined benefit obligation.

Benefit obligation are expected to be paid as follows:

23.4. Pension plan financing – Optimum Petrobras Trust Fund

The Company, in its capacity as trustor, entered into a trust agreement with BNP Paribas Argentina Investment Partners S.A., in its capacity as trustee, which trust assets consist of shares of the Company (Note 2.6.8). As of December 31, 2015 which number 5,811,866 share of the Company.

The sole purpose of the trust is to make periodical contributions of shares and/or cash resulting from the sale of the shares in order for the Company to comply with the funding obligations under the Compensatory Fund (Note 23.2) and the Supplementary Pension Plan (Note 23.1).

24. Capital stock

As of December 31, 2015, the Company’s capital stock amounted to 2,019, fully subscribed, issued, paid-in and authorized for public trading.

Changes in capital stock in the last three fiscal years:

Restrictions on availability of the Company’s shares

Law No. 27.181 passed on October 5, 2015 declared of public interest the protection of the National Government’s shareholdings that are part, among others, of the investment portfolio of the Sustainability Guarantee Fund (Fondo de Garantía de Sustentabilidad) of the Argentine Integrated Social Security System (Sistema Integrado Previsional Argentino). To such effect, the Argentine Agency of Government Investments in Companies was created as enforcement authority.

According to the provisions of such law, the transfer of Company’s shares held by the Sustainability Guarantee Fund of the Argentine Integrated Social Security System shall require prior authorization of the Argentine Congress.

25. Reserves

26. Unappropriated retained earnings

27. Other comprehensive income

28. Related party transactions

Sale of companies

In December 2007 and in April 2009, Petrobras Argentina sold to PIB BV (a subsidiary of its holding company) a 40% equity interest and the remaining 60% equity interest in PVIE for USD423.3 million and USD619.4 million, respectively.  

The agreed price further includes a contingent consideration in favor of the Company to reflect the value of the "Prospectus Kinteroni" in market conditions or, alternatively, non-participation of the buyer and their respective compensation. Such compensation defined by the parties a consequence of the discovery of gas and condensate in the prospectus Kinteroni of Block 57 in January 2008. The Company continues negotiating with the buyer in order to agree on the amount.

Financial guarantees

In 2007, Petrobras Argentina issued USD300 million Class S corporate bonds, collateralized by a Standby Purchase Agreement provided by Petróleo Brasileiro (Note 20).

Commercial transactions

The Company carries out commercial transactions in the ordinary course of business. The Company makes purchase and sale of crude oil and oil related products with PELSA, Refinería del Norte and EG3 Red, and operations of transportation of oil and gas with Oldelval and TGS. In addition, the Company makes crude oil and oil related products import and export transactions with subsidiaries of Petróleo Brasileiro, particularly with Brasken S.A. and Petrobras Global Trading BV. In addition, the Company has contracts of technical, administrative and technological assistance with PBI BV, Petróleo Brasileiro, Petrobras Colombia Combustible and Petrobras Venezuela Inversiones y Servicios. Finally, transactions with OCP are described in Note 30.

Balances and transactions with related companies

Outstanding balances with related parties as of December 31, 2015, 2014 and 2013 are as follows:

The main transactions with related companies for the years ended December 31, 2015, 2014 and 2013 are as follows:

During 2015, 2014 and 2013, the Company paid to its directors and executive officers salaries for approximately 34, 26 and 18, and no significant payments of other benefits were made. The members of the Board of Directors and executive officers do not receive any share based payments or compensation.

29. Oil and gas areas and participation in joint ventures

29.1. General considerations

The Company is jointly and severally liable with the other participants for meeting the contractual obligations under these arrangements.

The production areas in Argentina are operated pursuant to concession production agreements with free crude oil availability.

According to Law No.17,319, royalties equivalent to 12% of the wellhead price of crude oil and natural gas are paid in Argentina. The wellhead price is calculated by deducting freight and other sales related expenses from the sale prices obtained from transactions with third parties. This rate may increase from 3% to 4% depending to the producing jurisdiction and market value of the product.  

The Company’s branch in Bolivia performs at its own risk and for its own account, in the name and on behalf of YPFB exploration and production activities within the Colpa Caranda area. Pursuant to the agreement, YPFB owns the hydrocarbons, pays royalties and direct tax on hydrocarbons, which in the aggregate amount to 50% of the production valued on the basis of sales prices, and applies the 80% of the surplus amount to pay, in the first place, the costs and depreciations associated to the development and operation of Petrobras Argentina’s branch, being the rest shared between YPFB and the branch on the basis of an index calculated based on production volumes, depreciation rate, prices and taxes paid, among other items.

29.2. Exploratory well costs

The following table provides the year end balances and activity for exploratory well costs, during the years ended December 31, 2015, 2014 and 2013:

29.3. Oil and gas areas and participation in joint-operations

As of December 31, 2015, the Company and associates are part of the joint operations and consortia for the exploration and production of oil and gas as indicated below:

a) See Note 29.7.

b) The Company signed an agreement with Petrolera Pampa SA to make additional investments in well drilling, which would entitle Petrolera Pampa S.A. to obtain 43% of the production.

c) The granting of the concession is in progress and the term will be 25 years from such granting.

d) The Company has yield 50% of its direct and indirect working interest to ExxonMobil Exploration Argentina S.A..

e) The Company, in compliance with article 5.2 of the respective partnership agreements, informed to the partners of Enarsa 1 and Enarsa 3 its decision not to participate in retraining them in exploration permits according to Art. 30 of Law 27,007.

f) It is in process of returning to “Gas y Petróleo del Neuquén SA” (Permit holder).

29.4. Production concession in the Veta Escondida area

On April 4, 2012 by the sanction of the Provincial Decree No. 563/12, Petrobras Argentina was notified of a decision of the government of the Province of Neuquén to terminate the production concession in the Veta Escondida area. The Company has sought relief alleging that it has complied with all requirements under the concession and that it did not commit any breach which would support the decision adopted by the Government of Neuquén.

On December 19, 2013, Petrobras Argentina(as operator), and Total Austral having an  interest of 55% and 45% in the Veta Escondida exploitation concession, respectively, reached an out-of-court agreement with the Province of Neuquén and GyP to settle the dispute arising from the enactment of Provincial Decree No. 563/12 which declared the expiration of the concessionaires’ rights under this exploitation concession and had led Petrobras Argentina to bring complaint against the Province of Neuquén.

On March 17, 2015, under Decree No.565/2015, the Province of Neuquén approved a standard agreement including terms and conditions similar to those provided in the agreement reached in December 2013. At the date of these financial statements, the parties are negotiating a solution to the conflict taking into account the model agreement approved and the current situation of the industry and market.

29.5. Changes in working interest oil and gas areas

On January 31, 2014 the Board of Directors approved the sale to YPF S.A. of the entire interest of 38,45% in the Puesto Hernández Joint Operation (UTE) agreement, for a total price of USD 40.7 million and recognized income before income tax of 181 recorded in “Other operating expenses, net” (Note 9). This transaction represents for the Company an early termination of the Joint Operation (UTE) agreement, whose assets represented approximately 1% of the total assets of the Company as of December 31, 2013.

The joint operation (UTE) agreement for the exploration and potential exploitation of the area Parva Negra Este, was approved by the Executive Branch of the province of Neuquén through Decree No. 575/14, published on April 4, 2014. The Company has the commitment to drill four onshore wells in the next two years, with a guaranteed amount of USD 27 million for the first year.

The Company had submitted a request for an exploitation concession in Parva Negra area, holding a direct and indirect interest of 47.63% and 52.37%, respectively. In 2014 the Company renegotiated its rights on the area and entered into a joint operation agreement with Gas y Petróleo del Neuquén S.A. (GyP), holder of the Parva Negra Este exploration permit, with GyP having a 15% interest and Petrobras (operator) having a 85% direct and indirect interest (40.48% direct and 44.52% indirect).

On March 30, 2015, the Company’s Board of Directors approved the sale to Compañía General de Combustibles S.A. of the Company’s entire interest in the Austral basin in Argentina in the amount of USD 101 million, resulting in a pre-tax gain of 674 recorded in “Other operating expenses, net” (Note 9). The transaction includes concessions operated under the Joint Ventures (UTE) of Santa Cruz I, Santa Cruz I Oeste, Glencross and Estancia Chiripá, assets related to Santa Cruz II, Punta Loyola Terminal and oil and gas pipelines operated in the basin.

In the third quarter of 2015, the Executive Branch of the Province of Salta, through Provincial Decree No. 3,129/15, ratified the incorporation of High Luck Group in the Chirete area. Therefore, the Company’s current interest in such area is 50%.

In the third quarter of 2015, the Executive Branch of the Province of Neuquén, through Provincial Decree No. 1,600/15, ratified the incorporation of Exxon Mobil Exploration Argentina S.A. in the Parva Negra Este area and therefore the Company’s current interest in such area is 42.50%.

29.6. Renegotiation of interest in oil and gas areas

On December 30, 2014 the Legislative Body of the Province of Río Negro ratified the agreement entered into with the Province on December 9, 2014 and approved by the Argentine Executive Branch under Decree No. 1,708/2014 on December 15, 2014, to extend for a 10-year term the three concessions the Company holds in that Province: 25 de Mayo – Medanito, Jagüel de los Machos and Río Neuquén.

This agreement mainly establishes the obligations of Petrobras Argentina S.A. to pay a Fixed Bond of USD 40 million, a USD 8 million contribution to Social Development and Institutional Strengthening and a 3% supplementary contribution on hydrocarbon production (in addition to the 12% royalty payment). Likewise, it was agreed to assign to Empresa de Desarrollo Hidrocarburífero Provincial Sociedad Anónima (EDHIPSA) 5% of the rights and obligations inherent to the production concession in the Rio Neuquén area in the Province of Rio Negro. Formalization of the mentioned assignment is in implementation phase as set forth in Article 3.18 of the agreement.

Petrobras Argentina has committed to spend about USD 907.7 million in hydrocarbon exploration and production as from the effective date of the agreement until the new expiration date of the concessions, of which 450.7 are up to 2017, 266.1 from 2018 to 2020 and 190.9 from 2021 onwards.

In addition, on December 30, 2014 the Legislative Body of the Province of Río Negro ratified the agreement entered into with PELSA to extend for a 10-year term the concession in the Entre Lomas field held by the Company in that Province.

This agreement mainly establishes the obligations of PELSA to pay a Fixed Bond of USD 25.3 million, a USD 5 million contribution to Social Development and Institutional Strengthening and a 3% supplementary contribution on hydrocarbon production (in addition to the 12% royalty payment). PELSA has committed  to spend about USD 491.8 million in hydrocarbon exploration and production as from the effective date of the agreement until the new expiration date of the concessions of which 172.8 are up to 2017, 139.9 from 2018 to 2020 and 179.1 from 2021 onwards.

In November 2014, the Company announced an investment of USD 622 million for the development of Punta Rosada formation in the province of Neuquén. The investment includes the drilling of 44 wells up to 4,000 meters deep search for tight gas. In 2014, 2015 and 2016, the investment will amount to USD 245 million and at least 15 wells that will add 1.4 million m3 per day of gas production in the province of Neuquén be drilled. Petrobras Argentina takes on the challenge of increasing production and increasing gas reserves.

Concerning the Jagüel de los Machos area in the Province of La Pampa, a legal dispute arose with such Province relating to the non-recognition of the extension rights on such area acquired by the Company according to the provisions of National Law No. 17,319, as amended by Law No. 27,007, and under the provisions of Provincial Decree No. 18/2015 dated January 28, 2015. As a result, although the Company has filed the relevant administrative motions for the defense of the rights vested on it, as from September 7, 2015 the Province of La Pampa has taken possession of the area and, consequently, all the Company’s activities in such area have been discontinued, with a loss of 121 shown under “Other operating expenses, net” (Note 9).

29.7. Investment commitments

In addition to the information in note 29.6, in Argentina, in connection with its interest in the consortia in charge of exploration activities in Río Colorado, Río Atuel, and Parva Negra Este oil areas, as of December 31, 2015 the Company has investment commitments of approximately USD 9 million, including drilling of exploration wells. PELSA has investment commitments totaling USD 22 million. Total of both, 8 are up to 2017, 11 from 2018 to 2020 and 12 from 2021 onwards.

29.8. Relevant information

Relevant information on assets, liabilities and results related to the Company’s interests in joint operations as of December 31, 2015, 2014 and 2013, includes the following:

Assets and liabilities

Statements of Income for the years ended December 31, 2015, 2014 and 2013

The charge for income tax is not an obligation for UTEs but an obligation for companies which integrate them.

30. Operations in Ecuador

As from 2006 the Ecuadorian Government introduced major tax and regulatory reforms in the hydrocarbon sector which resulted in significant changes to the terms and conditions set forth at the time of execution of the Participation Agreements.

Amendatory Agreements and Law amending the Hydrocarbon Law

On October 31, 2008, EcuadorTLC S.A., Teikoku Oil Ecuador and Petroecuador, among others,  executed the Amendatory Agreements regulating the operation of Block 18 and Palo Azul while the parties negotiated the migration to a new contract modality.

On July 26, 2010, the amendment to the Hydrocarbon Law in force was approved by operation of law, which provided for, among other things, the obligation to migrate to a new contract modality before November 24, 2010.

As a result of the negotiation process mentioned above, the Company decided not to accept the final proposal received from the Ecuadorian government, as this is insufficient to migrate to Service Agreements in Block 18 and Palo Azul Unified Field. Consequently, through Resolution dated November 25, 2010 the Hydrocarbon Secretary notified EcuadorTLC S.A. the termination of the Participation Agreements and instructed Petroamazonas EP to undertake the operational transition process.

Section 9 of the Amendatory Agreements indicates that the Ecuadorian government must compensate the terminated parties in an amount equivalent to unamortized investments adjusted by a variable rate and provides for a period of time for the Ecuadorian government and the terminated parties to work out the details of the termination payment.

On March 18, 2011, the Hydrocarbon Secretary issued Official Notice No. 626 to inform the Company that it was analyzing and structuring a new regulatory framework to determine a settlement price for the termination, to be applied instead of the provisions of the Amendatory Agreements. On April 11, 2011, the Company filed an answer to the Official Notice and rejected the terms thereof claiming these did not comply with the conditions set forth in the Amendatory Agreements by the parties concerned, which conditions may not be unilaterally modified. In this respect, the Company informed the Hydrocarbon Secretary that it would continue to seek compliance with the terms of the Amendatory Agreements.

On December 9, 2011, Petrobras Argentina served a notice on the Ecuadorian government (Trigger Letter) informing the existence of a dispute under the terms of the Treaty for the Promotion and Reciprocal Protection of Investments previously entered into between Argentina and Ecuador. The Treaty, implies the opening of a negotiation period prior to a possible arbitration to seek enforcement of the provisions of the Amendatory Agreements.

On June 21, 2013, not having reached an agreement with the Ecuadorian government, EcuadorTLC SA, Cayman International Exploration Company and Teikoku Oil Ecuador, members of the joint operation, submitted to the Ecuadorian Goverment a letter of notification of a dispute under the terms of the Amendatory Agreements starting their decision to submit the dispute to international arbitration under the arbitration Rules of the United Nations Commission on International Trade Law.

Finally, on February 26, 2014 the request for arbitration against Ecuador was presented in the above terms. On October 13, 2015 the Tribunal issued Procedural Order No. 2, in which it rejected a request for bifurcation requested by the defendants . The defendants will present its defense to the application and objections to the jurisdiction of the Court on or before the day March 21, 2016

As of December 31, 2015 the Company has recorded 698 to be recovered from the Ecuadorian State in accordance with the provisions of the Amendments Agreement, disclosed in Other current receivables (Note 15). This amount does not include the interest calculation for update, as the Company believes that it is not possible to determine with certainty the interest rate to be applied.

Crude Oil Transportation Agreement with OCP

The Company holds a contract with OCP, whereby it assumed a commitment to an oil transport capacity of 80,000 barrels/day for a term of 15 years counted as from November 10, 2003.

The transport contract is a “Ship or Pay” contract, so the Company must meet its contractual obligations for the total volume agreed upon, regardless of the real volume transported, and has to pay, the same as the other producers, a rate that covers the operating costs and financial services of OCP, among others.

The Company has the right to sell the transport capacity in the heavy crude oil pipeline (OCP) to mitigate the negative impact of its non-use. Periodically, the Company negotiates the sale of the hired transport capacity. On December 31, 2008, the Company entered into a contract with Petroecuador whereby the Ecuadorian State assumed a commitment to charge, effective January 1, 2009, the available crude owned by it and transported through the heavy crude oil pipeline to the oil transport capacity hired by the Company, up to a maximum volume of 70,000 barrels/day. In addition, the Company sold transport capacity of approximately 8,000 barrels/day of oil for the period from July 2004 to January 2012. As a result of the contract non-compliance by the buyers, the Company is making the pertinent claims. Lastly, 40% of the net contractual commitment resulting from the above had been assumed by Teikoku Oil Ecuador, as consideration for the transfer to this company of the 40% interest in Block 18 and Palo Azul in October 2008.

In the third quarter of 2015, the Company, through Petrobras Bolivia Internacional S.A., reassumed the obligations previously assigned to Teikoku Oil Ecuador relating to the mentioned agreement and received a USD 95 million payment. As a result of this transaction the Company has the necessary funds to continue with negotiations in Ecuador. The estimated obligations of 626 attributable to Contracts renegotiations in Ecuador were recognized in current provisions (Note 22). Additionally, as of December 31, 2015 the Company carries a liability for the net transport capacity hired from OCP, in current and non-current provisions for 299 and 88, respectively (Note 28). The premises used in calculation of the provisions mainly include the estimate of the applicable rate and the transport capacity used by third parties. The discount rates used in the measurement consider the type of liability in question, the business segment and the country where the transactions are conducted. In estimating the liabilities as of December 31, 2015, as a result of the assumptions revision, the Company recorded a gain of 507, under "Other operating expenses, net" (Note 9).

The Company must hold letters of credit to ensure compliance with its financial commitments under the Ship or Pay transport contract with OCP and the commitments related to OCP trade payables.

The letters of credit, falling due in December 2018, will be gradually released in the same proportion as those commitments become extinguished. As of December 31, 2015, the Company holds letters of credit for approximately USD 64.2 million. The Company is required to renew or replace the letters of credit as they fall due; otherwise, those amounts shall be paid in cash.

31. Contributions to finance additions to infrastructure in the energy sector in Argentina

31.1. FONINVEMEM, 2008/2011 Agreement and Secretary of Energy Resolutions No.95/2013, No. 529/2014 and No. 482/2015:

Through Resolution No. 712/04, the SE created the FONINVEMEM I trust for the purpose of granting creditors an incentive to invest in the MEM thus increasing the generation of electrical power in Argentina. In 2007, through SE Resolution No.564/07, the SE requested MEM agents to participate in FONINVEMEM II, with the purpose of complementing financing of FONINVEMEM I.

In addition, in November 2010 the SE and MEM generators (among which the Company is included) entered into an agreement for the following purposes: (i) enable addition of new generation capacity to meet the increase in demand for Energy and Power in the MEM; (ii) improve availability of existing generation equipment; (iii) determine a method to pay the amounts due to the generators accumulated in the 2008/2011 period, and (iv) recognize a higher Power price and an increase in recognized operating and maintenance costs.

On January 24, 2012, the SE Resolution No.495/12 suspended the greater recognition of operation and maintenance costs and higher prices of power affecting the remuneration paid to generators.

On March 26, 2013, the SE issued Resolution No. 95 which involved the change in the compensation of Generators, Cogeneration and Self-Generators MEM except the Generators Plus, the Binational Hydroelectric Generation and Nuclear Generation among others. One of its main changes is the modification being paid Included Generators, for the case of Petrobras comprising the Combined Cycle and Hydroelectric Genelba Pichi Picún Leufú. The new resolution established that the generators had the option of joining or not the conditions. On May 31, 2013, the company adhered to the new rules being the above mentioned central framed under the new resolution.

On May 20, 2014, retroactive to February of the same year, the SE through Resolution No. 529/2014 updated the remunerative value of Resolution 95/2013 aforementioned. Additionally, the new legislation incorporated remuneration stands to cover nonrecurring Maintenance of thermal power plants and additional remuneration for thermal machines in periods of peak seasonal demand.

On July 10, 2015, retroactive to February of the same year, the SE through Resolution No. 482/2015 updated the remunerative value of SE Resolution 529/2014 aforementioned. In addition, the new rules incorporate remuneration for new investments and compensation for efficiency and production improvements.

FONINVEMEM

The financing of FONINVEMEM I and II was made through the contribution of 35% and 50% of the credit balances recorded in 2004-2006 and in 2007, respectively, resulting from the spread between the selling price of energy and the variable generation cost. The total contribution in FONINVEMEM I by all the private power generating companies in the wholesale electric market is estimated at USD 470 million, of which Petrobras Argentina contributed USD 42 million. In addition, the Company was reimbursed the credit balances recorded in 2007 in the amount of USD16 million pursuant to Resolution No.564/07.

On October 17, 2005 and under the terms of Resolution No. 1,193 issued by the SE, Petrobras Argentina and other MEM creditors formally announced their decision to participate in the construction, operation and maintenance of two power plants of combined cycle 820 MW each.

For the purposes of the purchase of equipment and the construction, operation and maintenance of the power plants, two trusts funds were created. The procurement of the equipment, construction, operation and maintenance of each power plant will be undertaken by Termoeléctrica José de San Martín S.A. and Termoeléctrica Manuel Belgrano S.A., which will enter into a ten-year electricity supply agreement with CAMMESA for the 80% of the energy output, at a price that will allow to cover all costs. Also the contract provides the reimbursements of the FONINVEMEM and the repayment of the debt used to finance the initial investment. The 20% of the electricity output is sold in the spot market. Upon expiration of the supply agreement, the ownership of the assets held in trust will be transferred to the power generation companies proportionally to their contributions to finance the capital expenditure.

End of December 31, 2009, the gas turbines of both power plants were operating in open cycle mode and started to operate in combined cycle as from the first quarter of 2010.

The Company recovers the amounts contributed to the FONINVEMEM I, converted to USD and adjusted by Libo rate + 1% p.a., in 120 monthly installments starting March 2010, upon authorization of commercial operations of both power plants in the combined cycle mode referred to above. In addition, the Company is a shareholder in both companies with 8.9% share.

By December 31, 2009 the funds contributed by the Company to FONINVEMEM II had been fully recovered through investment in additional electricity generation projects under Resolution No. 564/2007 issued by the SE, whereby the Company built Genelba Plus, a 165 MW thermoelectric plant close to the existing Genelba Power Plant.

2008/2011 Agreement

On November 25, 2010, the SE and MEM Generators signed the 2008/2011 Agreement which will be implemented through new generation projects that have to be submitted by Generators to the SE for selection and subsequent approval.

As regards payment to generators entered into the Agreement, certain methods established for them to maintain contribution margins, mainly as regards the Power price, recognition of higher variable maintenance costs and other non-fuel costs. The indicated mechanism was in effect until December 31, 2011, with the implementation of the Resolution No.495/12 indicated above.

Secretary of Energy Resolution (SE) No. 95/2013:

In March 2013, the SE issued Resolution No. 95/2013 which involved the modification of the remuneration scheme of Generators, Cogeneration and Self-Generators MEM except the Generators Plus, the Binational Hydroelectric Power Generation and Nuclear Generation among others.

The main changes apply to generators that have joined this new scheme are:

(a) Changes in the remuneration of generating agents by scale and technology . Fixed costs and non-fuel variables as well as additional remuneration are paid (the latter two items will be paid based on the generation of each machine) . Part of the additional compensation will go to a trust fund works the electricity sector.

b) Temporary Suspension of contracts between private , both electrical energy and fuels and associated inputs, which will be administered by CAMMESA

c) Temporary Suspension of contracts Term Market for Base Demand and supply thus forcing the large users acquire their demand for electrical energy CAMMESA. Until October 7, 2013, the membership of the company at that resolution as Large User MEM were performed.

Secretary of Energy Resolution No. 529/2014:

In May 2014, retroactive to February, Resolution No. 529/2014 was issued to update the values of remunerative from Resolution No. 95/2013, the following remunerative concepts discriminated by scale and technology are added:

a) Remuneration of Non-Recurring Maintenance, a concept that is accrued and paid on the basis of maintenance to be performed.

b) Compensation of Thermal Machines Fixed Costs in Relation to the availability, which provides an increase in the price paid depending on the availability of the plant in the months of the year increased demand.

Secretary of Energy Resolution No. 482/2015:

 In July 2015, retroactive to February, Resolution No. 482/2015 was issued to update the values of remunerative from Resolution No. 529/2014, the following remunerative concepts discriminated by scale and technology are added:

 a) Resources for investments FONINVEMEN 2015-2018, to be assigned to generators with investment projects already approved, or to be approved, by the Secretary of Energy.

 b) Incentives for energy production and operational efficiency.

31.2. Financial Trust for Works on Gasoducto Sur (Fideicomiso Financiero de Obra Gasoducto Sur)

In order to assist in financing the expansion of the transportation capacity of the General San Martín Gas Pipeline, in the offshore leg across the Straits of Magellan, in the fourth quarter of 2009 Petrobras Argentina underwrote bonds issued by Fideicomiso Financiero de Obra Gasoducto Sur, for an amount in pesos equal to USD30 million.

Petrobras Argentina received in exchange debt securities denominated in Argentine pesos (“VRD Obra-4 Estrecho Definitivos”) that bear interest at a rate equivalent to the Reference Stabilization Coefficient plus an annual nominal rate of 8%. The principal amortizes in 30 quarterly installments from April 25, 2011.

32. Warranty bonds, sureties and guarantees granted

The warranty bonds, sureties and guarantees as of December 31, 2015 which are not disclosed in other notes amount to 2,526.

Additionally, in certain business operations in which the Company and the counterparty act as customers and suppliers, both sides issued guarantees for such operations by equivalent values, which at 31 December 2015 amount to 652.

In addition, as of December 31, 2015, the Company had the following contractual purchase and sale:

(a) Estimated price of $0.71 per MMm3.

(b) Prices are generally determined by formulas based on future market prices. Estimated prices used to calculate the monetary equivalent of these purchase commitments for purposes of the table are based on current market prices as of December 31, 2015 and may not reflect actual future prices. Accordingly, the peso amounts provided in this table with respect to these commitments are provided for illustrative purpose only.

33. General Resolution No. 629/2014 - Save Documentation

On August 14, 2014, the CNV issued Resolution No. 629 by amending rules about guard documentation.

In this regard, the Company advises that trade books, corporate books and accounting records are in the registered office.

The Company has sent documentation of certain age to AdeA provider - File Management SA to be stored, it is in Ruta 36, km 34.5, Florencio Varela, Buenos Aires.

34. Subsequent events

Negotiations for the sale of the shareholding PETROBRAS in the Company:

On March 2, 2016, Petroleo Brasileiro S.A. - PETROBRAS, announced that its Executive Board has approved to conduct negotiations with the company Pampa Energia S.A. for the sale of its indirect stake of 67.2% in the share capital of the Company, agreeing to an exclusivity period of 30 days, which may be extended for 30 additional days.

PETROBRAS added that this transaction is subject to approval by its terms and end by the Executive Board and Board of Directors of PETROBRAS conditions, as well as by the relevant regulatory bodies.

35. Expenses classified by nature for the years ended December 31, 2015, 2014 and 2013

36. Oil and gas reserves (INFORMATION NOT COVERED BY THE AUDITORS’ REPORT)

The table below presents the estimated proved reserves of oil (including crude oil, condensate and LNG) and natural gas, by geographic area, of subsidiaries and companies under joint control or related companies as of December 31, 2015.

The Company revises its estimates of its reserves at least once a year. The Company's reserves estimate as of December 31, 2015, 2014 and 2013 were audited by DeGolyer and MacNaughton. This technical revision covered approximately 81%, 80% and 73% of the Company’s estimated reserves as of December 31, 2015, 2014 and 2013, respectively.

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