YPF S.A. — Audit Report / Information 2004

May 16, 2005

YPF Holdings, Inc. and Subsidiaries (A Wholly Owned Subsidiary of YPF S.A.) Consolidated Financial Statements Years Ended December 31, 2004 and 2003, and Independent Auditors’ Report

NOTE: NEW FS APPLIED

DO NOT DELETE DASH ON PAGE 12 OF FOOTNOTES - PER ANDREA

YPF HOLDINGS, INC. AND SUBSIDIARIES

(A Wholly Owned Subsidiary of YPF S.A.)

TABLE OF CONTENTS

Page

INDEPENDENT AUDITORS’ REPORT 1

CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2004 AND 2003:

Balance Sheets 2-3

Statements of Operations 4

Statements of Changes in Stockholder’s Equity and Comprehensive Loss 5

Statements of Cash Flows 6

Notes to Consolidated Financial Statements 7-24

INDEPENDENT AUDITORS’ REPORT

Board of Directors
YPF Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of YPF Holdings, Inc. and Subsidiaries (the “Company”), a wholly owned subsidiary of YPF S.A., as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholder’s equity and comprehensive loss, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the combined financial statements of Global Companies LLC and Affiliates (“Global”), the Company’s investment which is accounted for by use of the equity method. The Company’s equity of $32,175,000 in Global’s net assets at December 31, 2003, and $8,181,000 in Global’s net income for the year then ended are included in the accompanying consolidated financial statements. The financial statements of Global were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such company, is based solely on the report of such other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

April 26, 2005

YPF HOLDINGS, INC. AND SUBSIDIARIES

(A Wholly Owned Subsidiary of YPF S.A.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2004 AND 2003

1. ORGANIZATION

YPF Holdings, Inc. (“Holdings” or the “Company”), was incorporated in Delaware, U.S.A., on July 31, 1996, and holds investments in certain subsidiaries. The Company is engaged in oil and gas exploration activities in the Gulf of Mexico.

YPF S.A. (“YPF”) owns 100% of the Company’s shares. YPF S.A. is a wholly owned subsidiary of Repsol YPF.

The consolidated financial statements as of and for the year ended December 31, 2004 and 2003 include following wholly owned subsidiaries (collectively referred to hereafter as “Subsidiaries”), Tierra Solutions Inc. (“Tierra”), Maxus Energy Corporation (“Maxus”), YPF Distribution Co. and APEX Petroleum. APEX Petroleum merged into Maxus effective October 15, 2003.

In March 2005, the Company received a support letter from YPF stating that YPF would provide necessary financing, if required, to allow the Company to continue to operate through January 1, 2006.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The consolidated financial statements of the Company include the financial statements of the Company and its subsidiaries. The Company accounts for its 51% ownership interest in Global Companies, LLC (“Global”) using the equity method of accounting. Global was sold on July 2, 2004 (See Note 5). All significant intercompany transactions have been eliminated.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from these estimates.

Cash and Cash Equivalents—Short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash are considered cash equivalents.

Fair Value of Financial Instruments—Financial instruments are composed of accounts receivable, notes receivable, accounts payable and notes payable. The carrying value of such financial instruments is equal to their fair value.

Oil and Gas Producing Activities—The Company follows the “successful efforts” method of accounting for its oil and gas exploration and production operations. Accordingly, exploratory costs, excluding the costs of exploratory wells, are charged to expense as incurred. Costs of drilling exploratory wells, including stratigraphic test wells, have been capitalized pending determination as to whether the wells have found proved reserves, which justify commercial development. The company recognized dry hole costs of approximately $17.4 million in 2004.

The capitalized costs related to producing activities, including tangible and intangible costs, have been depreciated on the unit-of-production basis by applying the ratio of produced oil and gas to estimated recoverable proved oil and gas reserves.

The Company reviews its proved oil and gas properties for impairment when changes in circumstances indicate that the carrying amount of such properties may not be recoverable.

The capitalized costs related to acquisitions of properties with unproved reserves are reviewed periodically by management to insure the carrying value is recoverable. If necessary a valuation allowance is provided, by a charge against earnings, to reflect the impairment of unproved acreage.

The Company was notified that Unocal Myrtle Beach Green 943 #1 well was determined to be a dry hole in March 2004. The Company prepaid approximately $10,720,000 for the estimated cost to drill the well, which was spud on December 27, 2003. The Company incurred approximately $810,000 of actual drilling costs in 2003. The remaining costs were recorded as exploration expense in 2004.

Other Property, Plant and Equipment—The Company’s other property, plant and equipment consisting of software, furniture, fixtures and installations has been depreciated using the straight-line method, with depreciation rates based on the estimated useful life of each class of property. Normal maintenance and repairs to all other fixed assets have been charged to expense as incurred.

Equity Investment in Affiliate—The Company held an investment in Global Companies LLC and certain affiliates until July 2, 2004 when it was sold. Since the Company did not exercise independent control over the entity, the equity method of accounting was used to account for this investment. Under the equity method, the Company recognized its proportionate share of the net income of Global currently, rather that when realized through dividends (see Note 5).

Restricted Cash—The restricted cash balance represents cash used to pay workers compensation claims for one of the Company’s subsidiaries.

Income Taxes—Income taxes are recognized for (a) the amount of taxes payable or refundable for the current year, and (b) deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred tax assets and liabilities are measured based upon enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Revenue Recognition—Net revenues are recorded based on the Company’s share of overriding royalties recorded on the accrual basis.

New Accounting Pronouncements—In December 2003, the FASB revised SFAS No. 132, Employers’ Disclosures about Pensions and other Postretirement Benefits. The revised statement retains the disclosures required by the original SFAS No. 132 and requires additional disclosures describing the types of plan assets, investment strategy, measurement date, plan obligations, cash flows and components of net periodic benefit cost recognized during interim periods. The Company adopted the revised statement in 2004.

In January 2004, the Financial Accounting Standards Board issued FASB Staff Position FAS 106-1, Accounting and Disclosure Requirements Related to the New Medicare Prescription Drug, Improvement and Modernization Act of 2003, referred to in this report as the Act. This Staff Position permits a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-time election to postpone accounting for the effects of the Act. In May 2004, the FASB issued Staff Position FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which supersedes Staff Position FAS 106-1 effective July 1, 2004. Staff Position FAS 106-2 provides transitional guidance for accounting for the effects of the Act on the accumulated projected benefit obligation and periodic post-retirement health care benefit expense. The Company determined the decrease in the benefit obligation due to recognizing Medicare Part D is $5.4 million and the decrease in the annual expense is $0.7 million.

In 2004, the FASB issued Staff Position No. 142-2, Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Oil- and Gas-Producing Entities, that clarified that oil and gas drilling rights are tangible assets. This position is consistent with the Company’s classification of the cost of acquiring oil and gas drilling rights in property, plant and equipment on the Company’s consolidated balance sheet. Therefore, adoption of this rule had no impact on either the Company’s earnings or consolidated balance sheet.

On December 16, 2004, the FASB issued Statement 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, to clarify the accounting for nonmonetrary exchanges of similar productive assets. SFAS 153 eliminates the exception from the fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not have any nonmonetary transactions for any period presented that this Statement would apply. The Company does not expect the adoption of SFAS 153 to have a material impact on the Company’s financials statements.

FASB Staff Position (“FSP”) FAS 19-1—SFAS No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, requires the cost of drilling an exploratory well to be capitalized pending determination of whether the well has found proved reserves. If this determination cannot be made at the conclusion of drilling, SFAS No. 19 sets out additional requirements for continuing to carry the cost of the well as an asset. These requirements include firm plans for further drilling and a one-year time limitation on continued capitalization in certain instances. The EITF in their discussions of this issue noted that as a result of the increasing complexity of oil and gas projects due to drilling in remote and deepwater offshore locations, companies increasingly require more than one year to complete all of the activities that permit recognition of proved reserves. Furthermore, because of new technologies, additional exploratory wells may no longer be required before a project can commence. EITF Issue 04-9, Accounting for Suspended Well Costs, sought to determine whether SFAS No. 19 should be clarified to recognize the industry changes that have taken place in the past quarter century. This issue was discussed by the EITF and it was determined that a formal amendment to SFAS No. 19 would be required if the FASB concurs with broadening the requirements for continued capitalization of exploratory well costs. In the proposed FSP FAS 19-a, the FASB has tentatively decided to increase required disclosures and to allow continued capitalization when (a) the well has found a sufficient quantity of reserves to justify completion as a producing well and (b) the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project.

The Company follows FASB Statement No. 19 regarding capitalization of exploratory drilling costs which are evaluated monthly for initial capitalization and quarterly for continued capitalization. As of December 31, 2004 the company had approximately $21.6 million of capitalized exploratory drilling costs representing two projects and four wells. In both projects wells have been drilled within the last 12 months. At December 31, 2003 the balance was approximately $10 million for two wells and two projects, one of which resulted in a dry hole.

The following table reflects the net changes in capitalized exploratory well costs during 2004 and 2003.

The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed and the number of wells for which exploratory well costs have been capitalized for a period greater than one year since the completion of drilling.

The project has three wells totaling $13 million. The latest one was drilled in March 2004. The Company and its partners believe reserves have been discovered that are commercially viable and the project is in the engineering phase of development. The MMS has granted a field designation and Suspension of Production for this field. First production is expected by October 2007. A two year contract for a drilling rig has been awarded. Drilling of the first of seven planned development wells is scheduled to begin between July 2005 and November 2005 depending on rig availability. Definition engineering for the development system and awarding of contracts for development is to be completed by April 2005 along with contracts for major sub sea equipment, production facilities and installation contracts.

Reclassification—Certain amounts reported in the consolidated financial statements for the prior period have been reclassified to conform with the current consolidated financial statement presentation.

1. RELATED PARTY TRANSACTIONS

The Company performs geological and geophysical exploration activities and provides payroll and financial services for affiliated companies. As of December 31, 2004 and 2003, the Company had accounts receivable from those affiliated companies related to these services of $10.3 million and $10.9 million, net of an allowance for uncollectible accounts of $3.3 million and $2.8 million, respectively.

At December 31, 2004 and 2003, the Company had $1.2 million and $3.3 million of management fees payable to Repsol YPF related to the 2001 fiscal year, respectively.

As of December 31, 2004 and 2003 the Company has a promissory note receivable from Repsol International Finance B.V. of $63.8 million and 123.0 million, respectively. The maturity date is December 31, 2005. The note accrues interest at a variable interest rate. The average interest rate for the year ended December 31, 2004 and 2003 was 1.3% and 1.1%, respectively.

During 2004, the Company incurred administrative costs on behalf of YPF that were to be reimbursed by YPF. YPF later informed the Company that $1.8 million of expected reimbursements would not be paid; rather, the amount due the Company would be settled by reducing YPF’s investment in the Company. Consequently, the Company wrote-off its receivable from YPF and reduced additional paid in capital for $1.8 million.

1. LONG-TERM DEBT AND OTHER OBLIGATIONS

There was no long-term debt outstanding as of December 31, 2004 as the outstanding balance was repaid in 2004. Debt at December 31, 2003 consisted of the following (amounts in thousands):

1. SALE OF EQUITY INVESTMENT IN AFFILIATE

On July 2, 2004, the Company sold its investment in Global to the investors that owned the remaining 49% of Global for $43.0 million. Before the sale, the Company accounted for its 51% of investment in Global using the equity method of accounting. The Company had allocated goodwill of $15.0 million, net of accumulated amortization of $4.5 million as of December 31, 2003 to the investment. The goodwill was written off after the sale of Global as a reduction of gain on sale. At December 31, 2003 and for the year then ended, the summarized financial information of Global was as follows (in thousands):

1. EMPLOYEE BENEFIT PLANS

Pensions—The Company has a number of trustee noncontributory pension plans covering substantially all full-time employees. The Company’s funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements under governmental regulations, plus such additional amounts as management may determine to be appropriate. The benefits related to the plans are based on years of service and compensation earned during years of employment. The Company also has a noncontributory supplemental retirement plan for executive officers and selected key employees. Key information of these plans as of the date of the last actuarial report is as follows (in thousands):

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $115.0 million, $113.6 million and $64.6 million, respectively, as of December 31, 2004 and $115.1 million, $113.2 million and $66.8 million as of December 31, 2003.

Other Postretirement and Postemployment Benefits—The Company provides certain health care and life insurance benefits for eligible retired employees and certain insurance and other postemployment benefits for eligible individuals whose employment is terminated by the Company prior to their normal retirement. The Company accrues the estimated cost of retiree benefit payments, other than pensions, during employees’ active service periods. Employees become eligible for these benefits if they meet minimum age and service requirements. The Company accounts for benefits provided after employment but before retirement by accruing the estimated cost of postemployment benefits when the minimum service period is met, payment of the benefit is probable and the amount of the benefit can be reasonably estimated. The Company’s policy is to fund other postretirement and postemployment benefits as claims are incurred. Key information as of the date of the last actuarial report is as follows (in thousands):

The Company recognized the subsidy available under the Medicare Prescription Drug Improvement and Modernization Act of 2003. This decreased the 2004 net periodic post-retirement benefit cost by $0.7 million and decreased the accumulated post-retirement benefit obligation at January 1, 2004 by $5.4 million.

For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005. The rate is assumed to decrease by 1% each year to 5% for 2009 and remain level thereafter.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

The Company also provides for medical and death benefits to disabled employees and death benefits for certain former and retired executives. Total liabilities as of December 31, 2004 and 2003 amounted to $2.3 million and $4.0 million for these benefits, respectively. The discount rate used to calculate these liabilities was 5.75% and 6.25% for the year ended December 31, 2004 and 2003, respectively.

The expected long-term rate of return on pension fund assets was determined based on input from our investment consultants and the projected long-term returns of broad equity and bond indices. The Company anticipates that on the average the investment managers for each of the plans will generate long-term rates of return of at least 8.5 percent. The long-term rate of return is based on an asset allocation assumption of about 70 percent equity securities and 30 percent fixed income securities. The Company regularly reviews its actual asset allocation and rebalances its investments when it is considered appropriate. The Company will continue to evaluate its long-term rate of return assumptions at least annually and will adjust them as necessary.

The pension plan asset allocations are as follows:

The plan assets did not include a significant amount of stock of the Company or any affiliated company

Estimated future benefit payments are as follows:

The Company expects to make cash contributions to its pension trusts of $7.3 million in 2005. Expected retiree medical payments for 2005 are $4.4 million.

The Company also has a defined contribution plan. The plan allows for participant contributions of up to 10% of the participant’s annual eligible earning with a company matching contribution of one dollar for each dollar contributed up to a maximum 6% of participant’s compensation. The Company made contributions of $390,000 and $308,000 in 2004 and 2003, respectively.

1. INCOME TAXES

Deferred income taxes and benefits are provided for differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant deferred tax assets and liabilities are related primarily to net operating loss carryforwards, postretirement benefit costs, and litigation and environmental costs. Deferred tax balances as of December 31, 2004 are as follows (in thousands):

A valuation allowance has been provided for the net deferred tax assets because their future realization is not currently deemed more likely than not by management.

At December 31, 2004, the Company had $240.8 million of net operating loss carryforwards, which will begin to expire in 2022.

At December 31, 2004, the Company had alternative minimum tax credits of $20.7 million that carry forward indefinitely and are available to reduce future regular tax liability to the extent they exceed the related tentative minimum tax otherwise due. The Company also had a General Business Credit carryforward of approximately $15.0 million that expired in 2004.

During 2004, the Company paid $2.1 million state income tax expenses.

1. COMMITMENTS AND LIABILITIES

Litigation Liabilities—Amounts have been provided for various contingencies involving the Company. The estimated probable amounts recorded take into consideration the probability of occurrence, based on management’s expectations and on the opinion of legal counsel.

Environmental Liabilities—Environmental liabilities are recorded when environmental assessments and/or remediation are probable and material and such costs to the Company can be reasonably estimated. The Company’s estimate of environmental assessment and/or remediation costs to be incurred are based on either 1) detailed feasibility studies of remediation approach and cost for individual sites or 2) the Company’s estimate of costs to be incurred based on historical experience and publicly available information based on the stage of assessment and/or remediation of each site. As additional information becomes available regarding each site or as environmental remediation standards change, the Company revises its estimate of costs to be incurred in environmental assessment and/or remediation.

The major components of reserves as of December 31, 2004 and 2003 are as follows (in thousands):

Laws and regulations relating to health and environmental quality in the United States affect nearly all of the operations of the Company. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish in certain circumstances remedial obligations.

The Company believes that its policies and procedures in the area of pollution control, product safety and occupational health are adequate to prevent unreasonable risk of environmental and other damage, and of resulting financial liability, in connection with its business. Some risk of environmental and other damage is, however, inherent in particular operations of the Company and, as discussed below, Maxus Energy Corporation (“Maxus”) and Tierra Solutions, Inc. (“Tierra”) have certain potential liabilities associated with operations of Maxus’ former chemical subsidiary. The Company cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or enforced. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could in the future require material expenditures by the Company for the installation and operation of systems and equipment for remedial measures, possible dredging requirements and in certain other respects. Also, certain laws allow for recovery of natural resource damages from responsible parties and ordering the implementation of interim remedies to abate an imminent and substantial endangerment to the environment. Potential expenditures for any such actions cannot be reasonably estimated.

In connection with the sale of Maxus’ former chemical subsidiary, Diamond Shamrock Chemicals Company (“Chemicals”), to Occidental Petroleum Corporation (“Occidental”) in 1986, Maxus agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business or activities of Chemicals prior to the September 4, 1986 closing date (the “Closing Date”), including certain environmental liabilities relating to certain chemical plants and waste disposal sites used by Chemicals prior to the Closing Date.

In addition, under the agreement pursuant to which Maxus sold Chemicals to Occidental, Maxus is obligated to indemnify Chemicals and Occidental for 50% of certain environmental costs incurred on projects involving remedial activities relating to chemical plant sites or other property used in the conduct of the business of Chemicals as of the Closing Date and for any period of time following the Closing Date which relate to, result from or arise out of conditions, events or circumstances discovered by Chemicals and as to which Chemicals provided written notice prior to September 4, 1996, irrespective of when Chemicals incurs and gives notice of such costs, with Maxus’ aggregate exposure for this cost sharing being limited to $75 million. The total expended by the Company under this cost sharing arrangement was approximately $69.6 million as of December 31, 2004. The remaining portion of this cost sharing arrangement ($5.4 million as of December 31, 2004) has been reserved.

Tierra has agreed to assume essentially all of Maxus’ aforesaid indemnity obligations to Occidental in respect of Chemicals.

At December 31, 2004, reserves for the environmental contingencies discussed herein totaled approximately $98.3 million. Management believes it has adequately reserved for all environmental contingencies, which are probable and can be reasonably estimated; however, changes in circumstances could result in changes, including additions, to such reserves in the future.

In the following discussion concerning plant sites and third party sites, references to the Company include, as appropriate and solely for ease of reference, references to Maxus and Tierra. As indicated above, Tierra is also a subsidiary of the Company and has assumed certain of Maxus’ obligations.

Newark, New Jersey—A consent decree, previously agreed upon by the U.S. Environmental Protection Agency (the “EPA”), the New Jersey Department of Environmental Protection and Energy (the “DEP”) and Occidental, as successor to Chemicals, was entered in 1990 by the United States District Court of New Jersey and requires implementation of a remedial action plan at Chemicals’ former Newark, New Jersey agricultural chemicals plant. In 1998, the EPA approved the remedial design. Tierra believes the construction of the approved remedy has been completed and has submitted to the EPA its report in connection with the required optimization phase, which included testing and related operations. Tierra is awaiting the EPA’s response to such report so that it may move beyond the optimization phase. This work was supervised and paid for by Tierra pursuant to the above described indemnification obligation to Occidental. The Company has fully reserved the estimated costs required to conduct ongoing operation and maintenance of such remedy (at an average cost of approximately $1 million annually) for 10 years from and after January 1, 2005.

Passaic River, New *Jersey*—Studies have indicated that sediments of the Newark Bay watershed, including the Passaic River adjacent to the former Newark plant, are contaminated with hazardous chemicals from many sources. These studies suggest that the older and more contaminated sediments located adjacent to the former Newark plant generally are buried under more recent sediment deposits. Maxus, on behalf of Occidental, negotiated an agreement with the EPA under which Tierra is conducting further testing and studies to characterize contaminated sediment and biota in a six-mile portion of the Passaic River near the plant site. The stability of the sediments in the entire six-mile portion of the Passaic River study area is also being examined as a part of Tierra’s studies. The Company currently expects the testing and studies to be completed in 2005 and cost approximately $3 million after December 31, 2004, which amount has been fully reserved. Maxus and Tierra have been conducting similar studies under their own auspices for several years. In addition, the EPA and other agencies are addressing for the lower Passaic River in a cooperative effort designated as the Lower Passaic River Restoration Initiative (the “PRRI”). Tierra has agreed, along with approximately 30 other entities, to participate in a remedial investigation and feasibility study proposed in connection with the PRRI. Additional parties are currently negotiating to join in helping fund the EPA’s activities in this regard, eight additional parties having sent letters of intent to participate. The EPA has agreed to amend the order regarding this study when a total of nine additional parties (making a total of 40 entities) agree to participate. Tierra’s estimated share of the cost of this remedial investigation and feasibility study is approximately $320,000 over the next three years, which amount has been fully reserved. As of December 31, 2004, there is a total of $12.0 million reserved in connection with continuing such other studies and related matters related to the Passaic River and the Newark Bay. (See discussion of the DEP’s Directive No. 1 and the AOC below). Studies are ongoing with respect to the Passaic River and the Newark Bay watershed. Until these studies are completed and evaluated, the Company cannot estimate what additional costs, if any, will be required to be incurred. However, it is possible that additional work, including interim remedial measures, may be ordered with respect to the Passaic River and/or the Newark Bay.

On September 19, 2003, the DEP issued its Directive No. 1 for Natural Resource Injury Assessment and Interim Compensatory Restoration of Natural Resources for the Lower Passaic River (“Directive No. 1”). Directive No. 1 was served on approximately 66 entities, including Occidental and Maxus and certain of their respective related entities, and seeks to address natural resource damages allegedly resulting from almost 200 years of historic industrial and commercial development of the lower 17 miles of the Passaic River and a part of its watershed. Directive No. 1 asserts that the named entities are jointly and severally liable for the alleged natural resource damages without regard to fault. The DEP has asserted jurisdiction in this matter even though all or part of the lower Passaic River has been designated as a Superfund site and is a subject of the PRRI, a Congressional urban rivers restoration initiative designed to address urban rivers such as the Passaic through a joint federal, state, local and private sector cooperative effort. Directive No. 1 calls for the following actions: interim compensatory restoration, injury identification, injury quantification and value determination. Maxus and Tierra have filed a response to Directive No. 1 on behalf of themselves and Occidental, as successor to Chemicals, which sets forth both how these parties are complying with Directive No. 1 and certain defenses thereto. Settlement discussions between the DEP and the named entities have been held; however, no agreement has been reached or is assured.

On February 13, 2004, the EPA and Occidental entered into an administrative order on consent (the “AOC”) pursuant to which Tierra (on behalf of Occidental) has agreed to conduct testing and studies to characterize contaminated sediment and biota in the Newark Bay. Tierra presented a proposed initial work plan to the EPA. Tierra anticipates that the initial work plan, a study that would include sampling in Newark Bay, will be approved in early 2005. Tierra currently plans to conduct this study in 2005 at an estimated cost of $4.5 million. Such amount has been fully reserved. After the data has been collected in the initial study, a determination will be made as to what additional work, if any, might be required. In January 2005, several environmental groups sued the U.S. Army Corps of Engineers (the “Army Corps”) challenging the Army Corps’ failure to prepare a supplemental environmental impact statement plaintiffs’ allege is required in connection with a dredging project proposed for New York-New Jersey Harbor. Although neither the Company nor any of its subsidiaries is a party to this lawsuit, it could impact the timing, cost and approval of the proposed initial work plan.

Hudson County, New Jersey—Until 1972, Chemicals operated a chromite ore processing plant at Kearny, New Jersey (the “Kearny Plant”). According to the DEP, wastes from these ore processing operations were used as fill material at a number of sites in and near Hudson County. The DEP and Occidental, as successor to Chemicals, signed an administrative consent order with the DEP in 1990 for investigation and remediation work at certain chromite ore residue sites in Kearny and Secaucus, New Jersey. Tierra, on behalf of Occidental, is presently performing the work, and Tierra is funding Occidental’s share of the cost of investigation and remediation of these sites. Tierra, on behalf of Occidental, is providing financial assurance in the amount of $20 million for performance of the work. This financial assurance may be reduced with the approval of the DEP following any annual cost review. While Tierra has participated in the cost of studies and is implementing interim remedial actions and conducting remedial investigations, the ultimate cost of remediation is uncertain. Tierra submitted its remedial investigation reports to the DEP in late 2001, and the DEP continues to review these reports. The results of the DEP’s review of these reports could increase the cost of any further remediation that may be required. The Company has reserved its best estimate of the remaining cost to perform the investigations and remedial work as being approximately $25.5 million as of December 31, 2004. Also, the DEP has indicated that it expects Occidental and Maxus to participate with the other chromium manufacturers in the funding of certain remedial activities with respect to a number of so-called “orphan” chrome sites located in Hudson County, New Jersey. Occidental and Maxus have declined participation as to those sites for which there is no evidence of the presence of residue generated by Chemicals. The State of New Jersey has expressed an increased interest in possibly instituting legal action seeking recovery of its expenditures in connection with these sites. The parties have settled the DEP’s claims of natural resource damages related to chromite ore residue both at said orphan sites and other known and unknown sites in Hudson and Essex Counties, New Jersey. While Maxus and Tierra expect settlement discussions to continue on the other aspects of the DEP’s claims, there can be no assurance of a negotiated resolution to these claims. In addition, in June 2004, the DEP expressed a desire that a sediments testing program be conducted on a portion of the Hackensack River near the former Kearny Plant. Tierra, on behalf of Occidental, and other parties are engaged in discussions with the DEP regarding this issue. The Governor of New Jersey issued an Executive Order requiring state agencies to provide specific justification for any state requirements more stringent than federal requirements. In 1998, the DEP proposed new soil action levels for chromium. While the proposal remains incomplete in certain regards, the DEP is currently reviewing the proposed action levels.

Painesville, Ohio—From about 1912 through 1976, Chemicals operated manufacturing facilities in Painesville, Ohio (the “Painesville Works”). The operations over the years involved several discrete but contiguous plant sites over an area of about 1,300 acres. The primary area of concern historically has been Chemicals’ former chromite ore processing plant (the “Chrome Plant”). For many years, the site of the Chrome Plant has been under the administrative control of the EPA pursuant to an administrative consent order under which Chemicals is required to maintain a clay cap over the Chrome Plant site and to conduct certain ground water and surface water monitoring. Certain other areas have previously been clay-capped, and one specific site, which was a waste disposal site from the mid-1960s until the 1970s, has been encapsulated and is being controlled and monitored. In 1995, the Ohio Environmental Protection Agency (the “OEPA”) issued its Director’s Final Findings and Order (the “Director’s Order”) by consent ordering that a remedial investigation and feasibility study (the “RIFS”) be conducted at the former Painesville Works area. Tierra has agreed to participate in the RIFS as required by the Director’s Order. Tierra submitted the remedial investigation report to the OEPA, which report was finalized in 2003. Tierra will submit required feasibility reports separately. As of December 31, 2004, it is estimated that the remaining cost of performing the RIFS will be approximately $0.5 million. In addition, in the third quarter of 2004 and first quarter of 2005, the OEPA approved certain work, including the remediation of the site of a former cement plant, remediation of a former aluminum smelting plant and work associated with the development plans discussed below (the “Remediation Work”). Tierra expects this work to begin in 2005 and estimates its share of the costs associated with these projects to be approximately $8.8. As the OEPA approves additional projects for the site of the former Painesville Works, additional amounts may need to be reserved. In spite of the many remedial, maintenance and monitoring activities performed, the former Painesville Works site has been proposed for listing on the National Priority List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”); however, the EPA has stated that the site will not be listed so long as it is satisfactorily addressed pursuant to the Director’s Order and OEPA’s programs. The Company has reserved a total of $9.6 million as of December 31, 2004 for its estimated share of the cost to perform the RIFS, the Remediation Work and other operation and maintenance activities at this site. The scope and nature of any further investigation or remediation that may be required cannot be determined at this time; however, as the RIFS progresses, the Company will continuously assess the condition of the Painesville Works site and make any changes, including additions, to its reserve as may be required. Tierra has entered into an agreement with a developer for the possible development and use of all or portions of this site. While the developer is proceeding with its development plans, there can be no assurance that this site will be successfully developed or that any productive use can be made of all or a portion of this site.

Third-Party Sites—Chemicals has also been designated as a potentially responsible party (“PRP”) by the EPA under CERCLA with respect to a number of third party sites where hazardous substances from Chemicals’ plant operations allegedly were disposed or have come to be located. Numerous PRPs have been named at substantially all of these sites. At several of these, Chemicals has no known exposure. Although PRPs are typically jointly and severally liable for the cost of investigations, cleanups and other response costs, each has the right of contribution from other PRPs and, as a practical matter, cost sharing by PRPs is usually effected by agreement among them. At a number of these sites, the ultimate response cost and Chemicals’ share of such costs cannot be estimated at this time. At December 31, 2004, the Company has reserved approximately $3.7 million in connection with its estimated share of costs related to these sites.

The Port of Houston Authority (the “Port”) sued a number of parties, including Occidental (as successor to Chemicals) and Maxus, alleging in excess of $25 million in damages to its property, plus the need for remediation at certain of its property, as a result of contamination allegedly emanating from a facility adjoining Greens Bayou formerly owned by Chemicals and at which DDT and certain other chemicals were manufactured. Chemicals conveyed the Greens Bayou facility to a company in which it owned a 50% interest in 1983 and later conveyed its interest in that company to Maxus. Subsequently in 1985, Maxus acquired a full ownership interest in the company and then conveyed all of its interest in such company to a third party. Tierra is handling this matter on behalf of Occidental. While some of the substances of concern may have been manufactured at the Greens Bayou facility prior to these conveyances, Tierra and Maxus believe that most of any contamination of the Port’s property that may have emanated from the Greens Bayou facility occurred after the conveyance of the company in 1985 or has been remediated. The Port’s claims have been settled for an initial payment of $30 million and certain other undertakings, including an agreement to remediate various properties in the vicinity of the Greens Bayou facility, an agreement by another defendant to purchase a tract of land for up to $5 million, and an agreement to indemnify the Port up to an aggregate of $20 million in respect of certain matters. Based on current estimates, the cost of such remediation is not expected to exceed a total of $44 million. Pursuant to a cost sharing agreement among the defendants, Tierra (on behalf of Occidental) contributed $6.3 million toward the settlement, subject to the defendants’ agreement to arbitrate their respective obligations in connection with the settlement. The hearing in this arbitration was completed on October 14, 2004, and the arbitral tribunal issued its final award on or about January 7, 2005, after having issued an initial award in November 2004. The award, if it stands, would require Tierra (on behalf of Occidental) to pay the other defendants a total of approximately $26 million, and possibly interest (the “Current Payment Amount”), and bear approximately 70% of the costs of the aforesaid remediation. Maxus and Tierra paid approximately $28 million into a trust account in December 2004, which amount is to be made available to pay the Current Payment Amount if required. While the parties to the arbitration have engaged in preliminary discussions concerning possible settlement, on February 7, 2005 Maxus and Tierra have filed a notice of appeal to a second arbitration panel pursuant to the parties’ arbitration agreement. There is no assurance of success on appeal or that the settlement discussions will result in an agreement. As of December 31, 2004, the Company accrued a total of $31.2 related to this matter.

Legal Proceedings—In 1998, a subsidiary of Occidental filed a lawsuit in state court in Ohio seeking a declaration of the parties’ rights with respect to obligations for certain costs allegedly related to Chemicals’ Ashtabula, Ohio facility, as well as certain other costs. Both Maxus and Occidental filed motions for partial summary judgment. In 2002, the court granted Occidental’s and denied Maxus’ respective motions for partial summary judgment. In late 2004, the appellate court reversed the ruling of the trial court in certain respects and remanded the case for trial.

In 2001, the Texas State Comptroller assessed Midgard Energy Company, a subsidiary of the Company, approximately $26 million in Texas state franchise taxes, plus penalty and interest (estimated to be in excess of $51 million), for periods from 1997 back to 1984. The basis for the assessments essentially was the Comptroller’s attempt to characterize certain debt as capital contributions. This matter was settled in December 2004 for a total payment of approximately $5.2 million.

In 2001, the Texas State Comptroller also assessed Maxus Corporate Company, a former subsidiary of the Company that was merged into Maxus in December 1998, approximately $1.4 million in Texas state sales taxes for the period of September 1, 1995 through December 31, 1998, plus penalty and interest. On August 19, 2004, the administrative law judge issued a decision affirming approximately $1 million of such assessment, plus penalty and interest. The Company believes the proposed decision is erroneous, has paid the revised tax assessment, penalty and interest (a total of approximately $1.8 million) under protest. Maxus filed suit in Texas state court in December 2004 challenging the administrative decision. The matter will be reviewed by a trial de novo in the court action.

In 2002, Occidental sued Maxus and Tierra in state court in Dallas, Texas seeking a declaration that Maxus and Tierra have the obligation under the agreement pursuant to which Maxus sold Chemicals to Occidental to defend and indemnify Occidental from and against certain historical obligations of Chemicals, including claims related to “Agent Orange” and vinyl chloride monomer (VCM), notwithstanding the fact that (a) said agreement contains a 12-year cut-off for defense and indemnity obligations with respect to most litigation, and (b) Tierra is not a party to said agreement. This matter currently is set for trial in late 2005. In a related development, in June 2003, the U.S. Supreme Court affirmed, by a four to four vote, a decision of the Second Circuit Court of Appeals, which held that the 1984 settlement of the claims of Vietnam veterans does not preclude certain Vietnam veterans from asserting claims alleging injury due to Agent Orange exposure. While Maxus believes there are a number of valid defenses to any claims that may be asserted by Vietnam veterans who are not bound by the terms of the 1984 settlement, it also believes that Occidental is responsible for any Agent Orange lawsuits filed after the September 4, 1986 cut-off date.

In May 2003, the U.S. Internal Revenue Service (“IRS”) assessed Maxus (for 1994, 1995 and 1996) and the Company (for 1997) an aggregate of approximately $24.3 million in additional income taxes. Maxus and the Company believe that most of these assessments are without substantial merit, and they have protested this assessment. On January 30, 2004, the IRS assessed the Company an additional $7.7 million in withholding taxes the IRS contends should have been withheld from an interest payment to YPF International Ltd. in 1997. In February 2005, the IRS withdrew its assessment of the $7.7 million mentioned above.

Maxus has agreed to defend Occidental, as successor to Chemicals, in respect of the Malone Services Company Superfund Site in Galveston County, Texas. This site is a former waste disposal site where Chemicals is alleged to have sent waste products prior to September 1986. It is the subject of enforcement activities by the EPA and a lawsuit for damages brought by certain private parties. With respect to the EPA enforcement activities, Occidental is one of many PRPs that have been identified, and Tierra (which is handling this matter on behalf of Maxus) presently does not know the degree of Occidental’s alleged involvement as successor to Chemicals. Further, Occidental currently is not a defendant in the private lawsuit. Maxus is named as a defendant in this lawsuit; however, it believes it is improperly named.

In March 2005, Maxus agreed to defend Occidental, as successor to Chemicals, in respect of an action seeking the contribution of costs incurred in connection with the remediation of the Turtle Bayou waste disposal site in Liberty County, Texas. The plaintiffs alleged that certain wastes attributable to Chemicals’ found their way to the Turtle Bayou site. This matter currently is in trial.

The Company, including its subsidiaries, is a party to various other lawsuits, the outcomes of which are not expected to have a material adverse affect on the Company’s financial condition. The Company has established reserves for legal contingencies in situations where a loss is probable and can be reasonably estimated.

The Company has entered into various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. Such contractual, financial and/or performance commitments are not material.

Operating Leases—The Company leases office space under operating leases. Rental expense was $0.7 million and $0.8 million for 2004 and 2003, respectively. Required future minimum lease rental payments are $244,000, $250,000 and $146,000 for 2005, 2006 and 2007, respectively.

******