Document of

The World Baik FILE COPYFOR OFMFCIAL USE ONLY

ReSo No. P-2745-AR

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

YACIMIENTOS PETROLIFEROS IFISCALES

WITH THE GUARANTEE OF THE ARGENiTINE REPUBLIC

FOR AN

OIL AND GAS ENGINEERING PROJECT

June 4, 1980

This documt bas a restrlcted dislbutlom and may be wed by reepimts mly In the perfornmce Oftheir offici duis. Its cntents may not otberwise be discte_d without Word Dank horimwatI.n

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CURRENCY EQUIVALENTSApril 30, 1980

Currency Unit Argentine Peso ($a)US$1 - $a 1,800US$1 million - $a 1,800 million$a 1 million - US.$556

WEIGHTS AND MEASURES

I Barrel (B) of crude oil (0.85specific gravity/35° API) = 0.135 metric ton

1 Barrel (B) m 0.159 cubic meter1 British Thermal Unit (Btu) = 0.252 kilocalories1 Cubic Foot (CF) = 0.028 cubic meter1 Standard Cubic Foot (SCF) ofNatural Gas 1/ m 1,000 Btu

1 Metric Ton of Crude Oil = 44.4 x 10 BtuI Mile = 1.609 kilometers

GLOSSARY OF ABBREVIATIONS

B - BarrelBD - Barrels per dayCFD - Cubic Feet per dayGdE - Gas del EstadoIDB - Inter-American Development BankMCF - Thousand Cubic FeetMMCF - Million Cubic FeetMMCFD - Million Cubic Feet per dayYPF - Yacimientos Petroliferos FiscalesToe - Tons of oil equivalentLPG - Liquefied Petroleum Gas (Propane/Butane)

FISCAL YEAR

January 1 to December 31

1/ A cubic foot of gas is the amount of gas at sea level and 60degrees Fahrenheit contained in one cubic foot of space andis referred to as a standard cubic foot (SCF).

FOR OFFICL USE ONLY

ARGENTINA

OIL AND GAS ENGINEERING PROJECT

Loan and Project Summary

Borrower: Yacimientos Petroliferos Fiscales Sociedad del Estado(YPF).

w Guarantor: The Argentine Republic.

Amount: US$27 million.

Terms: 15 years including 3 years of grace at 8.25% per annum.

Project The objectives of the proposed project are (a) improveDescription: information on country-wide oil and gas reserves as

basis for a rational program of field development;(b) assist YPF in locating favorable geologicalstructures in the Northwestern Basin (Porcelana-RioSeco area); and (c) study the optimum development andutilization of natural gas primarily to avoid wasteand to determine related investment requirements. Theproject consists of: (a) 220 man-months of consultants'services to audit the reserves in 44 major reservoirs;(b) about 1,000 line-kilometers of semi-detailed seismicsurveys in a 60 km x 40 km quadrangle in the Porcelana-Rio Seco area; and (c) 160 man-months of consultants'services to study the optimum development and utilizationof natural gas. The project is expected to result in anumber of subsequent projects aimed at strengthening theproductive capacity of the oil and gas sector and assist-ing the country in attalning energy self-sufficiency.The project components carry no special risks exceptfor the seismic surveys which could fail to identifyhydrocarbon-bearing strlictures or generate data whichdo not give conclusive evidence on prospects. Thisrisk is normal for the industry.

I

This document has a restricted distribution and may be used b)y recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Dank authorization.

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Estimated Cost:1/

Local ForeiRn Total-----(US$ Millions Equivalent)---

Auditing of Reserves 0.7 2.4 3.1Seismic Surveys 16.3 17.5 33.8Natural Gas Optimization Study 0.3 2.0 2.3

Base Cost 17.3 21.9 39.2Physical Contingencies 1.9 2.5 4.4Price Contingencies 3.4 2.6 6.0

Total Project Cost 22.6 27.0 49.6

Financing Plan: Local Foreign Total----(US$ Millions Equivalent)---

Government 0.6 0.6YPF 22.0 - 22.0IBRD - 27.0 27.0Totals 22.6 27.0 49.6

EstimatedDisbursements: IBRD FY 1981 1982 1983

Annual 10.0 10.0 7.0Cumulative 10.0 20.0 27.0

Rate of Return: Not applicable.

-Appraisal Report: No separate report.

1/ Excluding taxes.

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TOTHE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO YACIMIENTOSPETROLIFEROS FISCALES FOR AN OIL ANID GAS ENGINEERING PROJECT

1. I submit the following report and recommendation on a proposed loanto Yacimientos Petroliferos Fiscales (YPF) with the guarantee of The ArgentineRepublic for the equivalent of US$27.0 million to help finance an oil and gasengineering project comprising; (a) auditing of reserves, (b) seismic surveys,and (c) a study on optimization of natural gas use. The loan would have aterm of 15 years including 3 years of grace, with interest of 8.25% per annum.US$2.4 million would be on-lent to the Government's Secretariat of Energywhich would undertake the natural gas optimization study.

PART I - THE ECONOMY

Introduction

2. An economic mission visited Argentina in November 1979 and itsreport is being prepared. The following section reflects the findings ofthat mission. The last Economic Memorandum (Nc,. 2208-AR) was distributed tothe Executive Directors in November 1978. CounTtry data sheets are attached asAnnex I.

Background

3. Argentina is a semi-industrialized country with a per capita incomeof US$1,910 as of 1978, a sizeable middle class and a fairly even distributionof income. Postwar GDP growth has averaged 3.5% in an economy which hasbeen subject to strong cyclical fluctuations. Sharp swings from expansionaryfiscal, monetary and wage policies to restrictive stabilization programs haveoccurred five times since 1950. During the early 1970s when Argentina'sexternal situation was favorable, the Government pursued an ambitious publicinvestment program. Large increases in public expenditures, nominal wages andcredit resulted in strong growth of domestic output, while maintenance offixed exchange rates led to rapidly increasing imports. In mid-1974, poorweather, falling world grain prices, and an EEC ban on beef imports haltedexport growth. Deterioration of the foreign sector coincided with an intensi-fication of domestic social and political conf]ict. Caught up in a wage-pricespiral, inflation rose to over 300% in 1975 and accelerated to an annual rateof about 800% in early 1976. A rapidly increasing foreign debt and a drasticfall in foreign exchange reserves brought the country close to defaulting onits external obligations.

Stabilization Efforts 1976-1978

4. The new Administration, which came to power in March 1976, had asits initial objectives strengthening the balance of payments, restructuringthe external debt and preventing hyper-inflation. Policies such as lowering ofexport taxes and raising interest rates had an immediate positive effect onthe balance-of-payments. Monetary and fiscal policies, supported by wagecontrols, succeeded in bringing down the rate of inflation from 780% during

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the year ending in April 1976 to 150% a year later. No further progress wasmade, however, in reducing inflation during the remainder of 1977 and 1978.Output varied greatly. After recuperating rapidly from the 1975-1976 reces-sion, growth came to a halt in late 1977 when a credit crunch and record highinterest rates resulted in a drop in investment.

5. Whereas external sector policies introduced in 1976 immediatelyproduced favorable export results, imports were held down by two recessions.As a consequence, the resource balances registered surpluses of $1.9 billionand $2.8 billion in 1977 and 1978 respectively. Surpluses on currentaccount were accompanied by substantial net capital inflows. At the begin-ning, the public sector was the primary borrower, but starting in 1977, highdomestic interest rates induced the private sector to borrow abroad on anincreasing scale. Although the authorities introduced some controls in 1978,long-term capital continued to flow into Argentina, and by the end of thatyear gross foreign exchange reserves stood at US$5.8 billion, equivalent to14 months of imports. Net reserves amounted to US$5.0 billion. This reservegrowth permitted a new approach to inflation control in the framework of anopen economy.

The 1979 Program

6. In late December 1978 the Government announced the followingprogram: predetermined schedules for adjustment of (i) exchange rates,(ii) prices of fuels and public sector services, (iii) wages, and (iv) themonetary base of internal origin, combined with a five-year import tariffreduction schedule and the formal reopening of the capital market to inter-national transactions. Most of the adjustments were to follow a decliningtrend, designed to dampen inflationary expectations and to limit price increasesof domestic producers. Foreign competition was to reduce the rate of priceincrease of domestic tradeable goods to the level determined by (a) the rateof price increase abroad and (b) the rate of depreciation of the peso. It wasrecognized,.however, that possible tariff redundancy and lags in the adjustmentof imports would delay this "convergence" of domestic and foreign inflationrates.

7. The new import tariff schedule provided for major reductions intariffs on goods produced in Argentina. By the end of 1983 the range ofimport tariffs is to be reduced to 10%-45%, compared with 10%-85% at thebeginning of 1979, and the average tariff will have fallen from over 50% toless than 25%. Shortly after the announcement of the 1979-84 liberalizationschedule, the Government started a supplementary program of temporary tariffreductions for goods whose domestic price increases exceeded increases ininput costs. In March 1979, tariffs for capital goods were eliminated inorder to facilitate the re-equipment and modernization of Argentine industry.These latter two tariff cutting programs were originally to be in place foronly one year but have now been extended for a second year.

8. One notable feature of the current stabilization strategy is thepassivity of monetary and fiscal policy. The pre-fixing of the peso vis-a-visthe dollar, along with the elimination of capital controls, allow the monetaryauthorities to influence only the money base originating from domestic sources.For each quarter in 1979, quantitative targets for the monetary base of

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domestic origin were set to ensure an adequate supply of credit to borrowerswho had no access to foreign credit sources and to limit the increase ininternational reserves. Fiscal policy is also viewed to be of secondaryimportance insofar as short-term stabilization objectives are concerned.The crowding-out effect, which is normally expected to result from heavypublic borrowing, does not occur, if the suppLy of foreign capital is, asthe authorities believe, highly elastic. Nevertheless, as an additionalmeasure to mitigate inflationary expectations, the authorities planned fora further decrease in the Central Government's deficit from 2.8% of GDP in1978 to 1.5% in 1979. The overall public sect:or deficit was not expected tochange significantly, however, from its 1978 Level, estimated at about 5%of GDP.

Results of the Program

9. Most of the policies outlined above were implemented during thecourse of 1979. The key variable, the exchangte rate, was moved according toplan; the tariff reform was applied; public sector prices and tariffs wereadjusted as envisaged; the monetary base of internal origin expanded onlyslightly more than projected. However, the eLimination of capital controlsand the maintenance of the schedule for exchange rate devaluation, despitehigh internal inflation, led to heavy capital inflows amounting to overUS$1.5 billion in the first nine months. With a tight labor market prevailingthroughout 1979, nominal wages increased more rapidly than scheduled and theGovernment eliminated the legal limitations oni wage increases in September.

10. The new approach did not begin to work immediately. Through thefirst eight months of 1979 the wholesale and consumer price indices rose atthe same rates on an annual basis as in 1977 and 1978. Among the factorsexplaining the continued high rate of inflation in the first half of 1979 wasthe unusually rapid rise in international prices, particularly of primaryproducts exported by Argentina. The external price component of the wholesaleprice index, important for determining internal prices, increased at about twoto three times the average rate of increase during 1978. Another part of thedivergence between actual and expected price behavior can be explained by lagsin private sector recognition of import opportunities, combined with organi-zational problems and a lack of confidence in the durability of the system.As a result, possible excess demand was not fully met by imports, at leastin the first three quarters of 1979. Several indicators also point at demand-pull factors. Monetary and credit expansion, boosted by the massive inflow offoreign capital, continued at a high level. lJnemployment was reduced from2.8% in 1978 to 1.5% in 1979, wages were adjusted more frequently, and aggregatereal consumption expenditure expanded by 10%.

11. By September 1979, however, wholesaLe and consumer price increaseshad begun to decelerate. The general wholesa:Le price index, which had risenat an average rate of 8.3% per month from January to August, increased by anaverage of only 3.3% per month from September 1979 to March 1980, the lowestmonthly rates since early 1974. The deceleration in inflation has led to a

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real depreciation of the exchange rate, higher real wages and positive realinterest rates. While the lowering of domestic prices in September andOctober can be attributed in large part to decreasing prices of primaryproducts, the impact of increasing exposure of manufacturers to internationalcompetition became discernible in November and December. As expected, thebranches most clearly exposed to foreign competition are those showing pricedeceleration most clearly.

Prospects for 1980

12. In accordance with the preannounced schedule, the peso was devaluedby 2.8% in January 1980 with a 0.2% decrease in the rate of adjustment in eachof the following months. Any excess demand in 1980 would be increasinglyreflected in the balance of payments on current account. Effects of the pastappreciation of the peso in real terms and tariff reductions which are onlynow being felt in the economy should lead to a continuous deceleration ininflation. Moreover, the Government intends to reduce public investmentrelative to GDP and to increase real public sector tariff rates only gradually.With prices of traded goods decelerating for the reasons mentioned above, thewage transmission mechanism is expected to have a decelerating impact on theprices of non-tradeables as well.

13. Preliminary projections indicate a deficit on current account ofbetween TJS$700 million and US$1 billion for 1980. Such a large deficit couldtrigger expectations of devaluation resulting in capital outflow. Thispossibility is recognized by the authorities and is a risk they are willing totake. With exchange reserves standing at a record amount of US$10.2 billion,they have reiterated their determination to make whatever internal adjustmentsin output and employment may be necessary to avoid large-scale devaluation andthe new round of inflationary impulses it could start.

Medium- and Long-Term Development Prospects

14. With the import tariff reduction beginning to take effect, industrialand overall economic growth are expected to be relatively slow in 1980 and1981. In addition, business failures of weak or overexpanded firms, shouldbecome more widespread and unemployment should increase--albeit from lowlevels. The scope of readjustment may be reduced if the small real deprecia-tion of the currency continues, reestablishing export and import substitutionincentives. Availability of long-term credit for re-equipment and moderni-zation will be a crucial requirement for supporting the restructuring ofindustry. Since the private sector is also expected to take on a number oftasks previously undertaken by the public sector, the flexibility and effi-ciency of the Argentine financial system will be severely tested.

15. While agricultural production is expected to decrease in 1980because of unfavorable weather conditions, growth in agricultural output inthe early 1980s should continue on the expansion path started in 1976/77.Exports of agricultural products and investment incentives for agricultureshould rise given the expected deceleration in domestic industrial priceincreases and favorable prices of Argentine products in international markets.The contribution of these factors together with increased use of technicalinnovations could lead to a sustained growth of agricultural output beyondthe 3.5% average rate achieved in the last three years.

16. Exports in current prices have grown over the past three years atan average rate of 25% per year, a rate which will be difficult to sustain.Although expansion in the immediate future is expected to be more gradual,export prospects appear to be excellent over the longer term. Since theoutlook for world prices of Argentina's export products is favorable, totalexport earnings are projected to increase by an average of 18% annually during1980-1985 (5% in real terms). About 85% of thait increase would be generatedby agriculture and agro-industry and about 15% by the manufacturing sector.Although Argentina is currently supplying 90% cof its petroleum domesticallyand expects to be self-sufficient by the mid 1980s, the ongoing import liberali-zation process, as well as the need for modernization of infrastructure andindustry implies that imports in current prices; could increase at about 20%per annum through 1985 (7% in real terms). The current account balance isprojected to turn negative from 1980 onward restoring Argentina to its tradi-tional situation of a net capital importing cotntry. Gross inflows of medium-and long-term capital including direct foreign investment are projected toincrease from US$3.1 billion in 1979 to US$4.9 billion in 1985. The bulk ofthese capital flows should be available from bilateral arrangements, exportcredits, world capital markets, and direct private investments. Officialmultilateral sources, however, may play an impcrtant role by providing financialsupport combined with technical and organizaticnal assistance and by stimulatingcapital flows from other sources.

17. Argentina's medium- and long-term external public debt amounted toUS$6.8 billion at the end of 1978, an increase of US$1.9 billion over its 1977level. Medium- and long-term private external debt also expanded significantlyfrom US$3.2 billion to US$4.6 billion. External public and total debt serviceratios, which had been 15% and 24% respectively in 1977, increased to 21% and39% in 1978. These increases reflect the Central Bank's prepayments of overUS$1 billion in debt contracted in 1976-77 for balance-of-payments purposesand some increase in private capital outflow. Amortization and interest paidin the first three quarters of 1979 show that the debt service ratios hadreturned to the 1977 level. The Bank's share in the external public debt was5.7% in 1978 and its share in debt service was 3.2%. Given the relativelymodest anticipated expansion of the public investment program, the public debtservice ratio is expected to remain below 20%, with the Bank's share notexpected to rise above 1978 levels. Although private indebtedness willprobably increase more rapidly, the overall debt service ratio is unlikely torise above 35% in the coming years. The current level of foreign exchangeassets of over US$10 billion should provide a comfortable margin to counteractany sudden capital outflows. Therefore, Argentina is considered creditworthyfor Bank lending.

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PART II - BANK GROUP OPERATIONS IN ARGENTINA

Bank Operations

18. Past Bank lending to Argentina has been sporadic because of periodic

macroeconomic difficulties and unsatisfactory sector policies, along with

delays and problems in complying with specific project conditions. After

a hiatus of five years, lending was resumed in September 1976. Since that

date, the Bank has made loans for seven projects amounting to US$791.0

million, of which a loan of US$60 million for an agricultural credit project

was recently cancelled. Projects financed by the Bank before 1971 are prac-

tically completed. Bank assistance during the past three years has been

directed to major infrastructure projects and to the provision of credit

for productive sectors, in order to assist Argentina through the initial

stabilization effort. The grain storage project would enable Argentina to

obtain better prices for agricultural products and to export them in a more

orderly manner throughout the year. The industrial credit project supports

the modernization and expansion of efficient industry in general and export

oriented industry in particular. The electric transmission and distribution

project, the Yacyreta Hydroelectric Project, the fourth highway project and

the second railway project provide part of the infrastructure necessary to

facilitate agricultural and industrial expansion. Annex II contains a

summary statement of Bank loans as of April 30, 1980, and notes on the

execution of ongoing projects.

19. The Bank's approach to assisting Argentina in recent years was to

participate in a limited number of relatively large loans. Now that the

Government has broadened its policies beyond stabilization to address struc-

tural and institutional constraints in the productive and social sectors,

its task has become more complex. Somewhat more diversified Bank lending

will be required to respond to the Government's request for assistance in

areas critical for Argentina's future economic and social development.

20. Such a program would follow a three-pronged strategy of assistance.

The Bank would finance projects to help, first, reform Argentina's economic

structure and make it more competitive; second, strengthen key public institu-

tions and support rational sector policies; and, third, address some social

problems. Projects in industry would aim predominantly at restructuring the

sector by concentrating the development of industrial capacity in areas where

Argentina has a comparative advantage or the ability to compete at world market

prices. Bank involvement in the agricultural sector would support the Govern-

ment's infrastructure investment program in areas where Argentina possesses a

comparative advantage which has not yet been fully utilized.

21. With the decline in effective protec:tion, input costs have becomecritical factors in determining the competitiveness of Argentina's productivesector in international markets. Energy and t:ransport are particularlyimportant cost components. Projects in the energy sector are expected to helpdevelop the potential of the water resources shared by Argentina and itsneighbors and the domestic water resources commensurate with the needs of anexpanding economy; in the transport sector, projects would improve the handlingcapacity and efficiency of the respective modes, thus mitigating the adverseeffect of Argentina's geographical location on international trade.

22. Virtually all projects under consideration would have importantinstitution building objectives. Because of managerial weaknesses andpolitical constraints, most of Argentina's key public enterprises and agencieshave been unable to implement sound investment: and operating policies. Proj-ects in support of Government efforts to redress this situation would bemainly in the transport, energy and social sectors. In the electric powersector, the Government has prepared, in close cooperation with the Bank, aleast cost investment program, and initiated a process to streamline the orga-nization of the sector. In close consultation with the Bank, the Governmenthas initiated a comprehensive program for redimensioning the railway systemthat has already resulted in certain improveme!nts. The National HighwayService has been strengthened, and actions to improve port services are underway. Continued Bank association with the transportation sector would aim atconsolidating these measures and carrying them further. The proposed projectand other projects in the hydrocarbon sector would assist Argentina in theeffort to rationalize and expand petroleum exyloration and exploitation and toremove bottlenecks in the processing and markEting of oil and natural gas.

23. Bank involvement in water supply and sewerage, regional developmentand vocational training would help formulate sector policies and strengtheninstitutions which are not fully equipped to handle efficiently new or largertasks which the Government intends to entrust to them. Bank support in thewater supply and sewerage sector would include measures to upgrade the plan-ning and implementing capacity of pertinent Gcvernment and provincial agencies.The Bank would also assist in the decentralization policy of the Governmentthrough participation in regional development. Bank support would relate toformulation of investment plans, preparation cf budgets, proposals on revenuesharing and upgrading of local managerial and organizational capacity. TheBank is planning to assist in redefining the role and policies of the NationalCouncil for Technical Education and Vocational Training in response to theneeds resulting from the reorientation of indtustry.

IFC Operations

24. As of April 30, 1980, IFC had made 14 loans to borrowers inArgentina totalling US$99.4 million and two equity investments of US$2.5 mil-lion, of which US$46.8 million have been repaid, cancelled or sold. A sum-mary of IFC's investments up to April 30, 198CI, is shown in Annex II.

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PART III - THE OIL AND GAS SECTOR

Overall Setting

25. Argentina has a substantial and diversified energy base. Theexploitable hydro-electric power potential over 50 years is estimated at 2.9

billion tons of oil equivalent (Toe) but the installed capacity to date wouldallow the harnessing of only about 7% of this potential. Proven reserves ofcrude oil at end-1978 were 330 million tons (2.4 billion barrels (B)) andthose of natural gas, 15.3 trillion cubic feet (375 million Toe), equivalentto 15 years and 40 years of current output respectively. There are alsodeposits of thermal coal, albeit of relatively low quality, and potential forvegetable fuels (firewood, bagasse), geothermal, wind and solar energy.Petroleum and natural gas, while accounting for only 14% of identified energyreserves, meet 86% of domestic energy demand. Because of past erratic policiesespecially with regard to private investment, the productive capacity forpetroleum and natural gas has remained below its potential. As its primarydevelopment objective for the energy sector, the Government aims at eliminatingpetroleum imports by attaining petroleum self-sufficiency by the mid-1980'sand building up exports once adequate reserves are identified. A large-scaleexpansion of hydro-electric power generation for the short- and medium-term isunderway while a gradual expansion of nuclear generation based on domesticnatural uranium is planned.

26. Primary energy output during 1970-75 increased at a rate well belowdemand growth primarily because of declining crude oil production. Thisresulted in a weakening of Argentina's overall energy position and increasedpetroleum imports. A marked improvement took place from 1976 onwards. Crudeoil output during 1976-79 rose by about 4.5% per annum and hydro capacitydoubled, reaching 3,200 MW in the latter year. Energy demand in recent yearsgrew at a lower rate than output. Energy demand in 1978 totalled 42.3 millionToe, i.e. 100 billion British Thermal Units (BTU) per 1 million US dollars ofGDP. This is high by Latin American standards but is comparable to countrieswith a similar level of development. Demand composition changed considerablyduring 1970-78. Petroleum products' share declined from 69% to 59% of energydemand whereas the share of natural gas increased from 21% to over 27% andthat of hydro/nuclear power combined, from 1.3% to over 7%. Coal and vegetablefuels account for the remainder. Electricity use has increased from 21% tonearly 30% of final energy consumption.

Hydrocarbon Sector

27. Argentina's oil and gas sector ranks third in output and fourth inrefining capacity in Latin America. Producing fields are scattered widely insix sedimentary basins (Annex 4 and Map IBRD 14924), and their remoteness fromthe main refining and consumption centers poses difficult logistical problems.Output of crude and condensate in 1979 approached 173 million B, the highestever, and that of natural gas increased to 436 billion CF (1.2 billion cubicfeet per day (CFD)). The oil and gas sector, including refining, contributesabout 2% to GDP. Argentina has attained a high degree of hydrocarbon self-sufficiency as imports in 1979 accounted for just 12.7% of domestic petroleum

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demand and 20% of natural gas demand. Import volumes of crude oil and naturalgas continued to decline in 1979 whereas imporl: volumes of petroleum products--primarily gasoline, kerosene and gas oil--increased considerably. Because ofsubstantial price increases, the import bill for hydrocarbons reached US$1,050million, equivalent to 18% of merchandise imports, up from US$408 million in1978. Imports of natural gas from Bolivia are based on a 20-year contractextending to 1992 and will be increased from 1G0 million CFD in 1979 to230 million CFD from mid-1980 onwards.

Institutional Base

28. Sector policies are the responsibilit:y of the Secretariat of Energy(Secretaria de Estado de Energia) within the Mi'nistry of Economy. The Secre-tariat is charged with (i) pricing and investment policies, (ii) approval ofexploration and production contracts negotiated between the state oil enter-prise and private companies, and (iii) developrient of new sources and overallenergy planning, a function which is still in :.nitial stages. The state-ownedYacimientos Petroliferos Fiscales (YPF), which was established in 1922, is themain policy implementing entity. It operates -n virtually every branch ofthe petroleum and natural gas sector except marketing of natural and liquefiedpetroleum gas (LPG). In 1979 YPF accounted for about 50% of exploration, overtwo-thirds of crude output, 85% of natural gas output and 73% of petroleumrefining. YPF is also charged with negotiating and monitoring explorationand production contracts with private companies. Gas del Estado (GdE), astate enterprise established in 1957, is responsible for imports, processingand marketing of natural gas and LPG. There is also a significant and growingparticipation by private firms, both domestic and foreign, in the oil and gassector. Exxon and Shell are active in explorat:ion, refining and marketing;Cities Service and Amoco, in production; and Total, Occidental and Union ofTexas, in exploration. About 16 domestic companies are producing hydrocarbonsas contractors of YPF and some 50 specialized iirms provide services to thepetroleum industry.

Exploration and Production

29. Argentina's hydrocarbon-bearing areas cover about 1.2 million sq kmonshore and 0.4 million sq km offshore. Of the six basins (Annex IV and MapIBRD 14924) the Cuyo basin is probably the best: explored and the Southernbasin, the least explored. Cumulative discoveries of crude from the early1900's have amounted to 5.55 billion B, of which 3.1 billion B have alreadybeen produced. Exploration has surged since 1976, and the decline in reserveswas reversed as a result. This was largely because of the resumption of explora-tion by private firms after the Government launched a policy of encouragingsuch investment, complemented by YPF's efforts. From 1980 onwards, both YPFand private companies are likely to step up exploration, especially in theextreme Southern and Northern basins where private companies have acquiredacreage.

30. As an increasing area for exploration and production has beenassigned to the private sector, recent increases in crude output have beenbrought about mainly by private firms. The latter now provide nearly

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one-third of crude output, up from 27.5% in 1975. Associated with thisdevelopment, there has been an increase in the share of crude produced throughsecondary recovery. Output of natural gas, which is largely associated withcrude, increased at a rate averaging about 6% per annum throughout the 1970's.Natural gas output is concentrated in Santa Cruz and Neuquen, but the fastestgrowth has occurred in the distant Tierra del Fuego fields.

Refining and Transport

31. Refining capacity amounts to some 0.7 million barrels per day (BD).There is a total of 14 refineries, six of which are owned by YPF. Mostrefineries are small and only four are larger than 0.1 million BD. Refineriesare located largely near consumption centers. Capacities have been ample tomeet domestic demand for most products, except medium distillates, and toprovide exportable surpluses of fuel oil. Because of the small size of mostunits and low capacity utilization of less than 70% for the industry as awhole, refining costs are high. Until recently, the Government allocatedcrude primarily to YPF's refineries. As a result of policy changes aimed atminimizing processing and marketing costs of petroleum products, domesticallyproduced crude is now allocated according to individual refineries' share ofthe market for petroleum products.

32. In the transport subsector, a system of pipelines is owned andoperated exclusively by YPF (crude and petroleum product pipelines) and GdE(natural gas pipelines). Only 45% of crude and about one-third of productsare moved by pipeline, the remainder being transported by coastal tankers,rail and road. Crude oil pipelines total some 1,700 km in length and 0.43million BD in capacity, and are concentrated in Neuquen and the Northernarea. Crude from the Southern production centers is transported by tankersentirely owned and operated by YPF. Product pipelines amount to 2,950 km andnearly 0.4 million BD of capacity. Trunk pipelines for natural gas extendalong the length of the country, connecting the producing areas in theextreme North and South with the consumption centers around Buenos Aires.Gas pipeline capacity of 1 billion CFD is sufficient to meet summer demand,but falls short of potential winter peak demand by about 20%, thus restrictinggas use. Expansion of the Northern and Southern trunklines and constructionof a new pipeline from the gas-rich Neuquen fields to the Buenos Aires indus-trial belt, to be completed in 1982, will ease supply bottlenecks and allowbetter utilization of gas resources. Storage capacity for crude oil andpetroleum products is about 18 million B each or about 70-80 days's supplywhich is adequate in light of Argentina's relatively high degree of self-sufficiency. For natural gas, very little storage is available.

Domestic Demand

33. Domestic demand for petroleum fuels including field and refineryconsumption amounted in 1978 to about 437,000 BD. Among the major sectorsof demand, transport accounts for 54%; power generation, 20%; industry, 15%;and the commercial and residential sectors combined, 11% of petroleum fuelsconsumption. Increase in sales to final consumers during 1971-78 averagednearly 2.5% per annum. There were considerable variations for specificperiods and individual products resulting from varying overall economic and

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sectoral performance, evolution in relative prices and substitution processes.Consumption of transport fuels has grown faster and fluctuated less than thatof industrial and household fuels. Gasoline consumption fell in 1974-75 whenits relative price increased substantially, but resumed afterwards itshistoric growth of 5.5-6% p.a. Consumption of industrial diesel and fuel oildeclined reflecting increased use of natural gas in industry and of hydropowerin electricity generation. Consumption of LPG has been growing fairly rapidly,replacing kerosene.

34. Natural gas has become increasingly important for meeting Argentina'senergy requirements. Industry accounts for nearly one-half of natural gasuse, followed by power generation (20%) and residential, commercial andGovernment sectors (about 30% combined). Howevrer, some 30% of output, net ofreinjection, is flared and it is urgent to improve gas utilization to reducethis waste of a valuable energy resource.

Public-Private Sector Relationship

35. In pursuit of its objective of attair,ing.petroleum self-sufficiencyby the mid-1980's, the Government has initiated. policies aimed at increasingYPF's efficiency and is giving top priority to enhancing participation byprivate firms in exploration and production. Writh regard to the former, YPF'soperations are being streamlined, its administration strengthened, and itsmanagerial autonomy increased (para. 48 and Anrex 5). Private sector partici-pation is on the basis of service contracts with YPF which are awarded throughcompetitive bidding. Foreign firms have to operate in association with domes-tic private firms for new exploration and prodtLction ventures. Explorationis regulated by the 1978 Risk Contract Law (No. 21,778) as complemented byindividual contracts between YPF and private companies. The initial explora-tion period is five years for onshore and sever. years for offshore areas.The development/production period is 25 years from the date of a commercialdiscovery and cannot exceed 30 years for exploration and production combined.The entire production has to be sold to YPF. The price for it normally isset at the time of bidding for exploration ares.s. Prices incorporated inrecent awards have been in the order of 60% of international prices adjustableaccording to a formula related to output and domestic inflation. In the caseof offshore natural gas discoveries, the operator is permitted to postponeexploitation for up to 10 years to allow for development of markets and con-struction of necessary infrastructure. The awerd of contracts for productionfollows a similar pattern, with bidding based on the sales price to YPF,production volume, and/or size of investment, among others. In all cases,investment is financed by the contractor, with installations to be handed overto YPF at the end of the exploitation period without further compensation.Contracting companies are subject to standard corporate income taxation, withprovisions to take account of the specific requirements of the petroleumindustry.

36. The Government's policy of attracting private investment to hydro-carbon development has been reasonably successful. In response to the improvedinvestment climate, private companies have concluded with YPF during 1977-7912 exploration contracts covering nearly 85,000 sq km and 18 production

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contracts for 5,100 sq km. Some of the latter are for secondary recovery.There is keen interest among foreign companies to participate in hydrocarbonexploration because of their favorable assessment of Argentina's hydrocarbonpotential.

Investment Program and Prospects

37. Investment in the oil and gas sector over the medium term is gearedtowards two inter-related objectives, i.e. (i) increase of the productivecapacity of crude oil for attaining self-sufficiency by the mid-1980's and(ii) expansion and adaptation of the transport infrastructure for moving hydro-carbons from increasingly distant production sites to the centers of process-ing and consumption. While increases in energy demand over the 1979-85 periodmight be in the order of 5% per annum, petroleum demand is not expected togrow by much more than 3% per annum because of large-scale hydropower expan-sion and substitution of natural gas. However, in order to attain petroleumself-sufficiency by the mid-1980's, crude output growth would have to bemaintained at least at 4% per annum. This should be attainable as there issignificant scope for enhanced recovery and good possibilities for furtherimportant discoveries, taking into consideration that a large portion ofpotentially hydrocarbon-bearing areas has yet to be explored. It is likelythat more gas than crude oil will be found. However, with considerablepotential gas demand in industry, power generation and the residential andcommercial sectors, consumption growth through the mid-1980s could be closeto 10% per annum, which would justify an accelerated gas development program.Imports of natural gas from Bolivia are expected to remain at their contractlevel throughout the 1980's. At the same time, gas exports to other neighbor-ing countries are also conceivable, given Argentina's potential.

38. The Government is in the process of updating the investment programfor the oil and gas sector. Based on projects prepared by YPF and GdE andtaking account of increasing private sector involvement, investment in thesector in 1979-85 could total about US$14.3 billion (1979 prices). Explora-tion and field development might absorb US$9.5-10 billion (68% of totalinvestment) with the expectation of discovering and developing at least 2.3billion B additional crude reserves which would maintain the reserves/production ratio at 15 years throughout the 1980's. This includes recon-naissance and semi-detailed seismic surveys averaging about 25,000 line-kmper year as a vital initial step for exploration. Transport, storage anddistribution might require 30% and refining (mainly for secondary processing)2% of future investment as present refining capacities are ample to meetdemand over the next five years or so. YPF's 1979-85 investment for explora-tion, field development and production, refining and transport might be inthe order of US$7 billion. GdE's 1979-85 investment program totals US$1.3billion. Nearly one-half of it is for increasing pipeline capacity by about 1billion SCF, more than doubling present capacity in the process. Financingrequirements for investment of this magnitude will be considerable. Even iffuture sales prices for YPF and GdE would enable these entities to meet 40-50%of investment through internal cash generation, there would be borrowingrequirements for the 1979-85 period totalling US$4-4.5 billion, the largerpart of which would have to be covered from abroad.

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39. It is not yet clear what proportion of total investment might beundertaken by the private sector. Private firms have committed themselves tosubstantial expenditures on exploration and production. Private equity isfinancing a US$650 million natural gas transmission project initiated by GdEand might also be available for other pipeline projects. In order to play amore important part in petroleum development, domestic private firms needimproved access to financing including domestic financing. The Bank isexploring the possibilities for strengthening capabilities of the domesticbanking system to support these efforts.

Policy Issues

40. The main issues affecting the sector are pricing and overall plan-ning, particularly of natural gas development. Current natural gas userelative to reserves is limited and inefficient. Some 30% of output net ofreinjection is being flared, amounting to 350 million CFD, which in termsof energy content is almost equivalent to petroleum and natural gas importscombined. The proportion of output lost thrcough flaring, especially of gasassociated with crude oil production, is liketly to increase if infrastructureand gas utilization are not improved. The current inefficiency in the useof natural gas is based on first, an overall shortage of infrastructure because,until very recently, producers have been dissuaded by low prices to supplylarger amounts of natural gas to GdE, and the!y were reluctant to invest in gasgathering and transport facilities. Second, the substitution of natural gasfor fuel oil is difficult in some local marke!ts near inland refineries wherefuel oil is in excess supply. This explains in part why fuel oil is pricednationally about 10% below the price of natural gas and therefore the feasi-bility for setting differential prices among regions should be reviewed.Furthermore, even with a significant increase! in gas prices, studies areneeded to determine the extent and location of investments for recycling andtransport infrastructure, because the main gE&s fields vary in size and aredispersed geographically. Thus, the optimum scope of natural gas output anduse needs to be analyzed on a regional as well as national basis, togetherwith an assessment of alternative uses for fuels replaced by natural gas andof related investment requirements. Such a study is included in the proposedproject. The Government would discuss the results of this study with theBank (Section 3.07 of the draft Guarantee Agreement).

41. Fuel pricing in Argentina is complex. It involves issues relatedto crude oil and natural gas prices to producers as well as ex-refinery,wholesale and retail prices for petroleum products and natural gas to consumers.Between early 1976 and mid-1978, the Government enacted substantial priceincreases at all levels. Measured in current, US$ terms, these increases overthis period totaled 40% for producer prices of crude, 114% for retail pricesof petroleum products and 85-90% for natural gas tariffs. However, in anattempt to slow down inflation, the Government, during late 1978 and in 1979,kept these increases significantly below increases in the overall pricelevel and in fuel import costs. By end-1979, the retail price of petroleumproducts averaged US$0.75/gal (US$1.30/gal fcr gasoline). Net of fuel taxesthat aggregate 40% of the retail price and distribution costs, the ex-refineryprice at end-1979 averaged just about US$0.3,/gal which was less than 60% of

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the international level 1/ and below the amount paid by refiners/distributorsfor imported crude and petroleum products. GdE was particularly hard hit byincreased costs of imported gas. GdE's net profits were about US$28 millionin 1979 compared with US$99 million in the previous year. The Government hascompensated the refiners/distributors from fuel tax revenues for the lossincurred in import operations. These compensation payments were close toUS$175 million equivalent in 1979. To shield the consumer further from higherenergy costs, the Government also reduced fuel taxes on some products. How-ever, in early 1980, the Government reestablished a policy of increasingfuel prices in real terms.

42. The Bank has discussed with the Government the objectives of fuelpricing which should be (i) an improvement in the financial position of YPFand GdE taking into consideration investment requirements and future increasesin costs of exploration, production, and purchase of hydrocarbons (imports andproduction from risk sharing contracts); (ii) elimination of Government com-pensation payments to refiners/distributors; (iii) stimulation of production,reduction of import requirements and, possibly, building-up of an exportcapacity for petroleum; and (iv) more efficient use of fuel, conservation andreduction of waste. In light of Argentina's high degree of petroleum self-sufficiency and the Government's efforts to reduce inflation, gradual adjust-ments of fuel prices towards achieving international prices appear justified.An understanding has been reached with the Government that it will raise theprice of crude oil, petroleum products and natural gas, so as to enable YPFand GdE to generate funds sufficient to service their debt and make a reason-able contribution to their investments. Specifically, the Government hasindicated that it will continue to increase the price of petroleum productsand natural gas which, during the first four months of 1980 averaged 1.5% to2% per month above the non-agricultural wholesale price index, or about 7% forthe first four months, so that in the long run they reach international pricelevels. On the basis of this recent experience and the Government's policy,real price increases of 15% can be expected during 1980 which would enable YPFand GdE to earn revenues sufficient to service their debt and to contributethe funds required to finance, in the case of YPF, about one third of itsinvestment program, and in the case of GdE, about one half of its investmentprogram. The Government has also indicated that further price adjustmentswould take into account international fuel price changes as well as the resultsof the natural gas optimization and utilization study (para. 40), with theexpectation that both enities would service their debt and self-finance areasonable part of their investment programs. The Bank also explained to theGovernment that the financing of further projects in the petroleum sectorwould depend on continued progress in dealing with the pricing issue.

Previous Bank Lending to the Energy Sector

43. The proposed project would be the Bank's first in Argentina'shydrocarbon sector. Energy-related lending by the Bank to Argentina up tonow has been entirely for electricity development. Six loans were made for

1/ Export prices of the Antillean refineries have been used as an indicatorof international prices.

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this purpose during 1962-79 totalling US$617 million. The Bank made fourloans to SEGBA to help finance thermal generation plant, transmission, anddistribution, and one loan each to HYDRONOR and the Government, respectively,for developing the Chocon and Yacyreta hydropower schemes. With its recentlending for the power sector, the Bank helped Argentina to improve sectororganization and planning, a process which is continuing. Project Perform-ance Audit Reports by the Bank's Operations Evaluation Department have beencompleted on the first four loans. 1/ The reports conclude that while theprojects largely met their physical objectives and have assisted in improvingefficiency of the borrowers, the financial objectives were not met. Hence, theBank held intensive discussions on this problem with the Argentine Governmentduring 1976 and 1977. A more realistic pricing policy which the Governmentimplemented in 1978 for all energy products including electric energy hasbeen adversely affected by the higher than expected inflation of 1979. Asa result, a new round of intensive discussions between the Government andthe Bank on electric sector finances is now underway. The Inter-AmericanDevelopment Bank (IDB) made five loans to GdE for gas transmission projects in1971-79 totalling US$178 million.

PART IV - THE PROJECT

Background and Objectives

44. The proposed project was identified during the visit of a Bankpetroleum sector mission to Argentina in August 1979 and was appraised inNovember 1979. Negotiations were held in Washington, D.C. from May 9-13,1980. The Argentine Delegation was headed by Mr. Jorge Fernando Scosceria,Finance Director, YPF. Since this is an engineering project, a separate staffappraisal report has not been prepared. Annex III contains supplementary dataon the project, Annex IV geological background and Annex V the description ofthe Borrower.

45. The proposed project is in response to a Government request to theBank for financial and institutional assistance in oil and gas sector develop-ment. It is designed to support the Government's principal developmentobjectives for the sector, i.e., (a) achieving petroleum self-sufficiencythrough the 1980s by accelerating exploration and production and by helpingin the strengthening of YPF's exploration and production departments; (b)enhancing sector efficiency by helping increase private investment andfurthering rationalization measures on the part of YPF and GdE including,through the reserves audit component, the provision of a better basis forbidding exploration and production areas by private companies; and (c) layingthe basis for attaining more efficient fuel utilization and overall resourceallocation by studying the markets for expanded natural gas use, identifyingthe needed investments in transport infrastructure, gas recycling, and storage,and recommending pricing policies for liquid fuels and natural gas includingspecific pricing actions during 1980.

1/ For Loans 308-AR and 525-AR, Report No. Z-17/1; for Loan 577-AR, ReportNo. M76-772 of November 16, 1976; and for Loan 644-AR, Report No. M76-121of February 27, 1976.

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46. Given the importance of a sound energy position for Argentina'sfuture economic development and the serious consequences of a decline inpetroleum production and recoverable reserves for the economy, which presentlyis close to energy self-sufficiency, it is appropriate for the Bank to expandits energy-related lending to the oil and gas sector. The issues facing thepetroleum sector are complex and have to be solved step-by-step. Lendingwould start with the proposed engineering loan which, in both the public andprivate sectors, could lead to a sequence of projects eligible for foreignfinancing, including Bank financing, and action would be initiated on theselected number of key issues discussed in para. 45.

Project Description

47. The proposed engineering project consists of the following components:

(a) Auditing of Reserves - To date, only approximate methods have beenfollowed for calculating proven reserves and little effort has beenmade to estimate the extent of probable and possible reserves.Thus, an external audit by reputable consultants would be carriedout to rigorously determine crude oil, gas and condensate reservesin the various producing areas in the country. The component con-sists of detailed reservoir engineering studies, covering 44 majorreservoirs which, together with additional reservoirs currentlybeing audited in the Neuquen basin, comprise 90% of the country'sknown reserves. The component will require 220 man-months includingfield work, gathering of data and work in the home office over aperiod of about two years as follows:

1. (i) determine proven secondary recovery oil reserves inabout nine reservoirs located in several basins through:(a) reservoir engineering studies for implementingenhanced recovery methods in oil fields operated byYPF; (b) studies for water flooding; (c) forecast ofwater injection and oil production rates; (d) studies ofoptimum recoveries with various flood patterns andinjection rates; (e) studies to determine surfacefacilities required; (f) economic review of the projects;(g) estimates of capital requirements for injectionmaintenance and workover expenditures; and (h) additionalstudies as required to optimize gas and oil recoveries;

(ii) determine proven reserves for the five newly discoveredoil and gas reservoirs located in the Northwesternbasin, including an evaluation of probable and possiblereserves by statistical methods;

2. revise and adjust calculations for a total of thirtycrude oil, gas, and condensate reservoirs, mainly inthe Southern basin, and in all other major reservoirsnot included in part 1. above.

(b) Seismic Surveys - Recent drilling in the Northernwestern basin hasdemonstrated that important additional hydrocarbon accumulationscould be found in an area along the subsurface structural alignment

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of the Devonian rocks which follow the sub-Andean folded belt.However, the area of greatest interest, located immediately south ofthe early discoveries and aligned with the Bolivian fields, does notshow a surface expression of the folded belt. For this reason it isnecessary to conduct a seismic survey over this area thus permittingthe accurate determination of the subsurface alignment of theDevonian rocks where hydrocarbons have been found in the vicinity.Financing by the Bank of this seismic survey is justified by thegood hydrocarbon potential of the area under consideration and thecontribution this survey would make to strengthening YPF's explora-tion department and to attracting private investment in exploration.The survey will consist of some 1,00C' km of seismic lines withstakes placed 25 to 50 meters apart, a coverage of 2400 to 4800%,20 to 40 holes per position at a depth of 1 to 3 meters and using96 channels for recording. These stringent parameters are dictatedby the complicated geology, the ruggedness of the terrain, the densevegetation and the thickness of the weathering zone. The equipmentto be used is very light and helicopters will be used for transportof equipment and supplies. The rate of progress is expected to be50 km per crew-month.

(c) Study to Optimize the Use of Natural Gas - Some 30% of the output ofnatural gas in Argentina is currently being flared, resulting in asignificant waste of energy resources while over 25% of consumptionis met through imports. With the aim of increasing efficiency ofenergy use and accelerating the attainment of self-sufficiency inenergy, the Energy Secretariat will undertake a study on optimizationof natural gas use. This study will be carried out by consultantsand is expected to require some 160 man-months over a period of twoyears. The study will analyze inter alia: (i) levels and structureof pricing of liquid fuels and of natural gas; (ii) demand fornatural gas and competing fuels; (iii) options for disposition offuel oil surpluses either through exports or secondary processinginto lighter products; (iv) optimization of future refining expan-sion and related investment requirements; (v) transport and storagerequirements for natural gas; and (vi) the scope for gas recyclingand reinjection and the optimum development of the gas fields. Theterms of reference have been discussed with the Government and arebeing finalized.

The Borrower 1/

48. YPF is by far the largest entity in the hydrocarbon sector and oneof the largest state oil companies in Latin America. It has a generallyadequate technical staff. However, after many years of haphazard growth asa state monopoly, and subjected to frequent changes in Government policiestowards sector development, YPF has become overstaffed and inefficient andwas adversely affected by rapid turnover of top management. Significantimprovements have taken place since 1977. The management has stabilized,

1/ A more extensive discussion is presented in Annex V.

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a creditable effort in staff reduction has taken place and more adequate in-formation systems, including that for financial information, are being estab-lished with the assistance of outside consultants. YPF's transformation froma state enterprise to an autonomous public corporation, which occurred in 1978will ease the implementation of further reforms. YPF's accounting system andprocedures were changed in 1978 from the Government budgetary system toconventional financial accounting. Its financial statements are audited bythe Sindicatura General de las Empresas Publicas which is considered qualifiedand independent. The 1977-78 audit reports still had a number of qualifica-tions but YPF expects that for 1979, it will obtain a clean opinion from itsauditors. YPF would furnish the Bank its own accounts and project accountsaudited by independent auditors acceptable to the Bank not later than sixmonths after the end of each fiscal year.

49. YPF's financial position has been adversely affected by inadequateprices for its products (which during the July 1978 - June 1979 period alonedeclined by over one-third in real terms) and continuously high overheads.With existing prices, and in the absence of major equity increases, theentity's internal sources would finance only about 10% of projected investment.In order to assure a more meaningful contribution to financing investment,YPF's sales prices in real terms would have to be increased; and a satisfactoryagreement on this matter has been reached (paragraph 42). In line with growinginvestment, future requirements for loan financing will increase. YPF's grossborrowing requirements should be in the order of US$650-800 million perannum during the next several years, and its annual debt servicing US$150-200million.

Project Costs and Financing

50. The total cost of the project has been estimated at US$49.6 millionequivalent including a foreign cost component of approximately US$27.0 mil-lion equivalent (54% of project cost). Contingencies included in the estimateamount to US$10.4 million equivalent (US$4.4 million for physical contingenciesand US$5.8 million for price escalations i.e., 11% and 15%, respectively ofthe base project cost). Of these, the foreign price contingencies adopted are10.5% in 1980 and 9% in 1981. Costs of the studies are based on US$14,000 perman-month given the highly specialized nature of the expertise required and thehigh cost of living in Argentina. The cost estimate by components (includingcontingencies) is as follows:

US$ Million

Local Cost Foreign Cost Total

Auditing of Reserves 1.2 3.2 4.4Seismic Surveys 20.8 21.4 42.2Natural Gas Optimization

Study 0.6 2.4 3.0

Total 22.6 27.0 49.6

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51. The proposed Bank loan of US$27.0 million equivalent would be at8.25% per annum interest for fifteen years including three years of grace.The estimated schedule of disbursements from the proposed loan is shown inthe Loan and Project Summary. YPF would provide US$22.0 million from its owninternal resources, to cover local costs for seismic surveys and for the auditof reserves component. Assurances have been given by YPF and the Governmentthat these funds will be made available (Section 3.01 of draft Loan Agreement).YPF will onlend US$2.4 million of the loan, under terms satisfactory to theBank, to the Energy Secretariat which will undertake the study to optimize gasutilization. The Government will provide the US$0.6 million required to coverthe local costs of this study (Section 3.01 of the draft Guarantee Agreement).

Project Implementation and Procurement

52. The auditing of reserves and the seismic surveys components will beadministered by YPF with the assistance of foreign and local consultants andcontractors. The consultants for the reserves audit will be selected from a"short list" acceptable to the Bank and their terms of reference will beapproved by the Bank (Section 3.02 of the draft Loan Agreement). The consul-tants will also provide training to YPF staff. Similar arrangements will bemade for the gas utilization study. The area fDr the seismic surveys waschosen by YPF's exploration department and has been visited by Bank staff.Since the crews normally can work only in the dry season (May-October) thework will not be completed until 1981. The seismic surveys will be carriedout by an internationally known geophysical contractor who already has beenselected under limited international tendering in accordance with industrypractice. Five well-known firms from two countries were asked to bid during1978 for a seismic program in the Northwestern basins and the contract wasawarded to the lowest evaluated bidder under cost-effective procurement. Assome of the areas originally envisaged for these surveys were subsequentlyallocated to the private sector, YPF decided during January 1980 to apply theexisting contract to the work in 550 line-km of the project area and completethe previously agreed work program, thus avoiding additional mobilization/demobilization costs and taking advantage of the fact that there were no rainsearlier this year. These arrangements were mada satisfactorily with no realincrease in unit costs vis-a-vis the original bid. The contract will beextended soon this year to cover the remaining 450 line-kilometers, tocomplete the 1,000 line-kilometers of the projezt, under similar terms andconditions (including lower unit costs) that shDuld be acceptable to the Bank(Section 2.03(b) of the draft Loan Agreement). The natural gas utilizationstudy will be administered by the Energy Secretariat, with YPF and GdE partici-pating in its monitoring and assisted by local and foreign consultants. Thelist of foreign consultants and the terms of reEerence for the study wereprepared by GdE, reviewed by the Bank, and have been agreed with the Secretariat(Section 3.02 of the draft Guarantee Agreement). Given these procedures, YPFand GdE experience, and the technical assistanca that will be provided, nomajor difficulties are envisaged in implementin,g the project which is scheduledto be completed by end-1982.

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Advance Contracting and Retroactive Financing

53. Because of the rainy season in the Northwestern basin (November-April), and in order for YPF to have the drilling rigs on location by November1980, the results of some of the seismic work must be available prior to thatdate. Therefore, seismic crews started work in January 1980 under the arrange-ments discussed in paragraph 52. These arrangements will last through March1981 because of the need for consistency in data collection and processing toallow a reasonable interpretation of drilling prospects in the relativelysmall area. Similarly, some of the data for the audit of reserves is neededpromptly to facilitate the preparation by YPF of bidding documents for tender-ing secondary recovery projects by private companies. This involves contractsof about $1 million for reserve auditing. It is therefore proposed to approveadvance contracting to the extent of US$35 million equivalent 1/ (of whichUS$18 million would be in foreign exchange) to cover the seismic servicescontract and part of the reserves audit. Further, since some of the seismicwork would be carried out prior to loan approval, it is proposed that retro-active financing of up to $5.0 million (i.e., some 19% of loan disbursements)be approved to cover expenditures under the advanced contract, incurred fromJanuary 1980. As the proposed loan is an engineering loan whose purpose isto prepare subsequent projects, this high level of advance contracting andretroactive financing is justified.

Disbursements

54. Disbursements of the Bank loan would be made against appropriatedocuments for 51%, representing the estimated foreign exchange costs, ofexpenditures for seismic surveys, and 100% of the foreign expenditures forthe reserve audit and the study to optimize the use of natural gas.

Prolect Benefits and Risk

55. Benefits to be derived from the proposed project are: (i) improvedknowledge of the productive potential of the hydrocarbon sector, facilitatingthe planning of future sector development; (ii) attraction of private invest-ment to the area where the seismic survey is undertaken; and (iii) improveduse of Argentina's energy potential, especially with regard to natural gas.Considering the deleterious consequences which increased hydrocarbon importswould have on the country's balance of payments, all options for increasingoil and gas output and for enhancing efficiency of energy use should beevaluated. Specifically, the seismic survey will permit the accurate deter-mination of the subsurface alignment and thus, define the potential for hydro-carbon accumulations in the Porcelana-Rio Seco area of the Northwestern basin.If favorable structures are found, YPF can immediately follow up with explor-atory drilling in search for new reserves. The reserves audit will helpovercome planning problems and obstacles to field development caused by theabsence of firm data on reserves and thus, will improve and strengthen sectorknowledge, planning and development. The study to optimize the use of naturalgas will provide the basis for improved energy utilization in the economy.

1/ Consisting of the seismic surveys component and a part of the auditingof reserves component, excluding contingencies.

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Moreover, the proposed project would help attract private investment. The

seismic survey and reserve audit will provide improved information to private

companies for bidding on exploration and field development. The gas utiliza-tion study will indicate the Government's commitment to develop markets and

infrastructure for gas whose discoveries are likely to be more plentiful than

those of oil. The proposed loan thus could lead to subsequent projects suit-

able for Bank and IFC financing.

56. The reserve audit and gas utilization study components are virt .Ily

risk-free as competent consultants would be selected. For the gas utillzfgtion

study, there is a risk of not having its recommendations implemented eftectively.However, the results of this study will be reviewed with the Bank and thei.r

implementation would be closely followed up in the course of subsequentenergy-related activities. The seismic survey of the Northwestern basin

carries the risk that subsurface structures favorable for hydrocarbon accumu-lation will not be found, but the presence of a continuous folded belt

throughout the Northwestern Basin and the results of recent drilling elsewherein the basin make this unlikely. Another risk relates to the quality of

seismic data. However, since field-gathering and interpretation will be madeby a highly specialized and reputable contracting firm and adequate super-

vision on part of YPF can be expected, this risk will be minimized to theextent feasible.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

57. The draft Loan Agreement between the Bank and Yacimientos PetroliferosFiscales, the draft Guarantee Agreement between The Argentine Republic and

the Bank, and the Report of the Committee provided for in Article III,Section 4(iii) of the Articles of Agreement are being distributed to theExecutive Directors separately. Special conditions of the proposed loan arelisted in Section II of Annex III.

58. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATION

59. I recommend that the Executive Directors approve the proposedloan.

Robert S. McNamaraPresident

Attachments

June 4, 1980

ANNEX I- 22- Page 1 of 5

ARClNINA - SOCIAL INDtCATORS DATA SKEET

ARGENTINA REFERNCE GROUPS (ADJUSTED AjjRAGESLAND AREA (TRtOUSANDsQ. m.) ~- MOST RECENT ESTIMATE) -

TOTAL 2766.9 SAME SAME NEXT HIGHERACRICULTURAL 1786.0 MOST RECENT GEOGRCWHIC ENCOME INCOME

1960 /b 1970 /b ESTIMATE lb RZGION /c GROUP /d GROUP /.

CNP PER CAPITA (USS) 600.0 1050.0 1910.0 1124.4 1942.6 3075.3

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALDIT) 1129.0 1703.0 1804.0 943.1 1646.7 2518.6

POPULATION AND VITAL STATISTICSPOPULATION, HID-TEAR (MILLIONS) 20.6 23.7 26.0URBAN POPULATION (PERCENT OP TOTAL) 73.6 78.4 80.5 59.3 51.2 72.1

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILLIONS) 33.0STATIONARY POPULATION (MILLIONS) 41.0TAR STATIONARY POPULATION IS REACHED 2065

POPULATION DENSITYPER SQ. KM. 7.4 9.0 9.1 23.5 28.2 33.5PER SQ. KM. AGRICU'LTuRAL LAND 12.0 13.0 15.0 50.5 100.5 91.3

POPULATION AGE STRUCTURE (PERCENT)0-14 TRS. 30.7 29.3 29.0 40.9 35.4 33.3

15-64 TRS. 63.7 63.7 63.0 54.4 56.3 57.565 YRS. AND ABOVE 5.6 7.0 8.0 3.9 5.1 5.7

POPULATION GROWTH RATE (PERCENT)TMTAL 1.8 1.4 1.3 2.4 1.7 2.1URBAN 2.6 2.0 1.9 3.7 3.0

CRUDE BIRTH RATE (PER THOUSAND) 24.0 22.5 21.0 32.8 27.5 31.4CRUDE DEATH RATE (PER THOUSAND) 9.0 8.6 8.0 8.5 9.1 8.2CROSS REPRODUCTION RATE 1.5 1.5 1.4 2.4 1.8 1.9FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS) .. .. ..USERS (PERCENT OF MARRIED WOesEN) .. .. .. 17.7

FOOD AND NUTRITIONINDEX OF FOOD PRODUCTION

PER CAPITA (1969-71-100) 86.2 101.0 109.7 99.4 102.0 98.7

PER CAPrTA SUPPLY OFCALORIES (PERCENT OF

REQUIREOUNTS) 115.0 129.0 129.0 107.0 120.8 112.7PROTEINS (GRAMS PER DAY) 98.0 99.0 107.1 60.4 80.9 70.3

OF WHICH ANIMAL AND PULSE 54.0 64.0 68.5 28.3 31.3

CHILD (AGES 1-4) MORTALITY RATE 6.0 4.0 3.0 6.7 5.1 2.5

HEALTHLIFE EXPECTANCY AT BIRTH (TARS) 65.0 67.4 71.0 63.6 65.6 68.7INFANT MORTALITY RATE (PERTHOUSAND) * 59.0 *- 76.1 45.5 20.8

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOTAL .. 56.0 66.0 63.4 69.4 73.9URBAN .. 69.0 76.0 79.5 85.1 94.6RURAL .. 12.0 26.0 38.6 43.0 64.6

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

MOTAL .. 85.0 97.0 58.8 70.1 ..URBAN .. 87.0 100.0 77.8 88.3RURAL .. 79.0 83.0 24.5 33.2

POPULATION PER PHYSICIAN 660.0 500.0 530.0 1841.9 1343.2 981.8POPULATION PER NURSING PERSON .. 980.0 .. 933.7 765.0 397.8POPULATION PER HOSPITAL BED

TOTAL 160.0 170.0 .. 563.4 197.6 240.6URBAN .. 140.0 .. 279.4 260.2RURAL .. .. .. 1140.9 1055.0

ADMISSIONS PER NOSPITAL BED .. .. .. 25.7 17.3 19.2

HOUS INCAVERAGE SIZE OF HOUSEHOLD

TOTAL 3.7 3.8 .. 5.0 4.7URBAN 3.5 .4 .. 4.8 4.4RWRAL 4.3 .. .. 5.3 5.1

AVERAGE NUFIBER OF PERSONS PER BOOMTOTAL 1.4 1.4 .. 1.3 L.1URBAN 1.3 1.4 .. 1.3 1.2RURAL 1.7 .. .. 1.5 1.2

A,CCESS TO ELECTRICITY (PERCENTOF DWELLINCS)

TOTAL 69.0 76.0 79.0/f 54.3 66.08RBAN S4.7 . .. 80.1 85.1.RURAL 19.3 .. .. 14.2

ANNEX I- 23- Page 2 of 5

ARG&NTINA - SOCIL INDICATORS DATA SHEET

ARCENTINA iLEuRNCE GROUPS (ADJUSTED AjGES- MOST RECENT ESTL'SAT) -

SI;E SAME NEXT HIGHERMOST RECE!n ZOCRAPUC 7NCOtm INCOME

196 /b 1970 /b ESTIMATE /b REGION Ic CROUP /d GROUP /e

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 96.0 106.0 108.0 107.3 101.7 107.6aALS 98.0 105.0 106.0 109.1 110.0FEMALE 99.0 107.0 108.0 107.4 92.8

SECONDAAT: TOTAL 32.0 37.0 56.0 60.5 51.2 39.7MALE 31.0 35.0 52.0 40.4 56.4PuA 33.0 40.0 60.0 39.0 43.7

VOCATIONAL ENROL. (I Of StCONDA1Y) 50.0 59.0 63.0 18.5 18.3

PUPIL-TEACMR IRATIOPRIuARY 22.0 19.0 18.0 37.1 27.1SECONDARY 7.0 7.0 8.0 17.9 75.3

ADllT LITERACY RATE (PERCENT) 91.0 93.0 93.0 77.4 96.1

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPULATION 24.0 61.0 81.0 29.1 53.4 6S.1RADIO RECEIVERS PER TIHOUSAND

POPULATION 176.0 370.0 838.0 172.1 225.9 210.3TV RECEIVERS PER THOUSAND

POPULATION 21.0 144.0 180.0 67.9 102.6 117.7NEWSPAPER ("DAtLY GCERALITREST") ClRCULATION PERTHOUSAND POPULATION 155.0 179.0 147.0 76.1 78.5CINEMA ANNUAL ATTENDANCS PER CAPIA 7.0 2.0 3.2 4.2 3.6

LABOR FORCLTOTAL LABOR FORCE (THOUSANDS) 8134.0 9216.0 10020.0

FEtALE (PERCENT) 21.4 24.7 25.6 21.5 24.5 27.2ACRICULTURE (PERCENT) 20.0 15.0 14.0 30.2 28.9 23.8INDUSTRY (PERCENT) 35.9 32.1 29.0 23.8 30.6

PARTICIPATION RATE (PERCENT)TOTAL 39.5 38.8 38.6 30.9 33.8 40.1MALE 61.0 58.1 57.3 47.3 51.3 55.7FEMALE 17.2 19.3 19.8 13.3 16.3 24.7

ECONtOMIC DOPENDENCY RATIO 0.9 0.9 1.0 1.5 1.3 1.0

INCOME DISTRIBUTtONPERCEiT oF PRlVATE INCco1RECEIVED BY

HITGEST 5 PERCENT Of HOUSEHOLDS 27.5 .. .. 23.7HIGHEST 20 PERCENT OF HOUSEROLDS 50.9 50.3 .. 5s.7 57.6LOWEST 20 PERCENT OP HOUSEHOLDS 6.9 4.4 .. 2.9 3.4.LOWEST 40 PERCENT Of HOUSEHOLDS 16.6 14.1 .. 9.9 11.0

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPrTA)

URBAN .. .. .. 265.6RURAL .. .. .. 185.1

ESTM^ATED RELATIVE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAmN .. .. 653.0 396.3 550.0RURAL .. .. 577.0 308.1 '03.4

ESTIMATED POPULATION 5ELOUW SOLUTEPOVERTY INCOME LEVEL (PERCT)

MRBAN .. .. .. 35.2RURAL .. .. .. 46.6

.ot availableNot applicable.

NOTEs

/a The adjusted group averages for each indicator are population-weighted geometric means, excXuding the extremevalues of the Indicator and the aost populated councry in each gsoup. Coverage of countries among theindicators depends on availability of data and is not unifom.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most lecent Estimate, betwen 1974 and 1977.

/c Latin America S Caribbean; /d Upper Middle Income ($1136-2500 ;er capita, 1976); fe 'tigh Income(over S2500 par capita, 1976); /f percent of population.

host Recanc Esctiate of GNP par capita is for L978.

August. 1979

- 24 - ANNEX IDIFzNnTO w SCOTAL nWlmICAORS Page 3 of 5

Notas: Alth.ugh the data are d-a fro aouea generally Judged the meat _nthoritati_ and reliable, it should, alo be noted that they aY not ha intern-timll.y cosoerable fleeas. of the lack of' standardized defiaitiens and ocunoPt.used hy different coun tries in collecting the dat.. The data are, nocethelee,useful to describe ordes- of meagitude, indicate treade, wAn charecteriae certain Majo) differences between countries.

The. ie srEs fo- seekh indicator are popsl,ation-ieghted geometric means, enoinding the cots-se o-lues of the indicator end the wet populatedconryi tehgop ieto lack of date., grop avrages of all indicators for Capital Surplus Oil Pyportera sod of indicator of Access to Water end t-crta

Piepsea, Osoeeg, Inome Piarihutio end crertyfor other country groups ar population.-ieghted geastric means without encios- of the ectrome vausadtie meet populated coutry.Sicthcosaef countries agthe indicatore decendes on ailahilty o.,f dat,aced is cot unidorm,.vautloc m-st t. exerisedin Ietlat-uvrgs ofee indicaitor to soothe.-Toenesae aretins,t.. osfc me norcevcs f"oetdrelis h -coparto the valis of 0ncindicetorataim swag th ountry end referece cs-cuca.

LAIM AREA (thousaand aqgke.) Aeces_to.Tceafipsl(ereto suais totl.uran ad rra -Total - Total surface areaecomprising land ares and inlan waters. heof people toa,chn,ndralsevdyeeeadiposal as

& ltt Wal- Hot recent etsate, of agricutural area used teiporarily pereesteges of their repective popsulationa. icereta diepesa, eey i.eludsorpsaetyfor crpe, pasetures, market sad kitchen gardens or te the colletion sad disposal, with or sithout treatmet, o f huma -reta

l1ie tahce,. and eets-sterhrbete-sen ystems or the ass of pit pr-ivies and eIlar

- N mpecpthdaestiae atl Bm rrnt marke prcs, 7Pulation -r PgAoiin - bPolat ion divided by numher of practicing phyaicianecal6olsi970 by ass. covrion mehda oldRn ta (93f ais; j7f6 fr.iimeiiMa1 school at university levsi.1960, i970, end i977 data. - ~~~~psuajaulo nor kis-sla parson - Ppoplation divdide hy aster of practicing sale

]am eim 9 Fn CPITA- dAmsel ... nsupi-n ofomercial senergy And reale grasmata nurses, practical acrs-se, and assistant curse..to."lsAmigate,trolae , ntua gas d bydra-, unclear ass gee- bsuato gsttlRd oal rhnad ral-Populatioa (total, urban,

thsemal elettloity)LA kilogrm of Seal equivlent per capita; 1960, and rura ) diide ytherrsetv'ae fhsia aalbeii970, sad 1976 sdt.. Pubic end private general end spaialised hostpital and rehahiiitation renters.

Hospitals are estbhlibsnts permanently staffed by at least ose pkysiei-nPPUUI AnD VALSTATlITIC S stahlieadmats providing Principally ouatodial care are not included. Rural

TatalPsnmletldIdKYear (imahon) - As of July 1; i960, 1970, and hospitals, howevr, Lluclde health and Medical Center-s nOt permanently staffed1977 dte. by a physician (hbut by .a mdical assistant, ours., midwife, etc.) tich offerUrba Poulation (pecet of total) - Ratio of urban to total population; ia-patient accommodation sad provide a limited rasge, of maGical failities.

difeet defiiton of os-ha areas may affect comprability of date. AS4siRjprjopl2" Ttanutber of admissions to or discharges frosa onre;1960, 1970, and 1973 data. te1tirIliC IEntr of bd"s.

- ,- Curret Population projection ar based cm wxUs3MA97Vstatl Ppujlation by age and see and their mertelity and fertility Aes Risel oI11f&Woseehod (os-sosprhushl)-tta.we.ed rural -rates. Prejoctiss paraenters for mortality rates comrise of thee. A househol cossso ru niiul b hr iigquarters andeslo.sassesSing life espeoteney At birth Smeesin with cowtry a their main meaLs. A hoarder or lodger may or sq not be included in thePee caPita income level, end fainL life enpeetamoy ts IItelse at hcouseold for statistical Purposes.

773years. The p%eraters for fertility cats aleso have three lsa,ls Avers mashe of_persons pr roo -total whnadrua - Average masarasaKift declime in fertility accordIng to anvm,s level and pest of person pr os in ubn n ua sIed cnvetional dellings,fealty pleading perfrormae. task country Is then asaigned -on of these respectively, Desilioge eoide css-peessnent structures and unoccupied parts.sine tutimations of mertality end fertility trends for projection Aola toScr piy(oret of delns oa.we.ndrrl-Cnpuross..ctoa dealing wtelcrity I Liigqarter as perceotegs of

9fllpAtiM u,gioa - -S ttionery population ther Is no growth total, orban, and rural dwelLings respectively.rtisequal to thLe death rate, and also, the age

structure remains constant. ThLis is achieved cay after fertility rates EIsr-ATIONdecline to the replacment Leve of unit ne reproduction rate, when -MwdE-lmtPatioseach generation of seme replsca itself exactly. The stationery poPe- E1=l§ :2EStll

7totE l anI eae- Gross total, male and female enroll-

lation size was satiated so the heels of the projected okaracterietios seto alae a h pIay Lel as percentages of respective primaryof the population in the year 2000, and the rate of decline of fertility choni-age populations.; normally inclodes children aged6A-Li Years hutrate to repLacmet level. adj1usted for differet lengths of primary edocatico; for countries sith

Tear statiosary Population i reached - The pear she stationary population osirersal educatioc enrollment say exeed 150 percent eioce some pepticssios hue been reachd. are he1 or shove the official school age.

P.-Iti ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~eonD Scday school - total, aeadfml - Compted as ahov; seonedaryFeifi M IoffiA-year population per squer kilometer (LOS hateres) of dedction require at LatV Co years oapproved primar instructiot;tot araproides genera - uatonlor teacher training instructioa. for Pupils -

Pa ks.h. Acricultu-rL lend - Computed as shove for agricultural Land usuLly of 12 to 17 year of age; cer-epondeoe orss r generally

EquUation As. Structure (Percent) - Children (0-Lb years), origaeVoceticone enrollment (percet of secondary) - Vocationa Ilointitutions -Inclde(13.61 years)J, and retired (h5 years end over) as percentages of aid-year techoical, industrial, or other programs skidc operate independently or us

population; 1960, 1970, and 1977 data, departments of secondary institutions.Peoulation Growth Rats (pecnt total - Anmasl. eroth rates of total mid. Ne1il-echrrtio-piar.aAeaodr Total etodats em.eolld to

yeer popo&lat.o. for 1950-60, 19h0-70, and 1970-77. prmrnn eodr eesdvddb usere of teachersa to tieocrePfoplation GrwhPte (ercet) hen - Annual reeth, rates of urban speeding levels.

populaions or 199-60, 9h0-70 and1970-75. A litlterw rate coer s L iter-ate adults (able to rend end o-its) asCr,d t, r thousand) Annual Live births per thousand of mid- aperetg ott aut population aged iS years and over.

sall17" d 1977 data.cfpj~aj,pr5ong)- Amosa deathe par thousand of mid-year CONSUPTNyf S

at on; , 1 and 977 data. Sasseage- Car 4pe tho-snd copulaion) - Passenger care comprise ector carsGross Pesrodatios Pate, Averag number of deoghtera a oe ill hear saIng less thsneih pesos;seLue smiulance., eresad military

to her normal reproductive period if she coperisnees pre....t age-veiLsspeci fic fartIlity rates; -u-n-lly five-year avrages ending In 1phi, Rdl Reeivers (herthusad cowalatios) - All typos of r-civera for radio

190,ad 1975. bracat to eAr Mcohi per thousand of population; excludes oslicenee,Fuily lausind - WEthousads),- Annual comber of recivere in coutrice and io years hea -egiotration of radio cot en to

ace tore of brth -ctr deis Pne u ics of catio..al family effect; data for-recet yearsmay cot he coparble since mast cosotriesplnigpro-am. abolished licensing.

d:mluPLanin - ser plorcetofmr-id smn)-Prcentag of mass-ied TV Peeovor (pe thousanNjedpounio -v T rcivers for, h sdast togeraan ofchildhearig age~l5-b yea .) b use birth-cotruI devices puioprtosn ouaion; elde nicese TV rcivere isccuncr-ie

to all maried see ins sam age group. and In year she ragistratin of TV seats was teffect.

FOOP AND IURTO eepprCruato e husn ossicf -Shw th avrg icltioof all geera toerst eweapo , efiedas a per.iodcal puklilationine Nr- oo srostc e a t L677-O)-Od fprcpita dewted primarily to recording geceral ses It is conidered to he 'dailyanaprdcIonoFodordte rodustc Iecciude". eed and If It appears at least fou times n wek.

fedadis on calendar Yearbai - aditles cover primary goods fineAna tednsprfot e- er-he ntectro ikt(.g. sueran intead of sugar) ohich ar esdihle and ccntain nutrients acddrn h ec ncuigamsin odrv-ooa. n hl(ag . cffee end tea -r excluded). Aggregte peedusotion of each country units..tdi-i iam-d bl.isbased on national avrage producer-piewghs

Parceit sosy f alries (percent ofIl rqirentt) - Coated from LUmip PORCaeer eqIvle t o e fo upie -ilable in country per capita Tota micer Forc thousand) - tEc.ooical-ly active per-sons, including armdaper day. A-ailabla supplies comprise domestic production, imports Thea df-. and onspIoycd but ... iuding housewive, students, etc. Defioliti...asports, and baengse n istock. Net supplies aeclude animal feed, .. seed, in vaious countries are cot comarble -quantities used in food processing, and lcose.s in distribution. Peqire- F.-I. Percent) - Female labor forc as percentage of total labor- forcemos we-c estimated by PAO based ca phrsiologiosl ... eds for so-sa 1id.ltril "et ) - Labor fo-c to farming, forestry, hunting andactivity nod heal th Ioonn-Idoring cc,-oa cqrsace oy vehs fshn so Percentage of total 150cr force age, and sea distributions of population, and slowing 10 paerent for - j9f ro)-lbor- force tomning -ontructlco, asnufooturing and.asu. at household Leve. e ec_trici ctatr- end gas as percentage of tota1lLabor for-c.

per cacita supolr of orttei. (gram par day) - Protein cotent of per Patciaio-at eret) - total ae t eae-participation or-capita net Supply offndpr day. Ret npply of food is defined as ativity rates are coeputed as total ae o eaeLbrfrea e-shove Rqqiremosta o. 1 cotsl e etablished hy USDA peceid fora ceotages of total1, Male end female population of all ages reapectivly;aczlaae alloanc of do go-as of total protein per day and 20 grx of 1960, 1970, end 19735 data. These are 11,0e partiipatins rates refLectinganimal sand pulse protcin, of ohioh 10 grama should is semI protain. age-_ struture of tie P.pulato, enO long time, cr-sd. A few estimatesThe.sstatndards are l-osr thantoeo- 5gm ttoalpotinad r fro notional sucs53 gre of animal ptoisia an are-age for the es-ild, proPosed by lAO k-slnndnyPtio -RPatio of population under i and 65 and veer toIo the hr cr1t-Id od Surey, th lbo frc age group of 15-64 years -

Pe-cpt rtin oupi frM ianIa end P.ls - Protein cipply of foodderived fue toimalo sdpue Icases t- did. ioCM DIffPIYIOR

Child age 1.) tc.l Iate rtboond Annual ieaths tsr ticucend Preoaofria" teoom btoxvtianknd Oucedyrchsin go roce1- yore c clt-c Lo thic see crcpg o 0 Ot1 pa;r-sot,rich-est 20 era pors OPercont, and poo-ct -.0 Fc-cern

opiog -tnntv iota derived fro life tablee. of housoholde.

l'fe Especcancy atAi-byas-iveA_pv -mtr of fear. -f life Loonr houe vivery Coool-vl10 ce apv.- cbo o urlremaicing at binth; idb, d90 to 977. inca AbscItc poverty tca o Ictotl _melvl vi:fs eIiot a -toal

Cc!ant dur-tauty Omit. per Cho-snod) - Ancual deaths of intents under ot outritiooaily adequat di et lca -oeta o-food -equir-eoto soYear of age per- thcuxand live hirth.. uffor-dable.

Pusher of pecpe total, to-ba and roso-al) tt emaabln000 toa 0-lRelative povrty in -ce, level Ic oaver-t itdouces-oeeopioaf, veter supply cooe trae -ufao. eaters or inrne tper.-eoa income of the o-ot-,. Jrcan lo--l Ic c-io-o fr-o the ccl level

-tcimiae etr ouh as tint from protected borhtolen spring., eittih jsietfor- tigher coo t ofli viog -o orhan areasand usiti-7 echo) as P-eetagee of their ... spoetiv- p-olotio-. Et istimtd Po,o,cioSc Abso'lot e-yCme leve jereri ,b-e coo

an uban r-esa pblicfuti oraooot located sot anr than 25 ua e-en fpplto icbntdtua)cl r hs uePoo-.meters from a louse cay be ocasideved as being within reasnonble ccsof that house, In rurl area. reasonable acoisi would imly that thehousecife or meter, of the household is cso leav to epeed a diepe-opor- -oomcsd Social Data Dinoios.ticai pert of tie day in fetching she SW_ly s ottr sleds..Eo i Analysts and Proinoti... Dparcte-t

-25 - ANE I

Page 4 of 5

E C O N O M I C D 1 V E L O P M e N T D A T A

NATIONAL ACCOUNTS Actual Projected_______________ ~~~~~~ ~~~~~~~~~~~~~~1970- 1979-

1976 1977 1979 a" 1980 19S5 1976 1985 1976 1979 1985Annual Growth

Millions of US$ at 1978 Prices and Exchange Rate Rates As Percent of GDY

Gross Domestic Product 53,484 56,240 59,886 60,906 77,004 3.3 4.8 100.7 99.2 98.6Gains from Terms of Trade t+) -385 -293 428 938 1 065 3.3 - -.7' .8 1.4Gross Domestic Income 53,-099 55,947 60,314 61,844 78,069 4.8 100.0 100.0 100.0

Import Goods and NFS 3,837 4,456 7,243 8,999 11,993 13.1 10.9 7.2 12.0 15.4Export Goods and NFS -4.996 -6.841 -7,899 -8,633 10697 9.7 5.9 -9.4 -13.1 -13.7-Resource Gap -1,159 -2,385 -656 366 1,296 - -2.2 -1.1 1.7

Consumption Expenditures 41,157 41,847 45,812 48,186 61,594 3.3 5.7 77.7 76.0 78.9Investment Expenditures 10,685 11,720 13,846 14,023 17,770 5.0 4.7 20.2 23.0 22.8

Domestic Savings 11,844 14,022 14,502 13,658 16,474 4.5 2.3 22.3 24.0 21.1National Savings 11,440 13,535 13,578 12,413 14.664 3.6 1.3 21.4 22.5 18.8

MERCHANDISE TRADE Annual Date at Current US$ As Percent of Total

importsCapital Goods 500 874 2,247 3,502 7,196 - - 18 34.3 38.9

Intermediate Goods 1,870 2,402 3,418 4,292 9,159 - - 61.3 52.1 49.5Petroleum & Products 560 584 496 572 549 - - 18.4 7.6 3.0

Consumption Goods 70 98 398 853 1592 - - 2.3 6.0 8.6Total Merch. Imports (c.i.f.) 3,050 3,958 6,559 9,219 18,496 - - 100.0 100.0 100.0

ExportsPrimary products 2,807 3,842 6,778 8,178 14,868 - - 74.6 86.8 87.6Manufactured goods 956 1,495 1, 027 1.158 2 - - 25.4 13.2 12.4

Total Merch.Exports (f.o.b.) 3,763 5,337 7,805 9,336 16,964 - - 100.0 100.0 100.0

Merchandise Trade Indices Average 1978 = 100Zxport Price Index 83 91 127 147 212Import Price Index 83 97 118 128 187Terms of Trade Index 95 99 109 115 113

VALUE-ADDED BY SECTOR Annual Data at 1978 Prices and Exchange Rate

Agriculture 6,365 6,749 7,235 7,452 9,512 3.0 5.3 11.9 12.1 12.4Industry and Mining 20,805 23,621 27,677 28,230 3f,363 6.9 5.2 38.9 46.2 47.2Services and others 26.314 25,870 24.974 25,224 31.129 .5 4.1 49.2 41.7 40 4Total 53,484 56,240 59,886 60,906 7;,004 3.4 4,8 100.0 100.0 100.0

PUBLIC FINANCE Annual Data at Current Prices As Percent of GDP(Central Government) ; billions of $a

Current Receipts ,984 3,040 18,319 - 12.3 13,1Current Expenditures 903 2,183 15,089 - 11.3 10.8Budgetary Savings 81 857 3,230 1.0 2.3Transfers (net) -483 -724 -1,641 - 6.1 1,1Investment 343 920 3,840 - 4.3 2.7

SELECTED INDICATORS 1965- 1970- 1975- 1980-(Calculated from 3-yr. av. data) 1970 1975 1980 1985Average ICOR 4.4 6.9 6.8 3.7Import Elasticity 1.1 0.9 1.4 1.3Marginal Domest.Savings Rate-(%) 26.7 10.6 43.7 24.5Marginal Nat'l Savings Rate (%) 23.2 16.2 44.5 24.9

LABOR FORCE AND OUTPUT PER LABOR FORCE VALUE-ADDED PER WORKER IN 1975 PRICESWORKER AND EXCHANGE RATE

In millions In % of Total Annual Growth Net In US$ Percent of Av. Growth1970 1975 1970 1975 1970/7-5 1970 1975 1970 1975 1970/75

Agriculture 1,474 1,420 16 14 - 0.7 3,357 3,575 81 79 1.2Industry 2,948 2,941 32 29 0.0 5,407 6,842 131 150 4.5Services 4.790 5,779 52 57 3.8 4 140 3,618 100 80 -2.4TOTAL 9,213 10,140 100 100 1.0 4 133 4,551 T55 TO --

MONEY AND PRICES 1976 1977 1978(billions of $a

Money Supply (Ml) 330.6 1,259.9 3,080.0 7,742.9M1+ time deposits (M2) 409.7 1,838.4 6,254.2 17,169.3Ml as % of GDP 23.3 15.8 14.5 14.8M2 as % of GDP 28.9 23.0 29.4 32.8CPI Index (1974=100) 270.6 1,472.2 4,063.7 11,873.8a change CPI index 619.6 444 176 192

a/ The 1977-1979 changes reflect to a large extent the real appreciation of the exchange rate during 1978/79,

- 26- ANNEX I

Page 5 of 5BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT

(amounts in millions of U.S. dollars at current prices)

Actual Estimated Projected

SUMMARY BALANCE OF PAYMENTS 1972 1973 1974 1975 1976 1977 1978 1979 1980 1985

Exports (incl. NFS) 2,389 3,799 4,761 3,669 4,668 6,769 7,689 9,279 10,997 19,803Imports (incl. NFS) -2,222 -2,633 -4,218 -4,517 -3,584 -4,892 -4,901 -8.428 -11,325 -21,722

lesource Balance 167 1,166 1,543 -848 1,084 1,877 2,788 851 -328 -1,919

Net Interest Payments -323 -382 -388 -425 -464 -370 -387 -526 -213 -952Direct Investment Income -60 -77 -35 -16 -28 -208 -292 -30 -160 -365Other Factor Service Income -3 4 7 1 2 -40 -136 -55 -60 -85

5et Factor Service Income -386 -455 -416 -44D -490 -618 -815 -611 -433 -1,402urrent Transfers (net) -4 10 - 5 18 31 48 50 50 68

Balance on Current Account -223 721 127 -1.283 611 1.290 2,021 290 -712 -3,253

Private Direct Investment 10 10 10 - - 146 290 350 500 805Official Capital Grants 10 26 17 98 - - - - -

Public M&LT Leans (net) 205 364 228 -6B 1,319 356 1,350 207 241 20ODisbursements 522 832 776 44B 1,908 1,064 2,910 340 415 610Amortizaticn -317 -468 -548 -516 -590 -708 -1,560 -133 -174 -350

Other M&LT Loans (net) 51 -29 28 -3 -159 519 309 951 318 1,393Disbursements 101 71 244 405 268 1,059 1,328 2,489 2,071 3,529Amortizatimn -50 -100 -216 -408 -427 -540 -1,019 -1,538 -1,753 -2,136

Short-term Capital andTransactions n.e.i. 82 -444 -339 275 -1,814 31 -1,558 2,499 - -

Change in Reservest- - increase) -195 -865 44 854 -1.157 -2.227 -1,998 -4,297 -346 795

Level of Gross Reserves 465 1,330 1,286 432 1,589 3,816 5,814 10,111 10,457 9,800

GRANT AND LOAN COMMITMENTSOffitial Grants & Grant-Like - - - - - - - - -

Public M6LT LoansIBRD - - - - 115 205 165Other Multilateral 92 57 1 177 165 148 230Bilateral 82 42 519 42 146 117 74Suppliers 118 116 535 307 196 363 339Financial Institutions 390 156 488 126 970 754 1,445Bonds 120 65 290 200 207 93 146Total Public MQT Loans 802 436 1,833 852 1.803 1.680 2,399

DEBT AND DEBT SERVICEPublic Debt Outstanding &Disbursed 2,368 2,792 3,046 2,901 4,251 4,836 6,791

Interest on Public Debt 156 199 233 250 258 308 37Repayments on Public Debt 317 468 548 516 589 708 1,560Total Public Debt Service 473 667 781 766 847 1,016 1,597Other Debt Service 174 244 408 626 659 602 1,369Total Debt Service 647 911 1,189 1,392 1,506 1,618 2,966

BURDEW ON EXPORT EAR8TNC: (7.)

Public Debt Service 19.8 17.6 16.4 20.9 18.1 15.0 20.8

Total Debt Service 27.1 24.0 25.0 37.9 32.3 24.0 38.6TDS + Dir. Inv. Income 29.6 26.0 25.7 38.4 32.9 27.0 42.4

AVERAGE TERMS OF PUBLIC DEBT

Int. as % P-ior Year D0&D 8.3 8.4 8.3 8.2 2.9 11.6 11.8Amort. as % Prior Year DO&D 16.9 19.8 19.6 16.9 20.3 36.7 19.7

IBRD Debt Outat. & Disbursed 256 302 340 341 342 342 352IBRD as I of Public Debt 0&D 10.8 10.8 11.2 11.8 8.0 7.1 5.7IBRD Debt Service as % of

Public Debt Service 5.1 4.6 4.5 5.6 5.1 2.2 3.2

EXTERNAL DEBT (Disbursed Only) Actual Debt Outstanding on Dec. 31. 1978Disbursed Only Percent

IBRD 352 5.2Other Multilateral 552 8.1Bilateral 728 10.7Suppliers 1,575 23.2Financial Institutions 2,618 38.5Bonds 966 14.3

Total Public MELT Debt 6,791 100.0

- 27 -

ANNEX IIPage 1 of 4

THE STATUS OF BANK GROUP OPERATIONS IN ARGENTINA

A. STATEMENT OF BANK .OANS(As of April 30, 1950)

Amount less Undis-

Loan No. Year Borrower Purposa Cancellations bursed(US$ million)

Fully disbursed loans 409.8

505 1968 Argentina Livestock 15.3 0.8

733 1971 Ferrocarriles Railways 56.5 0.8

Argentinos S.A.1330 1977 SEGBA, S.A. Power 115.0 77.41384 1977 Argentina Highways 105.0 98.21463 1978 Banco Nacional Industrial

de Desarrollo Credit 100.0 76.4

1521 1978 Argentina Grain Storage 105.0 104.4

1564 1978 Argentina 1/ AgriculturalCredit 60.0 60.0

1677 1979 Ferrocarriles 2/ RailwaysArgentinos S.A. 96.0 96.0

1761 1979 Argentina 3/ Yacyreta Power 210.0 210.0

Total 1,272.6 724.0Of which has been repaid 172.2

1,100.4Amount sold 12.8Of which has been repaid 7.7 5.1Total now held by Bank 1,095.3

Total undisbursed 724.0

1/ Cancelled in full as of April 14, 1980 at Government's request.2/ Effective as of May 6, 1980.3/ Not yet effective.

- 28 -

ANNEX IIPage 2 of 4

B. STATEMENT OF IFC INVESTMENTS(As of April 30, 1980)

Fiscal Amount in US$ millionYear Obligor Type of Business Loans Equity Total

(US$ million)

1960 Acindar Industria Steel Products 3.7 - 3.7Argentina de Aceros, S.A.

1960 Papelera Rio Parana, S.A. Pulp and Paper 3.0 - 3.01961 Fabrica Argentina de Automotive 1.5 - 1.5

Engranajes, S.A.I.C. Transmission1962 PASA, Petroquimica Petrochemicals 3.0 - 3.0

Argentina, S.A.I.C.1965/1972 Celulosa Argentina, S.A. Pulp and Paper 12.5 - 12.5

1969/1975 Dalmine Siderca, S.A. Steel Products 17.0 - 17.01969 Editorial Codex, S.A. Printing and 5.0 2.0 7.0

Publishing1971/1973 Calera Avellaneda, S.A. Cement 5.5 - 5.51977 Alpargatas S.A.I.C. Textiles & Fibers 7.0 - 7.01977 Soyex S.A. Soybean Processing 9.0 - 9.0

Plant1978 Massuh, S.A. Pulp and paper 8.0 - 8.01978 Juan Minetti, S.A. Cement and

Constructionmaterials 9.0 - 9.0

1978 Ipako-Industrias Chemicals andPetroquimicas PetrochemicalsArgentinas S.A. 10.0 - 10.0

1979 Alpesca S.A. Fisheries 5.2 0.5 5.7

Total Gross Commitments 99.4 2.5 101.9

Less Cancellations, TerminationsRepayments and Sales 44.8 2.0 46.8

Total Commitments Now Held by IFC 54.6 0.5 55.1

Total Undisbursed 21.3 - 21.3

- 29 -

ANNEX IIPage 3 of 4

C. PROJECTS IN EXECUTtON(As of April 30, 198')

Loan 505-AR Balcarce Livestock Project, US$15.3 million loan of July 31,1967; Effective Date: August 31, 1967; Closing Date:July 31, 1980.

Lending to ranchers was slow from loan effectiveness until 1970,then accelerated as cattle prices increased and technical services improved.From 1970 to 1973, project performance was satisEactory and a substantialamount of the loan was disbursed but slowed up again in 1974. After thechange in Government in 1976, conditions for beef cattle development inArgentina improved for some time but recently the agricultural investmentclimate has deteriorated as a result of the Government's foreign exchangepolicies. The Bank loan has been about 96% committed and is expected tobe fully disbursed by the Closing Date.

Loan 733-AR Railway Project, US$84.0 million loan of April 28, 1971;Effective Date: July 30, 1971; Closing Date: June 30,1979.

It became clear in 1973-1974 that the original Project could not beimplemented because of the socio-economic situation of the country. On July2, 1974, US$27.5 million was cancelled. The remaining US$56.5 million was tofinance procurement committed by the original Closing Date, April 30, 1974.After having come to a standstill in 1975, procurement has regained momentum.The last of 59 contracts for Bank-financed goods were signed in May 1976.About $0.8 million still undisbursed will be cancelled soon.

Loan 1330-AR Electric Transmission and Distribution Program, US$115.0million loan of November 1, 1976; Effective Date: January 10,1977; Closing Date: December 31, 1981.

Mainly because of budgetary constraints on the funding of local costrequirements during 1978 and 1979, the overall execution of the project hasbeen delayed by about 15 months. This delay, however, does not significantlyaffect the economic viability of the project. The project is proceedingaccording to a revised schedule prepared in December 1979.

Loan 1384-AR Fourth Highway Project; US$105.0 million loan of May 16, 1977;Effective Date: December 13, 1977; Closing Date: June 30, 1981.

The civil works component has been delayed by about two yearsbecause of the Government's efforts during 1978 and 1979 to reduce publicexpenditures. All 48 civil works contracts have been tendered, 47 havebeen awarded and work has started in most of them. Other project componentsare being implemented satisfactorily.

- 30 -

ANNEX II

Page 4 of 4

Loan 1463-AR Industrial Credit Project; US$100.0 million loan ofSeptember 23, 1977; Effective Date: November 28, 1977;Closing Date: December 31, 1982.

The credit component of the project is proceeding somewhat behindschedule because of a lag in overall industrial investment. Commitmentsincreased recently and so far about US$30.0 million have been committed.BANADE's financial condition remains sound and management has begun takingimportant steps for further strengthening of its organization and procedures.

Loan 1521-AR Grain Storage Project; US$105.0 million loan of June 29, 1978,Effective Date: November 28, 1978; Closing Date: June 30,1983.

Consultants for project execution were contracted in October 1978and preliminary designs for the project silos have been evaluated. In June1979, the Government requested that the responsibility for project siloconstruction and operation be transferred from the public sector (JNG) to theprivate sector and also that silo capacity be reduced from 100,000 tons toabout 50,000 tons in order to make silos more attractive to the privatesector. A new project proposal is being prepared by the Government, for Bankreview in July 1980; project implementation has been suspended in the meantime.Based on additional studies to be undertaken by the Government on effectivedemand for construction of the silos by the private sector, a decision wouldbe taken by December 1980 whether to implement the project as a private sectorcredit project, or as originally designed.

- 31 -

ANNEX III

ARGENTINA

Oil and Gas Engineering Proiect

Supplementary Pro-ject Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare project: 3 months

(b) Agencies which prepared project: Yacimnientos PetroliferosFiscales (YPF) andGas del Estado (GdE)

(c) First presentation to Bank: September 1979

(d) First Bank missionto prepare the project: September 1979

(e) Departure of appraisal mission: November 1979

(f) Completion of negotiations: May 1980

(g) Planned date of effectiveness: September 1980

Section II: Special IBRD Implementation Actions

None.

Section III: Special Conditions

(a) The Government will discuss with the Bank the results of the studyto optimize the use of natural gas (para. 40).

(b) YPF will employ consultants satisfactory to the Bank to assistit in carrying out the reserves audit (para. 52).

(c) YPF will extend the contract to cover the remaining 450 line-kilometers of seismic surveys under terms and conditionssatisfactory to the Bank (para. 52).

(d) The Government's Secretariat of Energy will employ consultantssatisfactory to the Bank to assist it in carrying out the studyto optimize the use of natural gas (para 52).

- 32 -

ANNEX IVPage 1

ARGENTINA

OIL AND GAS ENGINEERING PROJECT

Geological Evaluation of the Hydrocarbon Potentialof Some Sedimentary Basins

1. The basic objectives of the exploratory efforts in Argentina are:(a) to obtain self-sufficiency in oil production within the next five years,a goal that is only less than 10% away; (b) to improve the relationshipbetween proven oil reserves and yearly production, which at present stands at15 to 1; (c) to improve planning, particularly in gas utilization. Theseobjectives can be accomplished since the country has important oil and gas-producing areas in six major sedimentary basins and there are good prospectsfor further discoveries in these and in some of the lesser known basinslocated within the continental and offshore regions.

2. The following is a brief geological description of the most importantbasins and assessment of their potential:

3. Northwestern Basins - Three different geological basins overlayingeach other, are designated under this generic name. The oldest and largestof these basins is the Devonian, which has an irregular shape and startedforming as a geosyncline in early Silurian times, but it is the Devonianmarine sedimentary sequence, consisting of gray shales and quartz sandstones,which has some economic significance. It extends over most of Jujuy, Saltaand Santiago del Estero provinces and covers an area of about 160,000 km ,with a maximum sediment thickness of up to 6,500 m. The Carboniferous Basinshaped as a small triangle with its base at the northern border, and extend-ing south from Bolivia, covers an area of some 15,000 km2, mainly over Saltaand Jujuy provinces, with a sediment thickness of nearly 1,800 m, primarilyof continental rocks laid down during Mississipian and Pennsylvanian times.The Neocretaceous Basin, also in the shape of a triangle, covering mainlythe province of Tucuman but also those of Jujuy and Salta, extends over anarea of some 110,000 km2, and has a thickness of nearly 2,800 m of continen-tal, marine and litoral sediments deposited from Coniacian to Danian times.

4. Both the Carboniferous and Neocretaceous Basins are of the intracra-tonic type, but the latter behaves as a basinal platform with a transitionalcycle at the end. All three basins are covered by a non-marine Tertiarysequence, deposited from mid-Eocene to Quaternary times, with some minorinterruptions, that may reach up to 9,000 m in thickness in the intermountaindeeps.

- 33 -

ANNEX IVPage 2

5. The main structural characteristics oi these basins permit a twopart sub-division. On the west, there are long asymetric folds, slightlyoverturned towards the east, possibly cut by a tmique strike-slip fault, andaligned in a north-south direction. On the eastern portion the structuralcharacteristics correspond to a typical tensional platform area, with pre-dominantly homoclinal-type structures, although in the Neocretaceous Basinthere are some folds of diapiric type.

6. In all three basins, the trapping hydrocarbon mechanism is definite-ly structural and the reservoir rocks are predominantly finegrained, thin-bedded, orthoquarzite sandstones interstratified with claystones. Theporosity and permeability of the reservoir rocks; have been greatly improvedby fracturing due to the intense deformation caused by folding. This isespecially true in the case of the Devonian Basi.n, where the reservoir rocksof the Santa Rosa formation have shown to have t:hese characteristics welldeveloped.

7. Throughout the entire sedimentary sequience of the three basins,which is an oil-producing region, there are a good number of rock formationswith excellent source-characteristics, such as l:he grey to dark-grey bitumi-nous shales within the Devonian and Carbonic Bas;ins, and the grey, oolitic-limestones and dark-grey to black shales of the Neocretaceous Basin. It istherefore believed that there are further deeper prospects where oil, gas-condensate and gas can be found. This is especially so with regard to theDevonian, where the entire section consists of niarine rocks and the structuraldeformation permits the presence of several long, north-south oriented foldedbelts where hydro-carbons can be found.

8. Cuyo or Central Basin - This basin covrers an area of nearly 80,000km2, extending over most of the Mendoza area and has an elongated shape witha north-south axis. Tectonically, it is a typical taphrogenic basin, withsedimentation starting in Triassic times and continuing later during theTertiary-Quaternary. Sediment thicknesses vary for the Triassic and Tertiary-Quaternary rocks between 3,700 to 3,500 m, respectively. Several volcaniccycles, diastrophism and a long hiatus during Cretaceous times interruptedsedimentation.

9. From a structural point of view, this basin can be sub-dividedin three units. The western portion (where mosi: of the oil fields havebeen found to date) consists of a belt of Tertiary folded rocks with twonorth-south anticlinal alignments, very often faulted along their axis. Thecentral zone presents very few folds, oriented northwest to southeast, i.e.,slightly divergent with those of the western zone, and where only one oilfield has been discovered so far (Vizcacheras). The eastern area, where nofolds have been formed, consists mainly of fault-blocks, and has not yieldedany production.

- 34 -

ANNEX IVPage 3

10. The type of sedimentation that characterizes the Cuyo Basin hasdetermined a scarcity of reservoirs as well as source rocks. The onlyacceptable reservoirs are made up of quartoze sandstones, generally com-pact, tobaceous and shaly. The main source rock appears to be the blackshales of the Cacheuta formation. Based on the above, it can be said thatthe prospects for further discoveries in the Cuyo Basin are limited tosmall fields and probably to only heavy oil not yet ready for exploitation,such as in the Llancanelo reservoir.

11. Neuquen Basin - Extending over an area of about 140,000 km2 thatcovers almost entirely the Neuquen province, this basin started forming inTriassic times, with sedimentation occurring throughout most of the Mesozoic,until marine deposition ceased in the late Cretaceous to early Tertiary.Continental sediments were depositeed afterwards. During most of the Tertiaryand Quaternary a series of volcanic and magmatic events also took place. Thesedimentary sequence can be estimated at approximately 7,000 m, for the deep-est portions of the basin, and consists of several well-defined sedimentarycycles.

12. Tectonically, this basin was formed over a stable platform and hasthe characteristics of a miogeosynclinal basin. Structurally, the easternand southern portions correspond to the basinal platform where block-faultingpredominates, but a very important element is also present, i.e. a 300 kmlong basement high with an east-west bearing axis, which was active duringevery one of the diastrophic periods. Over this zone, there are positivestructures related to reactivated basement faults and draping of sedimentsover old relief. The western zone is structurally defined by a belt offolded upper Cretaceous to Tertiary rocks, that have formed north-southoriented anticlines and synclines, generally asymetric and sometimesoverturned.

13. Hydrocarbon entrapment in this basin is related basically to thosestructural elements described above, but a good many reservoirs are theresult of a combination of structural and sedimentation factors. The latterhave great importance in many reservoirs where the trapping mechanism is thecombined effect of thinning-out of sandstones and low-porosity and permeabil-ity barriers in dolomites, limestones or sandy limestones located over folds,homoclines, terraces, etc. The predominant reservoir rocks are sandstonesand conglomerates mainly in the lower part of the section, but in the middleand upper parts calcareous sands, sandy dolomitic limestones and true dolo-mites are present. There are also accumulations in cracks, fissures, frac-tures and diaclases of limestones and marls.

- 35 -

ANNEX IVPage 4

14. Possibly, the best source rocks in this basin are the black shales

of the Los Molles formation and the fossiliferous limestones of the Barda

Negra formation, both occurring at the base of the sedimentary section.

Based on the presence of good source rocks, some excellent identified reser-

voirs, abundant types of traps, and a variety of sedimentary cycles, as well

as the size and configuration of the basin (which has yielded already good

volumes of oil and gas production), it is estimated that it still has a very

important potential for further discoveries. Much more attention therefore

should be paid towards furthering exploration for both oil and gas.

15. San Jorge Basin - This basin has an onshore portion that extends

over the Chubut and Santa Cruz provinces and the offshore portion coincides

with the Gulf of San Jorge from where its name derives. It has an elongated

shape with the main axis on a north-south direction, but with a slight bulge

towards the east in the central part, where most of the oil fields have been

found. It occupies an area of about 134,000 km2, taking into consideration

only the area where Cretaceous continental sediments are present.

16. Tectonically, it is a typical intracratonic basin, since through

most of its sedimentary history only continertal sedimentation took place,

with two well-defined subsidence phases: one predominantly concentric, with

slow, constant sedimentation that generated the central basinal portion, and

the other one, that occurred later on, extencing basin limits in a north-

south direction and with a reactivation of previous relief. Basin subsidence

and the start of sedimentation occurred in Iate Jurassic times, but relief

reactivation, of the second phase, probably happened in early Cretaceous

times. Sedimentation continued during most (if the Cretaceous, with a brief

interruption during the Senonian, but a marine transgression in the early

Paleocene marked the limits of the basinal sedimentary area considered in

this analysis. Afterwards, Tertiary formations covered these sediments as

well as the elevated zones around them.

17. The total sedimentary thickness has; been estimated to be in excess

of 8,000 m, on the basis of high resolution seismic information, since no

wells have penetrated the entire sedimentary section. Structurally, it is

possible to define two zones in this basin. The eastern zone, where the

predominant features are reactivated tensional faults, generally parallel

to the basin borders, were responsible for basinal subsidence, and are

mainly down to the basin, although some antithetic faults also exist. The

western zone which is characterized by folding related to basement faults,

consists mainly of north-south elongated folds, some overturned towards the

west. Both zones are separated by symmetric folds. Most oil fields have

been found in the eastern zone, i.e., in the basin platform area. In the

western zone there are no major fields, probably due to lack of good

reservoir rocks and poor migration timing.

- 36 -

ANNEX IVPage 5

18 The trapping mechanism seems to be related to a combined structural-sedimentary effect, based on pinch-outs against the upthrown side of faults,but some purely sedimentary traps are also known. The reservoir rocks areprimarily tuffaceous-sandstones, derived from pre-existing volcanic rockswith a clay matrix of piroclastic origin. Source rocks are principally thosedeposited at the base of the sedimentary sequence, and consisting mainlyof dark-grey to black shales and thin oolitic limestones, with much organicmatter disseminated throughout, very rich in ostracods and pollen, and some-times with thicknesses in excess of 4,000 m. The poor quality of the reser-voir rocks downgrades the potential of this basin, and also the shallownessof the second sedimentary cycle; however, the impressive thickness of sourcerocks and the possibility of a further extension of the basin towards theopen ocean makes it a fair prospect for continued exploratory efforts.

19. Austral and Malvinas Basins - These are the least explored, but themost prospective. The Austral Basin extends over most of Patagonia, coveringprovinces of Santa Cruz and Tierra del Fuego, as well as the continental andisland portions of southern Chile. It also extends offshore until it reachesits eastern limit, a basement ridge that separates this basin from theMalvinas, which is an entirely offshore basin. The Austral Basin has an areaof 180,000 km2 and the Malvinas is about 150,000 km2 in size. The AustralBasin is triangular in shape, with the long side of the triangle against theAndes, marking its western border, with the base located on Tierra del Fuego,and the hypotenuse marking the eastern limit, located along the shoreline ofArgentina. The Austral Basin consists of two main sedimentary cycles, bothpredominantly marine: one is Cretaceous, and the other one Tertiary in age.In both cycles the platform zone overlays each other (miogeosynclinal zone),but the eugeosynclinal zone, located towards the west and southwest, differsin both cycles. These basins probably started forming in late Jurassic times,with deposition of the famous Spring Hill formation, which filled up localdepressions. Afterwards, a progressive subsidence and open sea transgressiontook place during most of the Cretaceous and Tertiary, interrupted briefly attimes, but continuing until the end of the Tertiary. The total sedimentarysequence is estimated to be close to 8,000 m in both basins.

20. Structurally, the most important features are related to the pre-existing relief, prior to the deposition of the Spring Hill formation, whichis the most important oil reservoir in the platform zone. Elsewhere,especially towards the west, other hydrocarbon deposits, mainly gas, arebeing discovered in sandstone bodies intercalated throughout the entiresedimentary sequence. In this area, the predominant structural type arefolds. Towards the south, and in the Malvinas Basin, the main structuralelement are large reverse faults associated with recumbent folds and alsoprobably large strike-slip faults oriented east-west.

- 37 -

ANNEX IVPage 6

21. The trapping mechanism in the platform zone, where most productionhas been found, appears to be the combined effect of pre-existing relief,where the Spring Hill formation was deposited, and some structural element,such as a fault or any change in bedding attitudes. The largest depositsusually have a well-defined structural elemeat and a considerable thicknessof reservoir rock. Elsewhere, in these basinis, the trapping mechanism hasnot as yet been well determined. The main producing rocks are those of theSpring Hill formation, consisting of quartzose sandstones with a kaoliniticmatrix. The most probable source rocks are ;rey to dark-grey, partiallymarly shales overlying the Spring Hill formation, together with some glau-conitic shales of the upper member of this formation. This whole sequencecontains a very abundant fauna of ammonites and foraminifera.

22. Prospects for further exploration in both the Austral and MalvinasBasins are still plentiful and it is here that most of the future effort tofind additional oil and gas reserves should be placed. However, the possi-bilities of finding more gas than oil should be taken into consideration.

- 38 -

ANNEX VPage 1

ARGENTINA

OIL AND GAS ENGINEERING PROJECT

THE BORROWER

Yacimientos Petroliferos Fiscales Sociedad del Estado (YPF)

1. Yacimientos Petroliferos Fiscales Sociedad del Estado (YPF), fullyGovernment owned, is the main entity in carrying out the Government's energypolicies. It is in charge of studying, exploring and exploiting the liquidand/or gaseous hydrocarbons as well as of manufacturing, transporting andmarketing of these products, except for the distribution and marketing ofnatural and liquefied gas which is undertaken by Gas del Estado StateCorporation. In 1979, YPF accounted for about 50% of exploration, about67% of crude oil, 85% of natural gas production and 73% of petroleum refining.In exploration and production, the remaining portion consists practically ofsubcontracts of YPF to the private sector, which, based on Government policy,has been increasing its role in recent years. The refining capacity in theprivate sector is mostly owned by Esso and Shell. With an equity base ofabout US$2.65 billion, gross sales of over US$4.5 billion and total personnelof 36,000 in 1979, YPF is one of the largest companies in Latin America.

Organization, Management and Personnel

2. YPF was established by decree in 1922 as Direccion General deYacimientos Petroliferos Fiscales as a kind of Government unit. In 1977, theNational Executive Power Committee transformed it to a State Company underthe name of Yacimientos Petroliferos Fiscales Sociedad del Estado. YPF nowoperates under the Law of State Corporations, and reports to the Secretariatof Energy. The main object of this transformation was to encourage YPF tooperate more efficiently in its increasing industrial and commercial activities.According to the Law of State Corporations, YPF cannot be declared bankruptand can only be dissolved through the national Executive Power Committee.At present, all of YPF shares belong to the Federal Government, which hasdeposited the shares with the Sindicatura General de Empresas Publicas.

3. The direction and management of YPF is exercised by a Board ofDirectors, consisting of one President, one Vice-President and seven RegularDirectors, who are appointed by the Government for a term of three yearswith the possibility of reelection without limitation. The President, theVice-President and three Regular Directors are proposed by the Ministry ofEconomy; three Regular Directors by the three Commands-in-Chief and one bythe Ministry of Interior on behalf of the oil producing provinces. There havebeen no changes in the composition of the Board of Directors since its appoint-ment in 1977. Before 1977, there had been frequent changes of the Presidencyof YPF, impairing effective management. Since then, Mr. Raul Ondarts wasYPF's President and took a number of measures to improve the organization.

- 39 -

ANNEX VPage 2

Mr. Ondarts died in an airplane accident in November 1979 and was succeededby Mr. Carlos Benaglia, previously Vice President of YPF. The Board ofDirectors has formed an Executive Committee, which is in charge of the threeGeneral Directorates of YPF: Operations, Administration and Civil Works andContracts.

4. Excessive total employment and poor personnel structure have beenone of the major burdens of YPF until 1977, when its status and operationswere changed from a Government institution to a private company. From March1976 to October 1979, total employment at YPF has been reduced from 51,700to 35,700, a decline of about 30%. Within this period, the share of profes-sionals has increased from 4.7% to 6.7% of total employment. The substantialreduction of total employment as well as the increased flexibility in compen-sation policies have made it possible for YPF to pay competitive salariesand to attract competent personnel. Although general salary increases inArgentina are supervised by the Ministry of Economy, there is enough flexi-bility to provide for adequate salaries and salary increases on an individualbasis. With the stabilized management situation, the reduction and restructur-ing of personnel, as well as the more dynamic approach towards formulatingand implementing increasingly complex tasks, YPF appears to have made consid-erable progress since 1977. However, it will take time to achieve measurableresults at all levels of the entity.

Accounting, Reporting and Auditing

5. Since 1977, YPF's accounting system and procedures have been changedcompletely from the Government budgetary system to financial accounting, inorder to suit better the needs of a large industrial enterprise. Improvedreliability and timely availability of accounting information, as well as theestablishment of an integrated information system on accounting, costing, cashmanagement and budgeting have been the major objectives of YPF. With substan-tial new recruitment of competent staff in the financing and controller'sdepartments as well as with the help of outside consultants (mostly ArthurAndersen & Co), YPF has succeeded in improving the accounting system and, atpresent, is in the process of establishing cost accounting throughout YPF,which should be completed by 1981 with the help of consultants. At thesame time, YPF is aiming at integrating its information system, in orderto serve not only for accounting needs, but also for cash management, budgetforecast and control, monthly reports and cost accounting and control.YPF can show substantial achievements in improving its accounting system.However, in order to serve as an efficient management tool, there still willbe substantial efforts needed to bring YPF's information system in line withthe company's importance and complexity. With continuity in management andthe outside help of consultants, YPF should be able to establish an adequateinformation system within a reasonable time period.

- 40 -

ANNEX VPage 3

6. YPF has 23 accounting units, i.e. head office, 6 refineries, 5 pro-duction fields, 9 regional sales divisions and 2 storage facilities. In1980, all units will be equipped with electronic data processing units (IBM34), operating on the basis of a standardized accounting plan and providingfor more decentralization. Accounting of personnel, finance, depreciationand inflation adjustments will be centralized in the head office. Theestablishment of cost centers, to be completed by 1981 is mainly aimed at (1)efficiency control, (2) guidance for product price fixing and (3) accountingcosts for inventory control and valuation. YPF's Fiscal Years have beensomewhat irregular in the past (closing dates were July 1977, June 1978 andDecember 1978), but should now be the calendar years. Annual reports shouldbe completed for presentation to the shareholders' meeting 4 months afterthe end of the Fiscal Year. As a publicly owned company, YPF prepares alsoan annual budget, which is submitted for approval by the Ministry of Economy.The adherence to the budget is controlled by the Sindicatura General deEmpresas Publicas, which also audits YPF's accounts. In the past, YPF'sfinancial statements have been substantially qualified by the Sindicatura.With few qualifications left as of December 31, 1978, YPF expects that its1979 annual statements would be without qualifications. In addition to thelegal accounting and budget requirements, YPF prepares monthly reports forits management, analyzing the development of its operational and financialperformance.

Financial Analysis

General

7. Analysis of YPF's financial statements is complex because of highinflation in Argentina and because the accounting system in general and with-in YPF have been changed substantially in recent years. YPF's accountingsystem gradually changed from a budgetary system to financial accounting in1978. General accounting rules in Argentina now recommend adjustments of allnon-monetary assets and liabilities according to a general index, based oncost-of-living increases. However, even with sophisticated adjustmentmethods, financial statements will always show a mixture of real and infla-tionary impacts. Therefore, under the circumstances of high inflation andthe transitory stage of YPF's financial statements in recent years, only aglobal financial analysis can lead to reasonable conclusions. DetailedIncome Statements and Balance Sheets of YPF from 1977 to 1979, as well asNotes to Financial Statements explaining in detail the adjustment processare available in the project file.

- 41 -

ANNEX VPage 4

Production and Sales Prices

8. YPF' oil and ga! production and sales prices have developed asfollows (in millions of m

Pre-liminary

1974 1975 1976 1977 1978 1979_~~~~~~~~

Production (m3 millions)

Gas 8,947 9,833 10,819 11,532 11,447 12,330Oil

YPF 17.2 16.6 17.1 18.8 17.8 17.6Contractors 6.7 6.1 5.9 6.0 8.2 9.6

23.9 22.7 23.0 24.8 26.0 27.2

Imports (Crude Oil Net) 3.3 2.4 3.5 3.4 2.5 2.1Crude OilProcessed by YPF 19.8 18.9 19.5 20.4 20.5 21.1

Oil production has steadily increased since 1975. Based on YPF's policy toenlarge the role of the private sector in oi:L production, YPF's own productionhas been stable in recent years and major production increases have beenachieved by the contractors in 1978 and 1979. As a result of higher domesticproduction, imports of crude oil have been substantially reduced in 1978 and1979. For the difference between import prices and US$14.-/barrel, YPF isreimbursed by the Government. However, since YPF's own average productioncosts are at about US$10.-/barrel or less, an increase in domestic productionfavorably affects YPF's financial situation. YPF's refineries operate atabout 70% capacity utilization (private sector refineries substantially lessdue to general overcapacity.

Pre-liminary

1974 1975 1976 1977 1978 1979

Average Selling Prices

Current Arg$/litreYPF Wholesale Price 0.7 2.0 10.3 25.3 75.6 162.7

Retail Price 1.4 3.7 18.0 44.3 124.3 268.6

1974 Arg$/litreYPF Wholesale Price 0.7 0.64 0.56 0.58 0.68 0.57

Retail Price 1.4 1.19 1.03 1.02 1.12 0.95

- 42 -

ANNEX VPage 5

Selling prices of petroleum have deteriorated considerably in real terms inthe past five years. In real terms, YPF's average wholesale prices in 1979were about 20% below their 1974 level, with most of deterioration havingtaken place in the second half of 1978 and in 1979, as a result of the anti-inflation policy of the Government which fixes the prices of petroleum pro-ducts. March 1980 YPF selling prices ranged from US$-.71/gal for premiumgasoline to US$-.35/gal for fuel oil. Consumer prices as of March 1980 forthe same products were US$1.70/gal and USS-.37/gal, respectively.

Income Statements

10. YPF's Income Statements can be summarized as follows (in $a billions):

8-77/6-78 7-78/12-78 1-79/6-79 1-79/12-7911 months 6 months 6 months 12 months

(preliminary)

Sales 2,181.8 1,806.8 2,802.9 7,485.2Less: Sales Tax 570.8 491.5 698.6 1,939.6

Net Sales 1,611.0 1,315.3 2,104.3 5,546.6

Costs of Goods Sold 1,476.4 1,043.7 1,485.9 4,556.3Administration, Marketing 61.8 105.7 84.1 564.3and Other Costs

Operating Profit 72.8 165.9 534.3 425.0

Operating Profit/Net Sales 4.5% 12.6% 25.4% 7.7%Adjusted Net Profit/Net Sales 22.5% 21.2% 33.7% 14.3%Adjusted Net Profit/Equity n.a. 18.2% 22.2% 18.7%

Because of uneven fiscal years and high inflation rates, the comparability ofthe different periods is limited. The operating profits, as a major indicator,considerably improved during mid-1977 and mid-1979, although selling pricesin real terms declined. This can be mainly attributed to the reduction inpersonnel from 48,800 in January 1977 to 35,700 in October 1979. Furthermore,more efficient management and improved procurement and purchasing were otherimportant factors in relative cost decreases. However, during the course of1979, product selling prices have deteriorated in real terms to the extent,that operating profits in the second half of 1979 were negative, therebyreducing the results for the total fiscal year 1979 from the satisfactoryprofit level of the first six months. Since oil exploration and productioncosts are expected to increase in real terms in the future and since costreductions of the past two years are not likely to continue, YPF will needselling price increases, in real terms, of at least 15-20% in order to regain

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ANNEX VPage 6

a satisfactory level of operating profits. As discussed in para. 42 of thetext, the Government has informed the Bank that for the proposed engineeringloan, as a first step in reestablishing YPF's financial position, it willincrease fuel prices in real terms so that in the long run they would reachinternational price levels. To date, prices have been increased by an averageof 1.5 to 2% a month or about 7% for the first four months of 1980. Anincrease of at least 15% for the whole year iS expected which would allow YPF

t sufficient cash flow to service its debt and :ontribute to about one-third ofits investment program.

11. Apart from the operating profits, YPF's financial situation hasbeen highly affected by its leverage gains fr3m foreign exchange indebtedness.Since the general inflation rate used for the revaluation of assets was muchlarger than the respective decline of the excnange rate of the Peso, YPFcould obtain substantial book gains in its foreign-exchange indebtedness(US$535 million in 1979). However, in the long run, it should be expected,that the exchange rate development would be in line with the development ofinflation, indicating that such differences could also be reverse in futureyears, with implications of similar magnitude on the loss side. The contri-butions to the Government will be replaced in 1980 through taxes, as if YPFwere operating as a private company; it is expected that such tax burdenwould not exceed the present level of contributions.

Balance Sheets

12. YPF's Balance Sheets are summarized below (in billion Arg.$):

7-31-77* 12-31-78 6-30-79 12-31-79(preliminary)

Current Assets 245.2 785.0 1,306.4 2,071.0Fixed Asets 600.5 2,960.7 5,136.3 7,429.0

Total Assets 845.7 3,745.7 6,442.7 9,500.0

Current Liabilities 593.7 1,523.7 2,096.1 3,571.7Long-Term Liabilities 102.3 684.1 1,140.6 1,703.0Equity 149.7 1.537.9 3,206.0 4,245.3

845.7 3,745.7 6,442.7 9,500.0

Current Ratio 0.4 0.5 0.6 0.6Total Debt (incl.Current Liabilities)to Equity Ratio 82:18 59:41 50:50 45:55

* Not comparable with subsequent years because of differentadjustment technique.

- 44 -ANNEX VPage 7

The low current ratio is mainly a result of the relatively high share ofshort-term bank borrowings. This is mostly due to the non-availability oflarge amounts of long-term funds in the local market; however, most of YPF'sshort-term bank borrowings are rolled over. Also, current liabilities con-tain over Arg. $100 billion liabilities for sales taxes, which, on average,are payable only 30 days after collection. Given the scarcity of funds inArgentina, YPF's access to foreign markets (YPF borrows in foreign marketswith the guaranty of the Government), high inflation, and because the turn-over of its current assets is much faster than that of current liabilities,YPF's liquidity position can be considered acceptable under the circumstances.Total bank borrowings of YPF have been as follows (June 30, 1979, in US$million):

Short-term Long-term Total

Foreign 241.7 654.3 896.0Local 118.5 - 118.5

360.2 654.3 1,014.5

Subsequently, further substantial long-term borrowings have been undertakenin the Euromarket, increasing the capitalization of YPF and taking advantageof favorable market conditions. The maturity structure of long-term funds iswell balanced.

13. YPF's unsatisfactory equity structure in 1977 has dramaticallyimproved, as a result of large inflation gains from the adjustments of assetsand liabilities. Such accounting practice can be considered acceptable, withinflation rates as high as in Argentina in recent years. Total equity of YPFnow represents about half of its total assets which is quite satisfactory.However, in the future, in order (1) to cover possible losses from adjustmentsand (2) to finance part of the large investment program, equity increasesmight be required, unless YPF can obtain sales increases in real terms, whichwould provide for satisfactory operating profits. As already stated (para. 42of the text and para. 10 of this Annex), the Government has undertaken totake steps during 1980 on real price increases and the Bank has indicatedto the Government and YPF that the financing of projects in the hydrocarbonssector ensuing from the proposed engineering loan will depend on furtherGovernment action on prices.

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ANNEX VPage 8

Cash Flow and Investment Program

14. As part of the annual budget, YPF prepares fund flow statementswhich for- 1980 are as follows:

Projected1980

(in billion Arg.$;November 1979 prices)

Sources:

Revenues 5,756Less: Current Expenditures 5,569

187

Long-Term Bank Loans 953Suppliers' Credits -Other 8

1,148

Applications:

Investments 1,751Repayment Bank Loans 381

2,132

Working Capital (984)

Although these budget estimates are followed-up during the fiscal year, theyshould be considered indicative only, since t:here is as yet no tie-in between

YPF's financial accounting and budget estimal:es. However, the estimates

clearly underline that of the annual fixed investment of-about US$1.7 billionplanned for 1980, only about 10 can be financed with self-generated fundsfrom operations. With no further provision for equity financing, the invest-

ments will be mostly financed with foreign long-term bank loans (guaranteedby the Government) as well as through the working capital. When consideringthe above estimates, which have been prepared in 1979, inflation and foreign

exchange rates as well as adjustments should be taken into account. Althoughsome of these factors do not have an immedia:e impact on the cash flow, they

can nevertheless substantially influence the profit situation of YPF, thereby

improving or decreasing YPF's creditworthiness for its borrowings. YPF's debt

service payments on its foreign long-term loans should amount to about US$150to 200 million in the forthcoming years, depending on the assumed interestrate level and the maturities of the new borrowings. In view of the Govern-ment backing on financing YPF's cash deficits, as well as the presentlysatisfactory equity position of YPF (considering inflation adjustments), no

- 46 -

ANNEX VPage 9

financing problems for its investment program and its debt service paymentsare foreseen. However, taking the company's and the Government's philosophyof managing and operating YPF on private company principles, operating profits(based on the price/cost structure) at present are too low to finance theambitious investment program. Sustained price increases in real terms of15-20% during 1980 would increase YPF's operating profits and cash generationby about US$300 to 400 million, resulting in a self-financing share of newinvestments of about 35-50%. Although the former level could be consideredacceptable, the latter would be more satisfactory for an independent company.Thus, the planned real increase in prices during 1980 will allow YPF toself-finance a reasonable portion of its investment. Given prevailing infla-tionary conditions in Argentina, even a lower real increase would be animportant first step in helping consolidate YPF's finances.

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