YPF S.A. — Audit Report / Information 2007

Jun 3, 2008

	YPF Holdings, Inc. and Subsidiaries (A Wholly Owned Subsidiary of YPF S.A.) Consolidated Financial Statements as of and for the Years Ended December 31, 2007 and 2006, and Independent Auditors’ Report

4-19-2008 12:20 pm CT vpaehler – CSP requested visual gridlines (as opposed to printing gridlines) be toggled off in all tables. He also said to change cites to DT standard, Partner previously requested all have quotes.

4-16-2008 8:00 pm CT vpaehler – CSP requested “December 31,” above years in financials. Also changed balance sheet from 2 page spread to DT continued/concluded style per CSP.

4/15/08 910p c strammell - Per CSP: Please retain all non-zeros in tables as dashes and spell out state names. 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, 2007 AND 2006:

Balance Sheets 2–3

Statements of Operations 4

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

Statements of Cash Flows 6

Notes to Consolidated Financial Statements 7–26

Member of

Deloitte Touche Tohmatsu

YPF HOLDINGS, INC. AND SUBSIDIARIES

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

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 or the “Parent”) owns 100% of the Company’s shares. YPF is a subsidiary of Repsol YPF.

YPF and the Company entered into an agreement on October 8, 2007, that contains, among its provisions, the contribution to the Company as paid-in capital of certain notes payable to YPF and its subsidiaries. These loans had principal balances on December 31, 2007, totaling $255.9 million. In addition, this agreement provides for additional credit facilities for up to $235 million to be used for ongoing costs related to the Neptune Development Project (the “Neptune Prospect”) (see Note 2) and general corporate purposes to allow the Company and its subsidiaries to continue operating at its current and planned levels. This agreement closed on March 31, 2008, and is effective as of such date.

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 wholly owned subsidiaries (collectively referred to hereafter as “subsidiaries”), Tierra Solutions Inc. (“Tierra”); Maxus Energy Corporation (“Maxus”); Maxus International Energy Company (MIEC); Maxus (U.S.) Exploration Company (“Maxus US”); CLH Holdings, Inc. (CLH); and Gateway Coal Company (“Gateway”). 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 $9.1 million and $2.4 million in 2007 and 2006, respectively.

Capitalized costs relating to producing properties are depleted on the unit-of-production method. Proved developed reserves are used in computing unit rates for drilling and development costs and total proved reserves for depletion rates of leasehold, platform, and pipeline costs.

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 and at least annually by management to ensure 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 following table reflects, during 2007 and 2006, the net changes in capitalized exploratory well costs:

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:

In March 2007, the Company transferred its working interest in an exploratory well drilled in February 2004 for approximately $8.5 million to a subsidiary of Repsol YPF while retaining an overriding royalty interest. The transaction freed the Company from the additional capital investment necessary to develop the prospect while maintaining a revenue interest. An appraisal well originally planned for 2005 was delayed to await the results of drilling on an adjacent block of which the Company also holds an overriding royalty interest. Drilling in that block occurred in the third quarter of 2007. Since the Company is not aware of any plans to develop the prospect, all previously capitalized costs in the amount of $9.1 million related to this prospect have been fully impaired.

The Company sanctioned the Neptune Prospect on June 29, 2005. The initial field development involved seven subsea producing wells and a central floating production facility located in Green Canyon 613. As of December 31, 2007, the field gathering systems were being tied into the central facilities. Export systems have been tested for leaks and have been prepared for receiving production. All platform systems are being checked and remaining checklist items addressed. Four wells have been completed. The fifth well, of the seven well initial development, is currently drilling. The overall project was approximately 84% complete and the first production was forecasted for the end of the first quarter of 2008. Approximately $177.3 million has been incurred by the Company on the appraisal program and development project as of December 31, 2007. During 2008, expenditures by the Company are expected to be approximately $34.6 million.

In February 2008, the decision was made to escalate the sixth well to the second quarter of 2008 from the fourth quarter of 2008, eliminate the seventh well from the project, and acquire a new 3D seismic survey. The cost impact of this change is still being evaluated. No significant cost impact is expected since the cost of a completed well is similar to the cost of the planned seismic.

On March 16, 2008, the Company was notified that a structural anomaly had been identified on one of the pontoons of the Neptune Platform. Since that time, start-up activities were suspended and the facility was fully inspected. The anomalies were found to be isolated to the three pontoons and plans to remediate the structural anomalies have been devised and initiated. Current expectations are that start-up operations may re-commence by August 2008. The cost of remedial structural repairs is still being calculated.

Asset Retirement Obligations — The Company recognizes liabilities associated with the eventual retirement of tangible long-lived assets, upon the acquisition, construction, and development of the assets. The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset.

The Company will recognize depletion expense on the additional capitalized costs; accretion expense as the present value of the future asset retirement obligation increases with the passage of time, and the impact, if any, of changes in estimates of the liability. The following table sets forth a reconciliation of the beginning and ending asset retirement obligation (in thousands):

Other Property, Plant, and Equipment—The Company’s other property, plant, and equipment consisting of software, furniture, fixtures, and installations have 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.

Restricted Cash—The restricted cash balance primarily represents security deposits for letters of credit. The letters of credit are used as security with various governmental agencies and as support for bonds posted with governmental agencies or insurance companies.

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 consolidated 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 June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, which is an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 provides interpretive guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 was effective January 1, 2007, for the Company. The adoption of FIN No. 48 did not have a material impact on the Company’s consolidated financial position or statement of operations.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. FASB Statement No. 157 defines fair value, establishes a framework for measuring fair value, and requires enhanced disclosures regarding fair value measurement. FASB Statement No. 157 does not add any new fair value measurements, but it does change current practice and is intended to increase consistency and comparability in such measurement. The provisions of FASB Statement No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company does not expect the adoption of FASB Statement No. 157 to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). Among other items, FASB Statement No. 158 requires recognition of the overfunded or underfunded status of defined benefit pension and postretirement plans as assets or liabilities in the financial statements and requires the measurement of defined benefit and postretirement plan assets and obligations as of the end of the employer’s fiscal year. FASB Statement No. 158 was adopted by the Company at December 31, 2006. The adoption of FASB Statement No. 158 increased the Company’s liability for pension and other postretirement benefits and decreased stockholder’s equity in the amount of $22.7 million as of December 31, 2006.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115. FASB Statement No. 159 provides an entity with the option, at specified election dates, to measure certain financial assets and liabilities and other items at fair value, with changes in fair value recognized in earnings as those changes occur. FASB Statement No. 159 also establishes presentation and disclosure requirements that include displaying the fair value of those assets and liabilities for which the entity elected the fair value option on the face of the balance sheet and providing management’s reasons for electing the fair value option for each eligible item. The provisions of FASB Statement No. 159 became effective beginning January 1, 2008, and the Company did not elect to change how it records assets and liabilities.

In May 2007, the FASB issued FASB Staff Position (FSP) No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, (“FIN 48-1”) which amends FIN 48 and provides guidance concerning how an entity should determine whether a tax position is “effectively,” rather than the previously required “ultimately,” settled for the purpose of recognizing previously unrecognized tax benefits. In addition, FIN 48-1 provides guidance on determining whether a tax position has been effectively settled. The guidance in FIN 48-1 is effective upon the initial January 1, 2007 adoption of FIN 48. Companies that have not applied this guidance must retroactively apply the provisions of this FSP to the date of the initial adoption of FIN 48. The Company has adopted FIN 48-1 and no retroactive adjustments were necessary.

In December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. FASB Statement No. 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FASB Statement No. 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. The provisions of FASB Statement No. 160 become effective for fiscal years beginning on or after December 15, 2008. Management does not expect the adoption of FASB Statement No. 160 to have a material impact on its financial statements.

In December 2007, the FASB issued revised FASB Statement No. 141R, Business Combinations. Among other items, FASB Statement No. 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions as specified in the statement. This statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. The provisions of FASB Statement No. 141R become effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management does not expect the adoption of FASB Statement No. 141R to have a material impact on its financial statements.

Reclassifications—Certain reclassifications have been made to conform prior-year presentation to the current-year presentation.

1. RELATED-PARTY TRANSACTIONS

During 2007, the Company performed geological and geophysical exploration activities and provided payroll and financial services for affiliated companies. As of December 31, 2007 and 2006, the Company had accounts receivable from those affiliated companies related to these services of $11.6 million and $28.3 million, which are net of an allowance for uncollectible accounts of $7.6 million and $1.8 million, respectively.

On August 1, 2005, the Company entered into a credit agreement payable on demand with YPF. As of December 31, 2007 and 2006, the principal payable to YPF was $187.0 million and $183.4 million, respectively. The interest rate is London InterBank Offered Rate (LIBOR) plus 0.4% per annum. As of December 31, 2007 and 2006, accrued interest on this note amounted to $18.8 million and $7.5 million, respectively.

On November 17, 2006, the Company entered into a credit agreement payable on demand with YPF International S.A. This note was assigned to YPF on September 26, 2007. As of December 31, 2007 and 2006, the principal payable to YPF was $69.0 million and $35.0 million, respectively. The interest rate is LIBOR plus 0.4% per annum. As of December 31, 2007 and 2006, accrued interest on this note amounted to $4.0 million and $0.1 million, respectively.

On October 8, 2007, the Company and YPF entered into an agreement that provided for the capitalization as paid-in capital of the notes payable to YPF and its subsidiaries described above. The agreement closed on March 31, 2008, and is effective as of such date (see Note 1).

On July 2, 2007, the Company entered into a credit agreement with YPF International S.A. for an amount up to $235 million that will mature on July 1, 2012. The Company has pledged the assets of the Neptune Prospect as collateral for this credit agreement. The interest rate is LIBOR plus 3% per annum. As of December 31, 2007, the principal payable to YPF International S.A. was $102.8 million. As of December 31, 2007, accrued interest on this note amounted to $2.6 million. On January 30, 2008, YPF International S.A. assigned this note to YPF.

Affiliated companies perform geological and geophysical exploration activities and provide payroll and financial services for the Company. As of December 31, 2007 and 2006, the Company had accounts payable to those affiliated companies related to these services of $9.7 million and $3.7 million, respectively.

1. EMPLOYEE BENEFIT PLANS

Pensions — The Company has a number of trusteed 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):

Amounts recognized in the statement of financial position consist of:

Amounts recognized in accumulated other comprehensive loss consist of:

The accumulated benefit obligation for all defined benefit plans was $107,896 and $107,296 at December 31, 2007 and 2006, respectively.

The estimated net loss for the defined benefit plans that will be amortized from the accumulated other comprehensive loss into net periodic cost over the next fiscal year is approximately $3.9 million.

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 estimated net loss for the other postretirement plans that will be amortized from accumulated other comprehensive income into net benefit cost over the next fiscal year is approximately $1.2 million.

The Company recognized the subsidy available under the Medicare Prescription Drug Improvement and Modernization Act of 2003. This decreased the 2007 and 2006 net periodic postretirement benefit cost by $0.6 million and $0.6 million, respectively, and decreased the accumulated postretirement benefit obligation at January 1, 2007 and 2006 by $6.7 million and $5.6 million, respectively.

For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2008. The rate is assumed to decrease by 1% each year to 5% for 2012 and remain level thereafter.

(a) For measurement purposes, plan liabilities were valued as of December 31, 2007 and 2006, for the fiscal years ended December 31, 2007 and 2006, respectively.

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 (in thousands):

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, 2007 and 2006, amounted to $2.4 million and $2.6 million for these benefits, respectively. The discount rate used to calculate these liabilities was 6.5% and 6.0% for the years ended December 31, 2007 and 2006, 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 7.0%. The long-term rate of return is based on an asset allocation assumption of about 70% equity securities and 30% 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 at December 31, 2007 and 2006, 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 $8.4 million in 2008. Expected retiree medical payments for 2008 are $4.6 million.

On November 29, 2007, the Company engaged an actuary to assist in attempting to fund and simultaneously place annuities to cover the future obligations of the funded plans and to eliminate, or at least minimize, any future Company obligations under a defined benefit regime. Funding occurred on March 20, 2008, in the amount of $114.9 million. This amount was comprised of $73.4 million from the benefit plan trust assets and a $41.5 million cash payment from the Company.

The Company also has a defined contribution plan. The plan allows for participant contributions of up to 10% of the participant’s annual eligible earnings with a company matching contribution of $1 for each dollar contributed up to a maximum 6% of participant’s compensation. In addition, beginning January 1, 2007, the plan was amended to include a fixed profit sharing contribution by the Company equal to 7.5 % of the participant contribution. The Company made contributions of $294,000 and $533,000 in 2007 and 2006, respectively.

1. INCOME TAXES

Deferred income taxes and benefits are provided for differences between the consolidated 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, 2007, 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, 2007, the Company had $655.5 million of net operating loss carryforwards, which will begin to expire in 2022.

At December 31, 2007, the Company had alternative minimum tax credits of $20 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.

1. COMMITMENTS AND 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.

The major components of reserves as of December 31, 2007 and 2006, are as follows (in thousands):

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.

Laws and regulations relating to health and environmental quality in the United States affect the operations of the Company as a consequence of the labor of remediation assumed by Tierra for compromises engaged with environmental authorities mainly in aspects referred to Diamond Shamrock Chemicals, sold to Occidental and presently an Occidental subsidiary. 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 and Tierra could have certain potential liabilities associated with operations of Maxus’ former chemical subsidiary. The Company cannot predict which 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 (together with its subsidiary Occidental Chemical 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.

At December 31, 2007, reserves for the environmental contingencies discussed herein totaled approximately $121.3 million. These obligations are not discounted to their present value. Management believes it has adequately reserved for all environmental contingencies that are probable and can be reasonably estimated as of such time; 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. Maxus and Tierra are both wholly owned subsidiaries of YPF Holdings.

Newark, New Jersey — A consent decree, previously agreed upon by the U.S. Environmental Protection Agency (EPA), the New Jersey Department of Environmental Protection and Energy (DEP), and Occidental, as successor to Chemicals, was entered in 1990 by the United States District Court of New Jersey for Chemicals’ former Newark, New Jersey agricultural chemicals plant. The approved remedy has been completed and paid for by Tierra pursuant to the above-described indemnification obligation to Occidental. This project is in the operation and maintenance phase. Operating and maintaining such remedy is expected to cost approximately $1 million per year, and as of December 31, 2007, the Company has reserved approximately $15.8 million in connection with such activities.

Passaic River/Newark Bay, 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 has conducted 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 was also examined as a part of Tierra’s studies. While some work remains, these studies were substantially completed in 2005. In addition:

• Maxus and Tierra have been conducting similar studies under their own auspices for several years.
• The EPA and other agencies are addressing the lower Passaic River in a joint federal, state, local, and private sector cooperative effort designated as the Lower Passaic River Restoration Project (PRRP). Tierra, along with 72 other entities (as of December 31, 2007), has agreed to participate in a remedial investigation and feasibility study (RIFS) in connection with the PRRP. The parties are discussing the possibility of further work with the EPA. The entities that have agreed to fund the RIFS have negotiated allocations of responsibility among themselves based on a number of considerations.
• In 2003, the DEP issued a directive (“Directive No. 1”) to Occidental and Maxus and certain of their respective related entities as well as other third parties. Directive No. 1 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 PRRP. Directive No. 1 calls for the following actions: interim compensatory restoration, injury identification, injury quantification, and value determination. Maxus and Tierra responded to Directive No. 1 setting forth good faith defenses. Settlement discussions between the DEP and the named entities have been held; however, no agreement has been reached or is assured.
• In 2004, the EPA and Occidental entered into an administrative order on consent (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. The initial field work on this study, which includes testing in the Newark Bay, has been substantially completed. Discussions with the EPA regarding additional work that might be required are underway.
• In December 2005, the DEP issued a directive to Tierra, Maxus, and Occidental directing said parties to pay the state of New Jersey’s costs of developing a Source Control Dredge Plan focused on allegedly dioxin-contaminated sediment in the lower six-mile portion of the Passaic River. The development of this Plan is estimated by the DEP to cost approximately $2.3 million. This directive was issued even though this portion of the lower Passaic River has been designated as a Superfund site and is a subject of the PRRP. The DEP has advised the recipients that (a) it is engaged in discussions with the EPA regarding the subject matter of the directive and (b) they are not required to respond to the directive until otherwise notified.
• Also in December 2005, the DEP sued the Company, Tierra, Maxus, and several affiliated entities, in addition to Occidental, in connection with dioxin contamination allegedly emanating from Chemicals’ former Newark plant and contaminating the lower 17-mile portion of the Passaic River, Newark Bay, other nearby waterways, and surrounding areas. The DEP seeks unspecified damages for investigation, cleanup, and removal of alleged contamination, loss of use of property, and for other matters. The DEP also seeks punitive damages. The defendants have made responsive pleadings and/or filings.
• In June 2007, the EPA released a draft Focused Feasibility Study (FFS). The FFS outlines several proposals for early remedial action in the Passaic River, ranging from no action (which would result in comparatively little cost) to extensive dredging and capping in the lower eight miles of the River (which according to the draft FFS, the EPA estimated could cost from $900 million to $2.3 billion), and are all described by the EPA as involving proven technologies that could be carried out in the near term, without extensive research. At this time, no remedy has been selected, nor has action been demanded of any party. Tierra, in conjunction with the other parties of the PRRP group, submitted comments on the draft FFS to the EPA, as did a number of other interested parties. In September 2007, the EPA announced its intention to spend further time considering these comments, and to issue a proposed plan for public comment in the summer of 2008 and to select a clean-up plan in the last quarter of 2008. Tierra will respond to any further EPA proposal as may be appropriate at that time.
• In August 2007, the National Oceanic and Atmospheric Administration (NOAA), as one of the Federal Natural Resources Trustees, sent a letter to the parties of the PRRP group, including Tierra and Occidental, requesting that the group enter into an agreement to conduct a cooperative assessment of natural resources damages in the Passaic River and Newark Bay. The PRRP group has responded through its common counsel to request that discussions relating to such an agreement be postponed until 2008, due in part to the pending FFS proposal by the EPA. Tierra will continue to participate in the PRRP group with regard to this matter.

As of December 31, 2007, there is a total of approximately $39.6 million reserved in connection with the foregoing matters related to the Passaic River, the Newark Bay, and surrounding area. This amount consists of estimated costs for studies and remediation the Company has agreed to undertake. The Company has now evaluated alternative remediation scenarios for the lower eight miles of the Passaic River which resulted in an increase of approximately $24.0 million to the reserve. The development of new information on the imposition of natural resource damages, or remedial actions differing from the scenarios that have been evaluated, or changes in the Company’s share estimates could result in additional cost to be incurred.

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 AOC 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. 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 2001, and the DEP continues to review these reports. In addition:

• In May 2005, the DEP took two actions in connection with the chrome sites in Hudson and Essex Counties. First, the DEP issued a directive to Maxus, Occidental, and two other chromium manufacturers (the “Respondents”) directing them to arrange for the cleanup of chromite ore residue at three sites in Jersey City and the conduct of a study by paying the DEP a total of $19.55 million. While the Company believes that Maxus is improperly named and there is little or no evidence that Chemicals’ chromite ore residue was sent to any of these sites, the DEP claims the Respondents are jointly and severally liable without regard to fault. Second, the state filed a lawsuit against Occidental and two other entities in state court in Hudson County seeking, among other things, cleanup of various sites where chromite ore residue is allegedly located, recovery of past costs incurred by the state at such sites (including in excess of $2.3 million allegedly spent for investigations and studies) and, with respect to certain costs at 18 sites, treble damages. The DEP claims that the defendants are jointly and severally liable, without regard to fault, for much of the damages alleged. In February 2008, the parties reached a conceptual agreement on a possible settlement that remains subject to further agreement on terms and conditions. As a result the company has recorded a $7.1 million liability.
• Pursuant to a request of the DEP, in the second half of 2006, Tierra and other parties tested the sediments in a portion of the Hackensack River near the former Kearny Plant. Whether additional work will be required is expected to be determined once the results of this testing have been analyzed.
• In November 2005, several environmental groups sent a notice of intent to sue the owner of the property adjacent (the “Adjacent Property”) to the former Kearny Plant and five other parties, including Tierra, under the Resource Conservation and Recovery Act. The stated purpose of the lawsuit, if filed, would be to require the noticed parties to carry out measures to abate alleged endangerments to health and the environment emanating from the Adjacent Property. The parties have entered into an agreement that addresses the concerns of the environmental groups, and these groups have agreed, at least for now, not to file suit.
• In March of 2008, the DEP approved an Interim Response Action Workplan for work to be performed at the Kearny Plant site by Tierra and at the Adjacent Property by Tierra in conjunction with other parties. As a result, the Company has recorded a $7.8 million liability.

As of December 31, 2007, there is a total of approximately $34.3 million reserved in connection with the foregoing chrome-related matters. Soil action levels for chromium in New Jersey have not been finalized, and the DEP continues to review the proposed action levels. The cost of addressing these chrome-related matters could increase depending upon the final soil action levels, the DEP’s response to Tierra’s reports, and other developments.

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 AOC 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 (OEPA) issued its Director’s Final Findings and Order (the “Director’s Order”) by consent ordering that an 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 is submitting required feasibility reports separately. In addition, the OEPA has approved certain work, including the remediation of specific sites within the former Painesville Works area and work associated with the development plans discussed below (the “Remediation Work”). The Remediation Work has begun. As the OEPA approves additional projects for the site of the former Painesville Works, additional amounts may need to be reserved. More than 10 years ago, the former Painesville Works site was 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 as long as it is satisfactorily addressed pursuant to the Director’s Order and OEPA’s programs. The site has not been listed. The Company has reserved a total of approximately $7.3 million as of December 31, 2007, 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.

Other Sites — Pursuant to settlement agreements with the Port of Houston Authority (the “Port”) and other parties, Tierra and Maxus are participating (on behalf of Chemicals) in the remediation of property adjoining Chemicals’ former Greens Bayou facility where DDT and certain other chemicals were manufactured. Additionally, the parties have entered into negotiations with the federal and state Natural Resources Trustees concerning natural resources damages resulting from the contamination and the remediation, and have entered into a letter agreement setting forth a plan to purchase credits in specified restoration projects, pending reduction to a binding agreement. At December 31, 2007, the Company has reserved approximately $20.7 million for its estimated share of future remediation activities associated with the Greens Bayou facility.

In June 2005, the EPA designated Maxus as a potentially responsible party (PRP) at the Milwaukee Solvay Coke & Gas Site in Milwaukee, Wisconsin. The basis for this designation is Maxus’ alleged status as the successor to Pickands Mather & Co. and Milwaukee Solvay Coke Co., companies that the EPA has asserted are former owners or operators of such site. Preliminary work in connection with the RIFS in respect of this site commenced in the second half of 2006. Maxus has reserved approximately $0.25 million as of December 31, 2007, for its estimated share of the costs of the RIFS. Maxus lacks sufficient information to determine additional exposure or costs, if any, it might have in respect of this site.

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. Although Occidental is one of many PRPs that have been identified and have agreed to an AOC, Tierra (which is handling this matter on behalf of Maxus) presently believes the degree of Occidental’s alleged involvement as successor to Chemicals is relatively small.

Chemicals has also been designated as a 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, 2007, the Company has reserved approximately $2.4 million in connection with its estimated share of costs related to these sites.

Black Lung Benefits Act Liabilities—The Black Lung Benefits Act provides monetary and medical benefits to miners disabled with black lung disease, and also provides benefits to the dependents of deceased miners if black lung disease caused or contributed to the miner’s death. As a result of the former operations of its coal-mining subsidiaries, the Company is required to provide insurance of this benefit to former employees and their dependents. The Company maintains a reserve to cover its estimate of these obligations.

Legal Liabilities and 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. A settlement of this matter was reached in March 2007, with those activities required by the settlement document completed in the second quarter of 2007. The amount of the settlement had been fully reserved and the related reserve has been utilized at December 31, 2007.

In 2001, the Texas State Comptroller assessed a Maxus subsidiary approximately $1.4 million in Texas state sales taxes for the period from September 1, 1995 through December 31, 1998, plus penalty and interest. In August 2004, the administrative law judge issued a decision affirming approximately $1 million of such assessment, plus penalty and interest. The Company believes the decision is erroneous, but 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 said agreement contains a 12-year cut-off for defense and indemnity obligations with respect to most litigation. Tierra was dismissed as a party, and the matter was tried in May 2006. Following trial, judgment was entered against Maxus. Maxus appealed to the Dallas Court of Appeals, and the judgment at trial was affirmed in February 2008. Maxus has decided to petition the Supreme Court of Texas for review. The judgment awarded Occidental declaratory relief, approximately $2.5 million, and attorney’s fees and costs. In December 2006, the trial court set the amount of Maxus’ supersedeas bond, and Maxus posted such bond, in an amount of approximately $14.9 million including post judgment interest at the rate of 8% per annum. As of December 31, 2007, Maxus had established a reserve of approximately $14.9 million in respect of this matter. In developments related to the “Agent Orange” litigation that may be impacted by this lawsuit, the U.S. district court granted the defendants’ motions for summary judgment in a number of these cases, and the plaintiffs appealed the judgments to the Second Circuit Court of Appeals.

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 believed that most of these assessments were without substantial merit, and they have protested this assessment. In January 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. The Company believed this assessment was without substantial merit and challenged it. The Company and Maxus have settled these matters with the IRS. Pursuant to the settlement, the Company and Maxus received a total refund of approximately $7.5 million (including interest) in September 2006.

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. Trial for this matter was bifurcated, and in the liability phase, Occidental and other parties were found severally, and not jointly, liable for waste products disposed of at this site. Trial in the allocation phase of this matter was completed in the second quarter of 2007, and following post-judgment motions, the court has entered a decision setting Occidental’s liability at 15.96% of those costs incurred by one of the plaintiffs. Maxus is preparing to file an appeal of this matter. As of December 31, 2007, Maxus has reserved $3.75 million in respect of this matter.

In 2005, Skidmore Energy Company and others (“Skidmore”) have sued Maxus US, a subsidiary of the Company, in state court in Texas. Skidmore claims it was entitled to an assignment of approximately five oil and gas leases in the U.S. Gulf of Mexico. Maxus US denies Skidmore’s claims. Maxus US and Skidmore agreed to submit this matter to binding arbitration; the arbitration hearing was held from October 29 to November 1, 2007, with briefs submitted to the arbitration panel on November 6, 2007. The decision of the arbitration panel, holding that Skidmore should take nothing, was rendered on November 29, 2007.

Reference should be made to the sections above captioned “Passaic River/Newark Bay, New Jersey” and “Hudson County, New Jersey” for a discussion of certain other litigation.

The Company, including its subsidiaries, is a party to various other lawsuits, the outcomes of which are not expected to have a material adverse effect 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, which are not material except those of the Neptune Prospect. Total commitments related to the development of the Neptune Prospect, located in the vicinity of the Atwater Valley Area, are $34.6 million for 2008 and $0 thereafter.

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