cepsa | annual report 2009 | consolidated financial statements · | annual report 2009 |...

CEPSA | Annual Report 2009 | Consolidated Financial Statements

Legal DocumentsCEPSA Group

Report from Independent Auditors . . . . . . . . .4

Consolidated FinancialStatements . . . . . . . . . . . . . . . . . .6

Balance Sheets . . . . . . . . . . . . .6

Statements of Income . . . . . . . .8

Cash Flow Statements . . . . . . .9

Statement of RecognisedIncome and Expense . . . . . . . .10

Statement of RecognisedIncome and Expense . . . . . . . .11

Notes to the Financial Statements . . . . . . . . . . . . . . . . .12

Management Discussion& Analysis . . . . . . . . . . . . . . . . . .83

| Annual Report 2009 | Consolidated Financial Statements

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Report from Independent AuditorsCompañía Española de Petróleos, S.A. and subsidiaries (CEPSA GROUP)

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Consolidated Balance Sheets at December 31, 2009 and 2008 (Notes 1, 2 and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)

ASSETS 2009 2008(Thousands of euros)

Non-current assets Intangible assets (Note 4)

Intangible assets and rights 481,012 513,067 Impairment losses and amortisation charge (234,158) (251,789)Total intangible assets 246,854 261,278

Goodwill in consolidation (Note 5) 61,025 52,616 Property, plant and equipment (Note 6)

Tangible assets and rights 10,339,850 9,500,491 Impairment losses and depreciation charge (5,227,585) (4,635,705)Total property, plant and equipment 5,112,265 4,864,786

Investments accounted for using the equity method (Note 7) 88,926 95,034 Non-current financial assets (Note 8) 109,434 141,805 Deferred tax assets (Note 14) 88,837 129,840

Total non-current assets 5,707,341 5,545,359 Current assets Inventories (Note 9) 1,448,512 1,336,595 Trade and other receivables (Note 10) 2,317,936 2,059,877 Current income tax assets - 34,768 Other current financial assets (Note 8) 266,311 183,985 Other current assets 8,595 9,328 Cash and cash equivalents (Note 11) 598,537 480,954

Total current assets 4,639,891 4,105,507

Total assets 10,347,232 9,650,866

(The accompanying Notes 1 to 30 are an integral part of these Consolidated Balance Sheets)

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs, as adopted by the European Union (see Notes 2 and 30). In the event of adiscrepancy, the Spanish-language version prevails.77

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(The accompanying Notes 1 to 30 are an integral part of these Consolidated Balance Sheets)

SHAREHOLDERS' EQUITY AND LIABILITIES 2009 2008(Thousands of euros)

Equity (Note 12)

Shareholders’ Equity Share capital 267,575 267,575 Share premium 338,728 338,728 Revaluation reserve 90,936 90,936 Retained earnings 4,201,847 4,194,677 Profit attributable to the Parent 374,688 274,745 Interim dividend paid (107,030) (107,030) Total equity 5,166,744 5,059,631

Adjustments for changes in value Translation differences 66,050 54,675 Other adjustments for changes in value 54,762 24,861 Total adjustments for changes in value 120,812 79,536

Total equity attributable to shareholders of the parent 5,287,556 5,139,167 Minority interests (Note 12.f)

Equity attributed to minority interests 49,119 49,638 Profit attributed to minority interests 16,117 16,267 Total minority interests 65,236 65,905

Total equity 5,352,792 5,205,072 Non-current liabilities

Bank borrowings (Note 13) 1,109,601 916,516 Other financial liabilities (Note 13) 150,926 199,701 Deferred tax liabilities (Note 14) 228,572 275,820 Grants related to assets (Note 15) 81,451 70,119 Provisions (Notes 16 and 17) 130,349 165,157 Other non-current liabilities (Note 18) 31,804 102,838

Total non-current liabilities 1,732,703 1,730,151 Current liabilities

Bank borrowings (Note 13) 740,628 738,388 Other financial liabilities (Note 13) 69,647 18,199 Trade and other payables (Note 18) 2,407,498 1,944,260 Current income tax liabilities 35,599 5,399 Other current liabilities 8,365 9,397

Total current liabilities 3,261,737 2,715,643

Total equity and liabilities 10,347,232 9,650,866

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Consolidated Statements of Income for the years ended December 31, 2009 and 2008 (Notes 1, 2 and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)

(Thousands of euros) 2009 2008

Sales and services relating to ordinary activity 16,084,145 22,830,564 Excise tax on oil and gas charged on sales 2,280,753 2,284,935

Revenue (Notes 3.n and 25) 18,364,898 25,115,499 Changes in inventories of finished goods and work in progress (410,159) 170,684 In-house work on non-current assets 56,169 39,430 Procurements (Note 25) (12,852,169) (18,833,595)Other operating income (Note 25) 43,948 35,884Staff costs (Note 25) (530,867) (554,744)Changes in operating allowances 524,842 (593,892)Other operating expenses:

Excise tax on oil and gas (2,281,291) (2,285,169)Other expenses (Note 25) (1,777,181) (2,059,362)

Amortisation charge (615,877) (587,810)Allocation to profit or loss of grants related to non-financial assets and other grants (Note 25) 85,821 126,954Impairment and gains or losses on disposals of non-current assets (Note 25) (33,677) (50,840)

Profit from operations (note 24) 574,457 523,039

Share in profit of companies accounted for using the equity method (Note7) 35,600 37,492 Finance income (Note 27) 93,698 42,620 Finance costs (Note 27) (42,140) (68,870)Impairment and gains or losses on disposals of financial instruments 1,646 711

Consolidated profit before tax 663,261 534,992

Income tax (Nota 3.m y 14) (272,456) (243,980)

Consolidated profit for the period from continuing operations 390,805 291,012

Consolidated profit for the period 390,805 291,012

Attributable to: Shareholders of the Parent 374,688 274,745 Minority interests 16,117 16,267

Earnings per share:

Basic 1.40 1.03 Diluted 1.40 1.03

(The accompanying Notes 1 to 30 are an integral part of these Consolidated Statements of Income)

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Consolidated Cash Flow Statements for the years ended 31 December, 2009 and 2008 Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)

CASH FLOWS FROM OPERATING ACTIVITIES 2009 2008(Thousands of euros)

Net profit for the year 390,805 291,012 Depreciation and amortisation charge and impairment losses 649,554 639,667 Changes in provisions for contingencies and expenses 2,724 37,404 Grants related to assets and other deferred income (85,821) (126,970)Changes in deferred taxes (11,710) (74,229)Impairment and gains or losses on disposals of financial instruments (1,646) (1,477)Current provisions changes (524,842) 592,267 Other changes 8,627 6,709 Cash flows from operating activities before change in operating working capital 427,691 1,364,383

Change in operating working capital 647,681 (497,603)

Total cash flows from operating activities (a) 1,075,372 866,780

Cash flows from investing activities 2009 2008

Payments Intangible assets (24,748) (17,509)Property, plant and equipment (895,095) (1,204,444)Financial assets

Associates and other investments (859) (1,492)Other financial assets (65,394) (47,471)

Consolidated share adquisitions - (86,065)Grants received 7,347 628

Total payments (978,749) (1,356,353)

Collections Intangible assets 2,803 1,234 Property, plant and equipment 34,767 8,034 Financial assets 25,576 39,102

Total collections 63,146 48,370

Total cash flows from investing activities (915,603) (1,307,983)

Cash flows from financing activities 2009 2008

Dividends paid: To shareholders of the Parents (267,575) (294,333)To minority interests (24,557) (14,675)

Total dividends paid (292,132) (309,008)

Net change in non-current financial liabilities 378,170 726,305 Net change in current financial liabilities (135,961) 343,064 Net change in financial investments with returns (5,718) -Finance lease payments (23,184) (21,183)Total cash flows from bank borrowings 213,307 1,048,186

Total cash flows from financing activities (78,825) 739,178

Net increase in cash and cash equivalents 80,944 297,975 Adjustments due to changes in the scope of consolidation - 3,154 Effect of exchange rate changes 36,639 (28,228)

Cash and cash equivalents at beginning of year 480,954 208,053

Cash and cash equivalents at end of year 598,537 480,954

(a) The net income tax payments in 2009 and 2008 amounted to EUR 288,735 and EUR 313,326 thousand, respectively.

The net interest payments for 2009 and 2008 amounted to EUR 1,588 thousand and EUR 24,040 thousand, respectively.


Consolidated Statement of Recognised Income and Expense for the years ended 31 December 2009 and 2008 (Notes 1, 2 and 3) Compañía Española de Petróleos, S.A. and Subsidiaries ( Consolidated Group)

)(Thousands of euros) 2009 2008

A) CONSOLIDATED PROFIT FOR THE PERIOD of the income statement 390,805 291,012

B) INCOME AND EXPENSES RECOGNISED DIRECTLY IN EQUITY: 47,769 (51,180)1. Measurement of financial instruments: - (983)

a) Available-for-sale financial assets - (983)2. Cash flow hedges 37,119 (84,864)3. Translation differences 19,146 14,134 4. Companies accounted for using the equity method 303 (832)5. Tax effect (8,799) 21,365

C) TRANSFERS TO PROFIT OR LOSS: 1,278 (7,581)1. Cash flow hedges 1,826 (10,830)2. Tax effect (548) 3,249

Total recognised income/(expenses) (A+B+C) 439,852 232,251 a) Attributable to the Parent 415,964 222,896 b) Attributable to minority interests 23,888 9,355

(The accompanying Notes 1 to 30 are an integral part of these Consolidated Statement of Comprenhensive Income)

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Consolidated Statement of Changes in Equity for the years ended 31 December 2009 and 2008 (Notes 1, 2 and 3)

Compañía Española de Petróleos, S.A. and Subsidiaries ( Consolidated Group)

(Thousands of euros)

Reserve for Fair Share Share Revaluation Retained Translation Interim Value Accounting of Minority Capital Premium Reserve Earnings Differences Dividend Assets and Liabilities Interests Total

Balance at 01/01/08 267,575 338,728 90,936 4,529,146 33,629 (147,166) 97,756 71,225 5,281,829

Profit for the year 274,745 16,267 291,012

Gains (losses) recognised directly in equity 21,046 (72,895) (6,912) (58,761)

Total gains (losses) recogniseddirectly in equity - - - 274,745 21,046 - (72,895) 9,355 232,251

Changes due to transactions with shareholders

- Gross dividend (334,469) 147,166 (13,519) (200,822)

- Interim dividend (107,030) (1,156) (108,186)

Total transactions with shareholders - - - (334,469) - 40,136 - (14,675) (309,008)

Balance at 31/12/2008 267,575 338,728 90,936 4,469,422 54,675 (107,030) 24,861 65,905 5,205,072


Reserve for Fair Share Share Revaluation Retained Translation Interim Value Accounting of Minority Capital Premium Reserve Earnings Differences Dividend Assets and Liabilities Interests Total

Balance at 01/01/09 267,575 338,728 90,936 4,469,422 54,675 (107,030) 24,861 65,905 5,205,072

Profit for the year 374,688 16,117 390,805

Total gains (losses) recognised directly in equity 11,375 29,901 7,771 49,047

Gains (losses) recognised directly in equity - - - 374,688 11,375 - 29,901 23,888 439,852

Changes due to transactions with shareholders

- Gross dividend (267,575) 107,030 (15,471) (176,016)

- Interim dividend (107,030) (9,086) (116,116)

Total transactions with shareholders - - - (267,575) - - - (24,557) (292,132)

Balance at 31/12/2009 267,575 338,728 90,936 4,576,535 66,050 (107,030) 54,762 65,236 5,352,792

(The accompanying Notes 1 to 30 are an integral part of these Consolidated Statement of Changes in Equity)

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Notes to the Financial StatementsNotes to the consolidated financial statements for the years ended 31 December 2009 and 2008Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)

1. CEPSA GROUP ACTIVITIES

Compañía Española de Petróleos, S.A. (“CEPSA”), whose registered office is at Avenida del Partenón 12 (Campo de lasNaciones), Madrid, was incorporated for an unlimited period of time on 26 September 1929, it is registered in the MadridMercantile Register in Volume 206 of the Companies book, Sheet 100, Page 6045. Its employer identification number isA-28003119.

CEPSA and its investees (together “the CEPSA Group”) compose an integrated business group which operates in theoil and gas industry, in Spain and abroad, engages in business activities relating to the exploration for and extractionof crude oil, the production of petrochemical and energy products, asphalts, lubricants and polymers and thedistribution and marketing thereof; as well as the distribution of gas and the generation of electricity.

Table I, which forms part of these notes to the consolidated financial statements, shows the directly or indirectly ownedsubsidiaries, jointly controlled entities and associates which, together with CEPSA, compose the consolidated Group.The table lists these companies' registered offices and lines of business, together with the most significant economicand financial information thereon for 2009.

2.- BASIS OF PRESENTATION AND BASIS OF CONSOLIDATION

a) Basis of presentation

The accompanying consolidated financial statements were prepared in accordance with the International FinancialReporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and with all theinterpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB applicableat 31 December 2009 as adopted at that date by the European Union, in conformity with Regulation (EC) no. 1606/2002of the European Parliament and of the Council, applicable at the balance sheet date.

These financial statements and the 2009 individual financial statements of the Group companies included in the scopeof consolidation will be submitted for approval by their shareholders at the respective Annual General Meetings, andit is considered that they will be approved without any changes.

These financial statements are presented in thousands of euros (unless stated otherwise) since this is the currency ofthe principal economic environment in which the Group operates. Foreign operations are included in accordance withthe policies set forth in Note 2-d.

The financial statements of CEPSA and the CEPSA Group for 2008 were approved by the shareholders at the AnnualGeneral Meeting in Madrid on 26 June 2009, without any changes.

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Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 2 and 30). In the event of adiscrepancy, the Spanish-language version prevails.

Entry into force of new accounting standards

In 2009 the following interpretations of standards came into force and, where applicable, were used by the Group in thepreparation of the consolidated financial statements of the Group, and application thereof did not have a significantimpact on the Group’s financial statements:

Standard or interpretation Content Effective Date

IFRS 8 Operating Segment 01/01/2009Review IAS 23 Borrowing Cost 01/01/2009Review IAS 1 Presentation of Financial Statements 01/01/2009Amendment IFRS 2 Share-based payment - 01/01/2009

Vesting conditions and cancellationsAmendment IAS 32 and IAS 1 Instruments Puttable at Fair 01/01/2009

Value and Obligations Arising on Liquidation

Amendment IFRS 7 Financial Instruments: Disclosures 01/01/2009Amendment IAS 39 and IFRIC 9 Embedded Derivatives s 01/01/2009IFRIC 13 Customer Loyalty Programmes 01/01/2009IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, 01/01/2009

Minimum Funding Requirements and their interaction

According to revised IAS 1 CEPSA Group has included in these annual accounts a new statement named “consolidatedstatement of other comprehensive income”. When retrospective changes or reclassifications are applied a balancesheet must be presented at the beginning of the earliest comparative period (in this case, 1 January 2008). However,since the presentation of this new statement has no effect on the aforementioned balance sheet, it was not considerednecessary to include it.

At 31 December 2009, the Cepsa Group had not applied the following issued standards or interpretations, since itseffective implementation is required after that date or have not been adopted by the European Union.:

Standard or interpretation Content Effective Date

Review IFRS 3 Business Combinations 01/07/2009Amendment IAS 27 Cost of an investment in separate financial statements of an entity 01/07/2009Amendment IAS 39 Items designed as hedged 01/07/2009Amendment IAS 32 Classification rights to share 01/02/2010IFRIC 12 (1) Service Concession Arrangements 01/04/2009IFRIC 15 (1) Agreements for the Construction of Real Estate 01/01/2010IFRIC 16 (1) Hedges of a Net Investment in a Foreign Operation 01/07/2009IFRIC 17 (1) Distributions fon Non-cash Assets to Owners 01/11/2009IFRIC 18 (1) Transfers of Assets from Customers 01/11/2009IFRS 9 (2) Financial Instruments: Classification and measurement 01/01/2013Improvements project Non-urgent improvements to IFRS SeveralAmendment IFRS 2 (2) Share-based payments within the Group 01/01/2010Review IAS 24 (2) Related Party Disclosures 01/01/2011Amendment IFRIC 14 (2) Advances minimun payments required 01/01/2011IFRIC 19 (2) Extinguishing financial liabilities with equity instruments 01/07/2010

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(1) Date of obligatory application based on approval in the Official Journal of the European Union, which differs from the original date stated in the IASB.

(2) Standards and interpretations not yet adopted by the European Union at the date of preparation of these consolidated financial statements


According to its analysis of these standards and interpretations, Company management foresees that it will be appliedfrom the date required in each case and considers that the application thereof will not have a material effect on thefinancial statements.

b) Use of estimates and assumptions

The information in these financial statements is the responsibility of the Group's directors who expressly state that allthe policies and methods included in the IFRSs have been applied.

In the preparation of the consolidated financial statements in accordance with IFRSs the directors were required tomake estimates and assumptions. The final figures might differ based on these estimates and assumptions. Theseestimates and assumptions relate basically to the following:

- The determination of the recoverable amount for the calculation of the impairment losses on certain assets (seeNotes 4, 5 and 6),

- Estimation of crude oil reserves which mainly affects depreciation calculated using the unit of production method(see Note 3.c) and the determination of the recoverable amounts on the basis of impairment tests performed onexploration and production assets,

- The actuarial calculation of the post-employment benefit liabilities and obligations (see Note 16),

- The useful life of the property, plant and equipment and intangible assets (see Note 3-c),

- The measurement of provisions for liabilities (see Note 3-j).

Although these estimates were made on the basis of the best information available at 31 December 2009 on the eventsanalysed, events that take place in the future might make it necessary to change these estimates (upwards ordownwards) in coming years; Changes in accounting estimates would be applied prospectively in accordance with therequirements of IAS 8, recognising the effects of the change in estimates in the related consolidated income statements.

c) Basis of consolidation

All the companies over which the Parent exercises direct or indirect control were fully consolidated. Control is thepower to govern the financial and operating policies of a company so as to obtain benefits from its activities.

The share of the minority interests in the equity and profit of the CEPSA Group's consolidated subsidiaries is detailedunder “Equity - Minority Interests” in the consolidated balance sheets and “Profit Attributed to Minority Interests” inthe consolidated income statement, respectively.

Jointly controlled entities were proportionately consolidated and, accordingly, the accompanying consolidated financialstatements include the assets, liabilities, expenses and income of these companies only in proportion to the CEPSAGroup's ownership interest in their capital. Joint control exists in those cases where strategic decisions of the company,both financial and operative, must be unanimously approved by the parties sharing control. (see note 7)

The associates over which the Group exercises significant influence but not effective control, which are not jointlycontrolled entities, were accounted for using the equity method.

Significant influence is generally deemed to be exercised over companies which are between 20% and 50% owned. Inparticular, although the ownership interest in Compañía Logística de Hidrocarburos CLH, S.A. is lower than 20%,significant influence is exercised because, among other factors, the CEPSA Group is present in its Board of Directorsand there is a high volume of commercial operations between them.

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Any excess of the acquisition cost of the consolidated Group over the fair value of their net assets (assets acquired lessliabilities assumed) at the date of acquisition is included under “Goodwill”. Any deficiency of the acquisition cost of theconsolidated subsidiaries below the fair value of their net assets is recognised in the consolidated income statements.

All material balances, transactions and results between the fully consolidated companies were eliminated onconsolidation. The balances, income, expenses and results from transactions with proportionately consolidatedcompanies were also eliminated based on the percentage of ownership. In addition, the accounting policies andprocedures used by the Group companies were unified with those applied by the Parent, and all accounting policies andmeasurement bases with a significant effect on the consolidated financial statements were applied.

d) Foreign currency transactions and translation of financial statements in foreign currencies

Foreign currency transactions are recognised in euros by applying the exchange rates prevailing at the date of thetransaction. Any gains or losses arising at the date of settlement are recognised in the consolidated income statement.

Monetary items in foreign currencies are recognised in the consolidated balance sheet in euros at the year-endexchange rates or at the hedged exchange rates, if any. Exchange differences with respect to the exchange ratesprevailing at the date of transaction are recognised in the consolidated income statement.

Exchange differences arising on foreign currency loans to finance investments in the same functional currency whichgive rise to a hedge of the foreign currency risk associated with the loans (cash flow hedge) are recognised in equity asunrealised gains or losses in the accompanying consolidated balance sheets.

The financial statements denominated in foreign currencies of the Group companies resident abroad, which have afunctional currency other than the euro, were translated to euros by applying the "year-end exchange rate" method,consisting of the translation to euros of assets and liabilities at year-end exchange rates, of income and expenses atthe average weighted exchange rates for the year and of equity at the historical exchange rates. The resulting translationdifferences are recognised in equity under “Translation Differences” in the accompanying consolidated balance sheets.

The effect of the changes in exchange rates on each item is shown in the “Other Changes” column of the respectivetables.

e) Comparative information

The scope of consolidation at 31 December 2009 is considered equal to year ended 2008..

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The changes in the scope of consolidation in 2008 were as follows:

Full/Proportionate Company Consolidation Method Equity Method

CEPSA Petrosur, S.A. - EComar, Gestáo de Postos de Combustíveis, LDA I -Ertisa, S.A. E -Gestmanilva, S.L. - EGestvilar 2003, S.A. - EIntercontinental Química, S.A. (INTERQUISA) B -Lubricantes Nervión, S.A. (LUBRINER) - EPetrolera del Puerto, S.L. - IPetropesca, S.L. I EPetroquímica Española, S.A. (PETRESA) E —

I= Inclusion; E= Exclusion

It should be noted in this connection that mainly the exclusions from the scope of consolidation in 2009 and 2008 arerelated to mergers by absorption or liquidation. Among these are notably the exclusions at end-June 2008, due to themerger of Ertisa, S.A., Intercontinental Química, S.A. (INTERQUISA) and Petroquímica Española, S.A. (PETRESA) intoCepsa Química, S.A.

The detail of the effect on equity of the change in consolidation method and of the inclusions in and exclusions fromthe scope of consolidation is shown in the “Other Changes” column in the respective tables disclosing the changes ineach item during the year.

3. ACCOUNTING POLICIES

The principal accounting policies applied on consolidation were as follows:

a) Intangible assets

Intangible assets are measured at acquisition cost, and are reviewed for impairment when there are indications ofimpairment, and at least annually for assets with indefinite useful lives and for assets that are not yet available for use.(see Note 3-d)

Research and development expenditure is recognised in the income statement as incurred, except in the case ofdevelopment expenses relating to projects the technical and commercial feasibility of which has been determined,which are capitalised and amortised on the basis of their useful lives.

Manufacturing license rights are amortised at the same rates as those used to depreciate the industrial units to whichthey relate. Service station surface rights and flagging contracts are amortised over an average of twenty and five years,respectively, based on the contracts for transactions of this type, and computer software is amortized over a maximumof three years.

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In compliance with the commitments to reduce greenhouse gas emissions - the Kyoto Protocol - assumed by theEuropean Union in May 2002, various EU and national regulations were issued, which led to the approval, by RoyalDecree 1402/2008 of 29 October, of the National Emission Allowance Assignment Plan, which is in force for 2008-2012and affects eleven industry sectors including the refining and electricity generation sectors.

Allowances received for no consideration under the National Emission Allowance Assignment Plan are measured at themarket price prevailing at the beginning of the year to which they relate, and are recognised with a credit to a Grant item.

The emission allowances are recognised as non-amortisable intangible assets, measured at acquisition or productioncost, and are derecognised when they are delivered, transferred to third parties or meet the conditions established fortheir expiry. (see Note 4)

Pursuant to this legislation, the CEPSA Group must deliver in the first few months of the following year CO2 emissionallowances equal to the volume of emissions made during the year.

If the net realisable value of emission allowances is less than their carrying amount, the value of the allowances ownedwill be reduced to market value. Depending on whether these allowances were acquired or received for no considerationfrom public authorities. In the first case the appropriate impairment of intangible assets will be recognised or, in thesecond case, the value of the intangible assets will be adjusted or in the second case (allowances received from publicauthorities), the value of grants related to assets is adjusted with a charge to “Allocation to Profit or Loss of GrantsRelated to Non-Financial Non-Current Assets and Other Grants” in the consolidated income statement.

b) Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition of the investees over the fair value oftheir net assets -assets acquired less liabilities assumed- at the date of acquisition. (see Note 5)

The acquisition cost comprises the sum of the fair value of the assets delivered, the liabilities assumed and the equityinstruments issued, plus any other costs directly attributable to the transaction.

The fair value of net assets comprises the fair value of the assets and liabilities acquired that meet the requirementsestablished for their recognition plus the fair value of intangible assets which were not acquired but are identifiable andmeet the other requirements for their recognition and, lastly, the contingent liabilities which can be reliably measured.

In accordance with IFRS 3 and IAS 36, goodwill is not amortised, but rather, is tested for impairment at least once peryear (or more frequently if there is any indication of impairment). (see Note 3-d)

Goodwill is deemed to be an asset of the company acquired. Consequently, the foreign currency goodwill of the Groupcompanies resident abroad with a functional currency other than the euro is translated to euros at the exchange ratesprevailing at the consolidated balance sheet date, and any resulting variations are recognised as translation differences.

c) Property, plant and equipment

c.1) Exploration and production assets

Investments in exploration and production are recognised by the successful efforts method, whereby the accountingtreatment of the various costs incurred is as follows:

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Exploration costs and investments in areas with unproven reserves:

Exploration costs are charged to income as incurred. Acquisitions of exploration rights are capitalised and feasibilityanalyses and impairment tests, if any, are performed periodically on a field-by-field basis based on the results ofexploration (see Note 3-d). Exploration rights are amortised over a period not exceeding the term of the contract. In thecase of the discovery of proven reserves, the carrying amount is transferred to “Investments in Areas with ProvenReserves”.

Drilling costs are capitalised temporarily until it is determined whether proven reserves have been discovered, in whichcase they are transferred to “Investments in Areas with Proven Reserves”. On the contrary, if the results are negative,they are charged to income.

Investments in areas with proven reserves:

Investments relating to the acquisition of proven reserves, the development of fields and the construction of productionplants, as well as the estimated present value of abandonment costs, are capitalised and depreciated over the estimatedlife of the field based on the proven and recoverable reserves extracted (unit-of-production method) at the beginningof each year.

With respect to joint production contracts, this calculation is based on the proportion of production and reservesassigned to the Company taking account of the estimates based on the contractual clauses.

Impairment tests are performed periodically for each field and any impairment losses are recognised in the incomestatement. (see Note 3-d)

c.2) Other items of property, plant and equipment

Property, plant and equipment are measured at cost. Cost includes the acquisition cost and staff costs and other itemsrelated directly to these assets incurred only during the construction period. It also includes the estimated presentvalue of the abandonment costs that the CEPSA Group must bear, where appropriate.

Assets acquired before 31 December 2003, are measured at cost, revalued, where appropriate, pursuant to the relatedlegislation.

The costs of expansion, modernisation or improvements leading to increased productivity, capacity or efficiency or toa lengthening of the useful lives of the assets are capitalised. Periodic maintenance, upkeep and repair expenses arerecognised in the income statement on an accrual basis as incurred. Retired assets and the related accumulateddepreciation are derecognised.

Assets held under finance leases are presented in the balance sheet by recognising an asset and a liability for thesame amount, equal to the lower of the fair value of the leased asset and the present value of the minimum leasepayments. These assets are recognised based on the nature of the leased asset and are depreciated on the basis of theiruseful lives. Assets held under finance leases are subject to the same rules with respect to impairment losses as anyother item of property, plant and equipment.

At the reporting date the Group assesses whether there is any indication of impairment of property, plant andequipment. If such indication exists, an impairment test is performed and, where appropriate, the related impairmentloss is recognised. (see Note 3-d)

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The Group depreciates its property, plant and equipment, net of their residual value, using the straight-line method, atrates based on the following years of estimated useful life:

Depreciation of property, plant and equipment Years of Useful Life

Buildings and other structures 33 to 50Plant and machinery:

Machinery, installations and fixtures 10 to 15Furniture 10

Plants in service:Units 12 to 15Lines and networks 15 Tanks and spheres 20

Other items of property, plant and equipment 4 to 10

d) Impairment of assets

At the reporting date the CEPSA Group assesses whether there is any indication of impairment of property, plant andequipment and intangible assets and, where appropriate, estimates the recoverable amount thereof. Additionally,regardless of whether such an indication exists, the carrying amount of intangible assets with indefinite lives and ofgoodwill is compared with their recoverable amount at least once per year. (see Notes 3-a, 3-b and 3-c)

If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of theimpairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, theGroup estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimatedfuture cash flows are discounted to their present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset for which the estimates of future cash flowshave not been adjusted, using assumptions which are consistent with the Group’s strategic plan.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, its valueis reduced to its recoverable amount and an impairment loss is recognised as an expense, under “Impairment andgains or losses on disposals of non-current assets” in the accompanying consolidated income statement.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increasedup to the revised estimate of its recoverable amount, recognised as an expense, but so that the increased carryingamount does not exceed the carrying amount that would have been determined had no impairment loss beenrecognised for the asset (cash-generating unit) in prior years, and a reversal of an impairment loss is recognised asincome.

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e) Financial assets

Except for investments in associates, which are recognised using the equity method (see Note 2-c), both current andnon-current financial assets are initially recognised at acquisition cost, which is the fair value of the considerationgiven, including transaction costs.

Following the initial recognition, financial assets are measured on the basis of their classification, as follows:

- Originated loans and receivables and held-to-maturity investments are recognised at their amortised cost, net of anyimpairment losses. (see Note 8)

- Held-for-trading financial assets are measured, if any, at fair value, and fair value changes are recognised in theconsolidated income statement.

- Available-for-sale financial assets, which consist mainly of non-current equity investments, are measured at fairvalue and fair value changes are recognised directly in equity until the investments are sold, when the accumulatedamount relating to such investments is recognised in full in the consolidated income statement. Where fair value islower than cost, the difference is recognised directly in the consolidated income statement. For companies whoseshares are not listed on the stock market, the market price is taken to be the present value of the estimated cash flowsor, if these cannot be estimated, the underlying carrying amount obtained from the latest balance sheet, including,where appropriate, the unrealised gains existing at the time of acquisition and still existing at the date of subsequentmeasurement. (see Note 8)

f) Inventories

Crude oil, oil derivatives and petrochemical products are measured at the lower of weighted average cost and netrealisable value. Crude oil and oil derivatives in transit are recognised at the cost at source plus direct costs incurredthrough year-end. Replacement parts and supplies and other inventories are measured at the lower of averageacquisition or production cost or net realisable value. (see Note 9)

The Company assesses the net realisable value of the inventories at the end of each year and recognises the appropriateloss if this value is lower than the carrying amount. When the circumstances that previously caused inventories to bewritten down no longer exist or when there is clear evidence of an increase in net realisable value because of changedeconomic circumstances, the amount of the write-down is reversed.

Individual costs are allocated to refined products in proportion to the selling price thereof (isomargin method) due tothe complexity costs to each item.

g) Cash and cash equivalents

This heading includes cash and cash equivalents and other liquid assets.

Cash equivalents includes bank deposits and other investments maturing within three months and other liquid assetsincludes the same type of assets with maturities at three to twelve months. (see Note 11)

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h) Grants

Grants related to assets are measured at fair value. Non-refundable grants are recognised as deferred income under“Non-Current Liabilities” in the consolidated balance sheet and are charged to income on the basis of the useful lifeof the assets concerned. Repayable grants are recognised as non-current debt transformable into grants under “Non-Current Liabilities”. Grants related to income are credited to income when earned.

“Grants related to Assets-Greenhouse Gas Emission Allowances” includes allowances received for no consideration,as provided for in the National Emission Allowance Assignment Plan, which are measured at the market price prevailingat the beginning of the year to which they relate. This grant was allocated to profit or loss as grants related to non-financial non-current assets:

- Generally, as the costs incurred on the actual emissions accrue. (see Notes 15 and 25)

- If an impairment loss was recognised on the emission allowances received from the Government, as an adjustmentto the initially recognised value. (see Note 4)

i) Pension and similar obligations

CEPSA and several of its subsidiaries have the following pension obligations to employees and their beneficiaries:

- Pension obligations funded by the occupational pension plans assigned to the CEPSA Group, Pensions funds. Thesepension plans entitle participants to receive benefits for retirement or, where appropriate, for death or disability, asspecified in the plans. The plans take the form of hybrid plans and combine defined contribution plans, which coverretirement - whereby the sponsor makes periodic contributions-, and defined benefit plans which cover benefits fordeath or disability through an annually renewable policy -whereby the sponsor undertakes to fulfill the contributionscorresponding to Pensions Funds. Accordingly, these contingencies should be considered to be a defined contributionplan. The vested amount of the contingency assumed by the sponsor is covered each year with the annual contribution.

- Life insurance. A defined contribution obligation instrumented through an insurance policy which establishes theright of the insured to receive retirement benefits or, where appropriate, benefits for death or disability. Thecontributions made by the policyholder are made as a supplement to the pension plan, or since the commitments toemployees exceed the maximum contributions to pension plans.

- Annuity income for retired employees. These are obligations prior to the arrangement of pension plans, which entitlepersonnel or their beneficiaries to receive supplementary social security pension benefits in the event of retirement,death or permanent disability. This commitment has been externalised in full through the related insurance policies.

The adjustments arising from CPI increases or declines, which affect only the policies covering obligations tied toannual CPI performance, are recognised as expenses or income for the year, as appropriate, and their amount was notmaterial.

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Other non-current employee benefit costs

The Group has a commitment to a certain group of employees for the payment of annuity monetary consideration arisedfrom the withdrawal of company stores. Actuarial studies are performed annually and the actuarial gains and lossesare recognised as income or expenses, as appropriate.

The Company must recognise actuarial gains and losses as income or expenses when the unrecognised cumulativeactuarial gains and losses for each individual plan exceed by more than 10% the present value of the benefit obligationsor the fair value of the plan assets. At 31 December 2009, this situation had not arisen in the CEPSA Group.

j) Other provisions

“Provisions” includes liabilities arising from litigation in progress, environmental risks, abandonment costs and othercontingencies, which are uncertain as to their amounts or timing.

These provisions are recorded when a present obligation arises as a result of a past event, and it is probable that anoutflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate canbe made of the amount of the obligation.

The provision amount recognised is the present value of the expenditure expected to be required to settle the obligation.Provisions are reviewed at each balance sheet date based on the information available.

The obligation to deliver emission allowances for the CO2 emissions produced in the year is recognised as thegreenhouse gas emissions are made. These costs are charged to “Other Operating Expenses” in the income statementand credited to a short-term provision included under “Trade and other payables”, until the date the related emissionallowances are delivered (see Notes 3-a and 18). The unit value to be assigned to the emissions is determined takinginto account the following amounts:

- Firstly, the carrying amount of the emission allowances received for no consideration.

- Secondly, the cost of the other emission allowances capitalised in the balance sheet

- Lastly, where necessary, the most up-to-date estimate of the cost of acquisition of the remaining allowances

k) Bank borrowings and other financial liabilities

Bank borrowings and other financial liabilities are initially recognised at their fair value less directly attributabletransaction costs, and are subsequently measured at amortised cost using the effective interest method.

In accordance with its foreign currency risk management policy, the CEPSA Group arranged borrowings denominatedin US dollars to finance certain investments in non-current assets which generate cash flows also in US dollars. Thesefinancial liabilities were accounted for as a cash flow hedge. (see Note 13 and 22)

These hedges are designated and documented at inception, the high probability of cash flows is determined for thehedged item and effectiveness is assessed both prospectively and retrospectively, all in accordance with IAS 39 relatingto hedge accounting.

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Changes in the fair value of these financial liabilities are recognised directly in equity, net of the related tax effect, under“Adjustments for changes in value” in the accompanying consolidated balance sheets and are recognised in income forthe year as the hedge materialises. (see Note 25)

l) Derivative financial instruments and hedge accounting

The CEPSA Group uses hedging instruments and derivatives, including most notably futures contracts with crude oiland product brokers, to hedge the price risks arising from the monthly purchases and sales of oil-based products. Thetransaction limits and the hedging instruments have been approved by Group management and the monitoring processrespects the separation of the performance and control functions.

For foreign currency and interest rate risks, the transaction limits and hedging instruments (basically forward currencytransactions and interest rate swaps) have also been approved by Group management and the monitoring processrespects the separation of the performance and control functions.

All derivatives, whether or not they are designated as hedging instruments, are recognised in the accompanyingconsolidated balance sheets at their fair value.

The fair value of derivative financial instruments is calculated using quoted prices. When no quoted prices exist, fairvalue is determined on the basis of discounted cash flows, using the embedded derivatives curve applicable for the termof the derivatives, and option pricing models for derivative-options.

Exchange rate hedging contracts are measured using exchange rate hedge prices and embedded interest rate curvescalculated on the basis of the interest rates prevailing when the contracts expire.

The changes in the fair value of these derivative financial instruments were allocated to profit for the year, except in thecase of instruments classified as cash-flow hedges, the changes in which were recognised directly in equity, net oftheir tax effect, under “Reserve for Fair Value Accounting of Assets and Liabilities” in the accompanying consolidatedbalance sheets. (see Note 23)

The long-term firm commitments of purchases and sales of oil and gas were analysed and it was determined that theyfall outside the scope of IAS 39 since they relate to contracts with the purpose of receiving or delivering non-financialassets and in all cases they concern anticipated purchase and sale transactions.

m) Income tax

Current and deferred income taxes are recognised under “Income Tax” in the accompanying consolidated incomestatement, except when they arise from economic events that have been directly recognised in equity, in which case theyare recognised directly in equity.

The current income tax expense is the result of applying the tax rate to the taxable profit (tax loss) for the year, afterdeducting the tax credits allowable for tax purposes.

Deferred tax is accounted for using the balance sheet liability method, under which temporary differences aredetermined as the difference between the tax bases of assets and liabilities and their carrying amounts.

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Deferred tax liabilities are recognised for all taxable temporary differences, unless, in general, the temporary differencearises from the temporary recognition of goodwill, whereas deferred tax assets arising from deductible temporarydifferences and tax loss and tax credit carryforwards are only recognised if it is probable that sufficient future taxableprofit will be available against which they can be utilised. Deferred tax assets and liabilities are measured based on thetax legislation in force and the tax rates that have been, or are being, enacted at the balance sheet date.

The Group reassesses unrecognised deferred tax assets and unrecognised tax loss and tax credit carryforwards ateach balance sheet date, and recognises those for which it is probable that future taxable profit will be available againstwhich they can be utilised. Recognised deferred tax assets and recognised tax loss and tax credit carryforwards arereassessed and their amount is reduced to the extent it is no longer probable that future taxable profit will be availableagainst which they can be utilised.

n) Recognition of revenue and expenses

Revenue and expenses are recognised on an accrual basis, i.e. when the actual flow of the related goods and servicesoccurs, regardless of when the resulting monetary or financial flow arises.

“Net Revenue” does not include the value of exchanges of strategic stocks arranged with other operators.

In accordance with the legislation applicable to companies operating in the oil and gas industry, the excise tax on oiland gas sales is recorded as part of the selling price and as an addition to cost under “Net Revenue” and “OtherOperating Expenses”, respectively, in the consolidated income statements.

Interest income is accrued on a time proportion basis, by reference to the principal outstanding and the effective interestrate applicable.

Dividend income from investments is recognised when the shareholder's rights to receive payment have beenestablished.

o) Leases

Finance leases

Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leasedasset to the lessee.

When the consolidated companies act as the lessee, they present the cost of the leased assets in the consolidatedbalance sheet, based on the nature of the leased asset, and, simultaneously, recognise a liability for the same amount(which will be the lower of the fair value of the leased asset and the aggregate present values of the amounts payableto the lessor plus, where applicable, the price of exercising the purchase option). These assets are depreciated usingsimilar criteria to those applied to the items of property, plant and equipment that are owned

Operating leases

In operating leases, the ownership of the leased asset and substantially all the risks and rewards relating to the leasedassets remain with the lessor.

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When the consolidated companies act as the lessor, they present the acquisition cost of the leased asset under“Property, Plant and Equipment”, either as “Investment Property”, or “Other Assets Leased out under an OperatingLease”. These assets are depreciated using a policy consistent with the lessor's normal depreciation policy for similaritems and lease income is recognised in the income statement on a straight-line basis.

When the consolidated companies act as the lessee, lease costs, including any incentives granted by the lessor, arerecognised as an expense on a straight-line basis.

p) Current/Non-current classification

In the accompanying consolidated balance sheet debts due to be settled within twelve months are classified as currentitems and those due to be settled within more than twelve months as non-current items.

Loans due within twelve months but whose long-term refinancing is assured at the Company's discretion throughexisting long-term credit facilities are classified as non-current liabilities.

q) Earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the Parent by the number of sharesoutstanding during the year. The number of outstanding shares (267,574,941) remained unchanged in 2009 and 2008.

There are no other equity instruments giving rise to diluted earnings per share different from basic earnings per share.

r) Information on the environment

Per the Resolution dated 25 March 2002 of the Spanish Accounting and Audit Institute, environmental investments aredefined as investments included in the Company's assets for use in its business on a lasting basis which are mainly forthe purpose of minimising the impact on the environment and protecting and improving the environment, including thereduction or elimination of pollution in the future caused by the operations performed by Group companies.

Also, environmental expenses are deemed to be those incurred to prevent, reduce or repair damage to the environment,i.e. the natural surroundings, as well as those relating to environmental commitments.

With respect to provisions for environmental risks and obligations, the Group recorded provisions for environmentalactions to remedy the risk of gradual soil pollution, with a charge to “Other Operating Expenses” in the consolidatedincome statements. These provisions were quantified on the basis of in-house estimates and technical studies. Also,the Group has taken out insurance policies to cover such other environmental damage as might arise, including anythird-party liability that might arise therefrom. (see Note 28)

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s) Segment reporting

The CEPSA Group divides its organisational structure and activity management function into four business segments:Exploration and Production, Refining and Distribution, Derivative Petrochemicals and Gas and Power. These areas aresegments whose operating results are regularly reviewed by the highest authority in making of operating decisions, todecide the resources allocations and assess its performance (see Note 24-a). The key financial data thereon are asfollows:

Operating profit, which comprises the revenue and expenses arising from the operations of each primary businesssegment and the asset depreciation and amortisation charges, but does not include finance income or finance costs,nor other non-operating income or expenses, such as the gains or losses on disposal of non-current assets.

The operating profit included in Note 24 on segment reporting was calculated using the same bases as those used forinternal management information purposes.

Accordingly, due to the special nature of certain economic events, some income and expense items are classified as“non-recurring items” and are excluded from segment result (see Note 24-c). These non-recurring items generallyrelate to transactions that are significant but unusual and to the difference in the value of inventories between averagecost -used in the consolidated financial statements- and replacement cost -used to measure business segments- thusfacilitating the analysis of business segment performance and comparison between years.

In the section on segment assets and liabilities, the capital employed figure is disclosed. Capital employed is composedof non-current assets plus working capital (adjusted replacement cost) minus non-current non-financial liabilities,which is equal to the Group's financial structure (equity plus net borrowings). Net borrowings basically consist of currentand non-current borrowings minus cash and cash equivalents.

The information disclosed in relation to the geographical areas in which the Group carries on its activity was preparedbased on the location of the assets, while information on income was prepared based on the location of customers.

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4. INTANGIBLE ASSETS

The detail of the gross investments in intangible asset accounts, of the related accumulated amortisation andimpairment losses and of the changes therein in 2008 and 2009 is as follows::

2008(Thousands of euros )

Balance at Additions or Other Disposals or Balance at 01.01.08 Charges Transfers Changes Retirements 31.12.08

AssetsConcessions, patents and licences 80,162 768 (977) (1,262) (8,469) 70,222Goodwill 5,249 658 2,732 17,125 (4,803) 20,961 Computer software 127,564 9,524 43 (517) (867) 135,742Flagging contracts 65,296 6,040 - - (1,080) 70,256Other intangible assets 118,724 132,611 (1,489) 14,284 (48,249) 215,881Total 396,995 149,601 309 29,630 (63,468) 513,067

Amortisation Concessions, patents and licences (41,427) (3,015) 851 589 8,257 (34,745)Goodwill (4,860) - - 115 4,745 -Computer software (101,640) (6,618) - 6 (185) (107,385)Flagging contracts (20,339) (9,305) - - (133) (29,195)Other intangible assets (30,276) (4,504) 82 (4,168) (133) (37,054)Total (198,542) (23,442) 933 (3,458) (85,402) (208,379)Impairment losses (46,027) (43,410) - - 46,027 (43,410)

Net intangible assets 152,426 82,749 1,242 26,172 (1,311) 261,278

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2009(Thousands of euros)

Balance at Additions or Other Disposals or Balance at 01.01.09 Charges Transfers Changes Retirements 31.12.09

AssetsConcessions, patents and licences 70,222 3,779 8 408 (241) 74,176Goodwill 20,961 - - - (1,049) 19,912 Computer software 135,747 9,113 1,518 531 (185) 146,724Flagging contracts 70,256 6,731 - - (3) 76,984Other intangible assets 215,881 103,388 1 - (156,054) 163,216Total 513,067 123,011 1,527 939 (157,532) 513,067

Amortisation Concessions, patents and licences (34,745) (3,744) - (365) 241 (38,613)Goodwill - - - - - -Computer software (107,385) (7,874) (89) (296) 15 (115,629)Flagging contracts (29,195) (3,028) - - 2 (32,221)Other intangible assets (37,054) (9,654) - (311) 1,182 (45,837)Total (208,379) (24,300) (89) (972) 1,440 (232,300)Impairment losses (43,410) (2,458) - - 44,010 (1,858)

Net intangible assets 261,278 96,253 1,438 (33) (112,082) 246,854

The additions to intangible assets amounting to EUR 149,601 thousand in 2008 and EUR 123,011 thousand in 2009, relatemainly to the investment in computer software updates recognised by the Group companies under “Computer Software”,to investments in the renewal and execution of new flagging contracts for the service station network and to the additionto “Other Intangible Assets” in respect of the value of CO2 emission allowances relating to the allowances assigned forno consideration under the National Emission Allowance Assignment Plans as detailed below. (see Note 15)

2009 2008Thousands of euros Thousands of metric tones Thousands of euros Thousands of metric tones

Beginning balance 88,682 5,810 140 6,702Assignments 88,118 5,598 132,092 5,810Impairment losses (18,778) - (43,410) -Deliveries (85,005) (5,289) (140) (6,702)Other changes 1,219 (58) - -

Ending balance 74,236 6,061 88,682 5,810

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Emission allowances assigned for no consideration are measured at the market price prevailing at the beginning of theyear to which they relate. As a result of a decrease in the difference between this value and their quoted price on theemission allowance market at 2009 and 2008 year-end, the CEPSA Group recognised an impairment loss for theemission allowances amounting to EUR 18,778 thousand and EUR 43,410 thousand respectively. (see note 25)

In 2010 the allowances relating to emissions made in 2009 will be delivered and the related amount will be derecognisedfrom intangible assets and from the short-term provision for contingencies and expenses. (see Note 18)

The CEPSA Group, through its Parent CEPSA, has a 1.373% share in the Spanish Coal Fund for the purpose of financingvarious projects that target greenhouse gas reduction and the sustainable development of developing countries. Ifthese projects are successful, they will generate emission allowances. In 2009 EUR 273 thousand were paid to theWorld Bank for this share, and recognised as an addition under “Other Intangible Assets”, whereas in 2008 no paymentwas made in this connection.

The non-current asset disposals in 2008 and 2009 relate mainly to the delivery of emission allowances used in 2007 and2008, respectively.

The additions column includes EUR 6,372 thousand in 2008 and EUR 4,143 thousand in 2009 relating to staff costs,finance costs and other expenses relating to these projects which were credited to the related expense captions in theaccompanying consolidated income statements.

At 31 December 2009 the Group had intangible asset purchase commitments amounting to EUR 9,717 thousand.

5. GOODWILL

The detail, by company, of “Goodwill” in 2008 and 2009, is as follows:


Balance at Othe Impairment Balance at 01.01.08 Additions Changes Disposals Losses 31.12.08

CompanyDeten Química, S.A. 36,780 - (7,140) - - 29,640 CEPSA Estaciones de Servicio, S.A. 3,515 - - - - 3,515 CEPSA Portuguesa, S.A. - 16,899 - - - 16,899 Lubricantes del Sur, S.A. 399 - - - - 399 Detisa, S.A. 122 - - - - 122 Petropesca, S.L. - - 2,041 - - 2,041

Total 40,816 16,899 (5,099) - - 52,616

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Balance at Othe Impairment Balance at 01.01.08 Additions Changes Disposals Losses 31.12.09

SociedadDeten Química, S.A. 29,640 - 8,409 - - 38,049 CEPSA Estaciones de Servicio, S.A. 3,515 - - - - 3,515 CEPSA Portuguesa, S.A. 16,899 - - - - 16,899 Lubricantes del Sur, S.A. 399 - - - - 399 Detisa, S.A. 122 - - - - 122 Petropesca, S.L. 2,041 - - - - 2,041

Total 52,616 - 8,409 - - 61,025

The balance in the “Acquisitions” column for 2008 relates to the goodwill that arose on the purchase of all the sharesof Total Portugal Petróleos, S.A. This company was merged with Cepsa Portuguesa Petroleos, S.A.

According to the accounting records, the transaction gave rise to goodwill of EUR 16,899 thousand as a result of thedifference between the recognised fair value of its net assets (assets acquired less liabilities assumed) at the date ofacquisition, amounting to EUR 69,166 thousand, and the acquisition cost, amounting to EUR 86,065 thousand.

The “Other Changes” column includes notably those relating to the effect of the change in exchange rates on thegoodwill of Deten Química, S.A., since it was translated at the year-end exchange rate (see Note 3-b), and to the transferin 2008 of the goodwill of Petropesca, S.L. from “Investments Accounted for Using the Equity Method”. (see Notes 2-eand 7)

The goodwill allocated to the various cash-generating units at 31 December 2009 and 2008 is as follows:


Exploration & Production - - Refining & Distribution 22,854 22,854 Petrochemical 38,049 29,640 Gas & Power 122 122

Total 61,025 52,616

The cash-generating units to which goodwill was allocated were tested for impairment and the recovery of their carryingamounts was ascertained; it was not necessary to recognise any impairment loss.


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The recoverable amount of the business units was determined on the basis of their value in use calculated using theassumptions and cash flows included in the Group’s strategic plan, approved by its management. (see Note 3-d)

6. PROPERTY, PLANT AND EQUIPMENT

The detail of the gross investments in property, plant and equipment, of the accumulated depreciation and impairmentlosses and of the changes therein in 2008 and 2009 is as follows:


Balance at Additions or Other Disposals or Balance at 01.01.08 charges for the year Transfers Changes Retirements 31.12.08

Assets Land and structures 340,832 901 2,712 29,759 (888) 373,316 Plant and machinery 5,348,812 18,650 231,335 (36,260) (23,095) 5,539,442 Investments in areas with proven reserves 1,126,643 566,924 11,512 56,382 (11) 1,761,450 Investments in areas with unproven reserves 88,949 67,246 (10,276) 493 (15,857) 130,555 Other facilities, tools and furniture 110,286 840 7,435 5,630 (2,937) 121,254 Advances and property, plant and equipment in the course of construction 428,410 698,140 (248,457) 113 (1,205) 877,001 Other property, plant and equipment 646,201 46,711 529 8,716 (4,684) 697,473 Total 8,090,133 1,399,412 (5,210) 64,833 (48,677) 9,500,491

Depreciation Accumulated depreciation of structures (83,106) (9,292) - (9,035) 299 (101,134)Accumulated depreciation of plant and machinery (3,055,124) (264,421) 3,981 20,915 17,411 (3,277,238)Accumulated depreciation of investments in areas with proven reserves (621,064) (190,780) (11,293) (7,969) 4 (831,102)Accumulated depreciation of investments in areas with unproven reserves (69,441) (57,236) 11,293 (1,940) 15,857 (101,467)Accumulated depreciation of other facilities, tools and furniture (82,128) (6,912) (137) (4,341) 2,802 (90,716)Accumulated depreciation of other property, plant and equipment (173,046) (35,725) 124 (4,088) 4,135 (208,600)Total (4,083,909) (564,366) 3,968 (6,458) 40,508 (4,610,257)

Impairment losses (18,089) (8,333) - 4 970 (25,448)

Net property, plant and equipment 3,988,135 826,713 (1,242) 58,379 (7,199) 4,864,786

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Balance at Additions or Other Disposals or Balance at 01.01.09 charges for the year Transfers Changes Retirements 31.12.09

AssetsLand and structures 373,316 6,723 3,297 2,190 (1,349) 384,177 Plant and machinery 5,539,442 22,225 320,563 58,456 (39,936) 5,900,750 Investments in areas with proven reserves 1,761,450 61,991 (184,943) (18,914) (10,952) 1,608,632 Investments in areas with unproven reserves 130,555 69,582 187,596 (2,526) (18,937) 366,270 Other facilities, tools and furniture 121,254 2,273 5,152 578 (1,281) 127,976 Advances and property, plant and equipment in the course of construction 877,001 724,489 (351,650) (159) (2,117) 1,247,564 Other property, plant and equipment 697,473 2,004 18,458 (2,798) (10,656) 704,481 Total 9,500,491 889,287 (1,527) 36,827 (85,228) 10,339,850

Depreciation Accumulated depreciation of structures (101,134) (6,826) (1,169) 9,078 494 (99,557)Accumulated depreciation of plant and machinery (3,277,238) (281,517) (7,298) (43,476) 33,885 (3,575,644)Accumulated depreciation of investments in areas with proven reserves (831,102) (193,852) 27,628 8,301 3,874 (985,151)Accumulated depreciation of investments in areas with unproven reserves (101,467) (63,445) (20,392) 1,744 13,613 (169,947)Accumulated depreciation of other facilities, tools and furniture (90,716) (7,919) 1,353 243 1,172 (95,867)Accumulated depreciation of other property, plant and equipment (208,600) (38,018) (33) (520) 9,694 (237,477)Total (4,610,257) (591,577) 89 (24,630) 62,732 (5,163,643)

Impairment losses (25,448) (37,492) - (2,158) 1,156 (63,942)

Net property, plant and equipment 4,864,786 260,218 (1,438) 10,039 (21,340) 5,112,265

The additions to property, plant and equipment, which amounted to EUR 1,399,412 thousand in 2008 and EUR 889,287thousand in 2009, relate most notably to the following items:

- In the area Exploration and Production, increase the exploration efforts in various countries and investments madein the fields located in Algeria and Colombia to improve and expand facilities. Additionally in 2008 the acquisition ofoil and gas exploration and production rights in the Caracara block in Colombia.

- In the area Refining and Marketing, investments in refinery units aimed at enlarging, improving and flexibilising theproduction processes, including most notably the construction of new units at the La Rábida refinery under thecapacity expansion plan for distillation, production of middle distillates and other petrochemical products and newvacuum and mild hydrocracking units at the Gibraltar-San Roque refinery; to the acquisition, in 2008, from TOTAL ofits distribution activities in Portugal, to the enhanced organisation of direct sales and to the increased presence andgreater efficiency of the service station network, and, in general, improvements in industrial facilities to minimise theimpact on the environment and enhance safety in the Group’s activities.

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- In the area Gas and Electricity, investments made mainly for the construction of two new co-generation plants.

Additions in 2008 and 2009 include EUR 45,646 thousand and EUR 63,337 thousand, respectively, of staff, finance andother costs relating to the construction period of various items of property plant and equipment which were creditedto the accompanying consolidated income statements.

Noteworthy among the changes in transfers were those recognised in 2009, totalling EUR 196,768 thousand, in“Investments in Areas with Proven Reserves” and “Investments in Areas with Unproven Reserves” as a result of thedefinitive recognition of the acquisition of oil and gas exploration and production rights in the Caracara block inColombia.

The amounts recorded in the “Other Changes” column relate basically to changes in the scope of consolidation in 2008and to the effect of changes in foreign exchange rates against the euro at certain foreign subsidiaries.

The “Disposals or Retirements” column for 2008 includes mainly the derecognition of fully depreciated explorationassets and that of petrochemical plants and other supply facilities, whereas for 2009 it includes mainly the derecognitionof exploration assets (see Note 25) and other plants.

Certain CEPSA Group companies recognised impairment losses at 2008 and 2009 year-end of EUR 8,333 thousand andEUR 37,492 thousand, respectively, arising from the adjustment of asset values based on the expected recovery of thenet investment through the generation of future revenues, with the most significant in 2009 relating to those recognisedin the petrochemical area by one of its business lines in Canada, due to the decrease in margins and business activities.(see Note 25).

At 31 December 2009, the Group had property, plant and equipment purchase commitments amounting to EUR 214,323thousand, relating mainly to the investments currently being made at the La Rábida refinery.

At 31 December 2009, no material items of property, plant and equipment had been pledged to secure compliance withobligations relating to the ownership thereof.

The detail of the items of property, plant and equipment acquired under finance lease arrangements at 31 December2009 and 2008, is as follows:

2009 2008Accumulated Carrying Accumulated Carrying

Cost Depreciation Amount Cost Depreciation Amount

Plant 59,623 (24,400) 35,223 59,551 (21,420) 38,131 Transport equipment 81,975 (14,058) 67,917 82,043 (11,141) 70,902 Other property, plant and equipment 24,371 (2,207) 22,164 25,930 (1,616) 24,314

Total 165,969 (40,665) 125,304 167,524 (34,177) 133,347

In 1996 certain consolidable Group companies revalued their property, plant and equipment pursuant to Royal Decree-Law 7/1996 of 7 June, increasing the carrying amount of these assets by EUR 117,350 thousand. This increase in valueis being depreciated (the depreciation charge is a tax-deductible expense) with a charge to profit in 1997 and subsequentyears based on the years of residual useful life of the revalued assets.

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Certain CEPSA Group companies have been granted administrative concessions by the Spanish State to use mooringfacilities and access and adjacent areas at the ports of Santa Cruz de Tenerife which will revert to the State from 2009to 2028, Algeciras-La Línea on 2022 and Palos de la Frontera from 2018 to 2065. Management of the CEPSA Groupexpects that these concessions will be renewed when they expire.

The Group has taken out insurance policies to cover the possible risks to which its property, plant and equipment aresubject and the claims that might be filed against it for carrying on its business activities. These policies are consideredto sufficiently cover the related risks.

7. INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD AND JOINTLY CONTROLLEDENTITIES

¨Investments in Companies Accounted for Using the Equity Method¨ at 2009 and 2008 year-end relates basically toCLH is presented in the table below:

Company(Thousands of euros)

2009 2008

CLH 28,566 34,745Other companies 60,360 60,289

Total investments in companies accounted for using the equity method 88.926 95.034

Compañía Logística de Hidrocarburos CLH, S.A. has 2.54% of all the shares comprising its share capital listed on thefour Spanish stock markets, the last quoted closing price of December 2009 was 40.50 euros per share.

The detail of the changes in 2009 and 2008 in the above-mentioned heading is as follows:


Beginning balance 95,034 126,370 Profit after taxes incurred in the year 35,600 37,492 Dividends paid in the year (42,397) (54,373)Additions of investments in companies accounted for using the equity method 8 212

Retirements of companies as a result of: Mergers/ Change in consolidation method - (11,869)Other changes 681 (2,798)

ENDING BALANCE 88,926 95,034

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The principal financial aggregates relating to associated companies accounted for using the equity method aresummarised below:


2009 2008

Total Assets 705,000 675,767 Total Liabilities 616,873 584,497

Net Assets 88,127 91,270

Total Revenues 823,973 1,438,685

Profit for the year 190,582 182,998

Share of results of companies accounted for using the equity method 35,600 37,492

The detail of the goodwill of companies accounted for using the equity method, by the cash generating unit to which itwas allocated, in 2008 and 2009 is as follows::


Balance at Other Impairment Balance at 01.01.08 Additions Changes Disposals Losses 31.12.08

Direct sales companies 935 - - - - 935 Distribution network companies 6,666 - - - 6,666 Bunkering companies 2,041 (2,041) - - -

Total 9,642 - (2,041) - - 7,601


Balance at Other Impairment Balance at01.01.09 Additions Changes Disposals Losses 31.12.09

Direct sales companies 935 - - - - 935 Distribution network companies 6,666 - - - 6,666

Total 7,601 - - - - 7,601

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The “Other Changes” column for 2008 includes the transfer of the goodwill of Petropesca, S.A. to “Goodwill”. (see Notes2-e and 5)

The information at 31 December 2009 and 2008 of the financial statements of the main companies jointly controlled bythe Group is as follows:


Owner-ship Non-Current Current Non-Current Current Operating Operating% Assets Assets Liabilities Liabilities Income Costs

Nueva Generadora del Sur, S.A. 50% 359,308 47,347 269,645 137,010 445,719 386,207 CEPSA Chimie Montreal, LP 51% 336,306 74,723 389,683 21,346 344,496 351,594 CEPSA Chimie Becancour, INC 51% 33,106 39,622 37,076 35,652 165,763 157,639


Owner-ship Non-Current Current Non-Current Current Operating Operating% Assets Assets Liabilities Liabilities Income Costs

Nueva Generadora del Sur, S.A. 50% 337,614 44,272 315,948 65,938 219,472 204,296 CEPSA Chimie Montreal, LP 51% 250,312 76,646 92,000 234,958 236,893 350,714 CEPSA Chimie Becancour, INC 51% 37,654 30,845 38,469 30,030 107,827 98,956

All the proportionately consolidated companies are jointly controlled entities in accordance with the definitionestablished in IAS 31 (see note 2.c) and are included in Table I, which provides information on their line of business andmain economic aggregates.

Table II, which is an integral part of these Notes to the consolidated financial statements, details the main joint venturesoperated as jointly-controlled ventures and jointly-controlled assets, in which the CEPSA Group has an interest. Theaccompanying consolidated financial statements include the assets, liabilities, expenses and income in proportion tothe Group’s ownership interest. “

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8. FINANCIAL ASSETS

The balances of and changes in financial assets in 2008 and 2009 are as follows:


Balance at Other Balance at 01.01.08 Additions Transfers Changes Disposals 31.12.08

Non-current loans to companies accounted for using the equity method 74,008 27,440 (25,239) (900) (2) 75,307 Other non-current loans 56,690 15,210 (8,605) (652) (15,234) 47,409 Other non-current financial assets 45,557 6,312 (5) (3,418) (8,748) 39,698 Allowances (23,206) (1,374) 2,831 827 313 (20,609)Total non-current loans and financial assets 153,049 47,588 (31,018) (4,143) (23,671) 141,805

Current loans to companies accounted for using the equity method 85,847 131,787 25,240 (13,936) (75,370) 153,568 Other current loans 23,172 21,294 8,604 (784) (25,865) 26,421 Other current financial assets 1,407 441,174 5 2,798 (438,526) 6,858 Allowances - (428) (2,831) - 397 (2,862)

Total current loans and financial assets 110,426 593,827 31,018 (11,922) (539,364) 183,985


Balance at Other Balance at 01.01.09 Additions Transfers Changes Disposals 31.12.09

Non-current loans to companies accounted for using the equity method 75,307 37,597 (74,918) - (2,110) 35,876 Other non-current loans 47,409 23,023 (8,756) 741 (17,911) 44,506 Other non-current financial assets 39,698 5,625 - 4,348 (2,922) 46,749 Allowances (20,609) (2,647) - (915) 6,474 (17,697)Total non-current loans and financial assets 141,805 63,598 (83,674) 4,174 (16,469) 109,434

Current loans to companies accounted for using the equity method 153,568 59,961 74,918 (60) (47,058) 241,329 Other current loans 26,421 34,195 8,756 (4,184) (34,314) 30,874 Other current financial assets 6,858 12,743 - (110) (15,488) 4,003 Allowances (2,862) (9,467) - - 2,434 (9,895)Total current loans and financial assets 183,985 97,432 83,674 (4,354) (94,426) 266,311

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Following is a detail of the financial assets and liabilities at 31 December 2008 and 31 December 2009, by type andcategory for valuation purposes:

31.12.2008(Thousands of euros)

Financial assets Held-for-trading Available-for-sale Loans and Hedgingby type / category financial assets financial assets receivables derivatives TOTAL

Equity instruments - 14,504 - - 14,504 Debt instruments - - 110,334 - 110,334 Other financial assets - - 16,967 - 16,967 Non current - 14,504 127,301 - 141,805

Debt instruments - - 177,128 - 177,128 Derivatives 5,008 - - 512 5,520 Other financial assets - - 1,337 - 1,337 Current 5,008 - 178,465 512 183,985

Total 5,008 14,504 305,766 512 325,790


Financial assets Held-for-trading Available-for-sale Loans and Hedgingby type / category financial assets financial assets receivables derivatives TOTAL

Equity instruments - 16,243 - - 16,243 Debt instruments - - 73,452 - 73,452 Other financial assets - - 19,739 - 19,739 Non current - 16,243 93,191 - 109,434

Debt instruments - - 262,310 - 262,310 Derivatives 3,186 - - 93 3,279 Other financial assets - - 722 - 722 Current 3,186 - 263,032 93 266,311

Total 3,186 16,243 356,223 93 375,745

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The detail, by maturity, of the balances of “Loans to Companies Accounted for Using the Equity Method” and “OtherLoans” at 31 December 2008 and 31 December 2009, is as follows:


Maturing in 2009 2010 2011 2012 2013 Other Total

Loans to companies accounted forusing the equity method 153,568 69,176 4,550 - - 1,581 228,875 Otros Créditos 26,421 9,789 14,962 13,282 2,800 6,576 73,830

Total 179,989 78,965 19,512 13,282 2,800 8,157 302,705


Maturing in 2010 2011 2012 2013 2014 Other Total

Loans to companies accounted for using the equity method 241,329 28,814 4,252 - - 2,810 277,205 Other loans 30,874 9,250 6,886 5,929 13,098 9,343 75,380

Total 272,203 38,064 11,138 5,929 13,098 12,153 352,585

9. INVENTORIES

The detail of “Inventories” at 31 December 2009 and 2008 is as follows:


Crudes 466,958 500,405 Other raw materials 51,238 38,610 Finished goods 822,777 1,243,848 Other supplies 111,194 101,742 Allowances (3,655) (548,010)

Total 1,448,512 1,336,595

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Pursuant to the Directorate-General of Energy Policy and Mining resolution dated 26 December 2007, CEPSA and otherGroup companies which act as operators are required to maintain minimum oil product safety stocks equivalent to 50days of sales of the preceding 12 months in the domestic market for 2009, which was established in 2008 in 53 days,excluding sales to other wholesalers, and Corporación de Reservas Estratégicas de Productos Petrolíferos (CORES)inspects and controls the fulfilment of this obligation. CEPSA management considers that the consolidated Group hasbeen meeting this obligation.

As indicated in Note 3-f, CEPSA uses the average unit cost method to measure raw material and commercial goodsinventories.

In 2008 inventories were written down by a further EUR 544,133 thousand to adjust their carrying amount to their netrealisable value, due to the sharp drop in oil prices during the last few months of the year.

Conversely, in 2009 the EUR 544,355 thousand inventory write-down was reversed, since the circumstances for whichit had been recognised at 31 December 2008 had disappeared, due to the increase in the net realisable value of theinventories.

10. TRADE AND OTHER RECEIVABLES

El desglose de la cifra de deudores comerciales y otras cuentas a cobrar correspondientes a los ejercicios de 2009 y2008 es el siguiente (véase nota 22):


Trade receivables for sales and services 2,225,229 1,897,573 Receivable from companies accounted for using the equity method 171,377 224,890 Sundry accounts receivable 12,846 15,163 Tax receivables 59,676 55,480 Allowances (151,192) (133,229)

Total 2,317,936 2,059,877

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11. CASH AND CASH EQUIVALENTS

The detail of “Cash and Cash Equivalents” relating to 2009 and 2008 is shown below:


Cash 111,247 109,383 Cash equivalents 487,290 371,571

Total 598,537 480,954

This item includes cash balances, cash equivalents, bank deposits and other investments maturing within three months.(see Note 3.g)

12. EQUITY

a) Share capital and share premium

Share capital amounted to EUR 267,574,941 and consisted of 267,574,941 book-entry shares, totally subscribed andpaid, of EUR 1 par value each.

Per the information provided by the members of the Board of Directors who are shareholders, at 31 December 2009,Total, S.A. and International Petroleum Investment Company (IPIC), directly and indirectly owned 48.83% and 47,06%respectively, of the share capital of CEPSA.

In 2009 the ownership interests held by Banco Santander and Unión Fenosa in CEPSA, of 32.5% and 5% respectively at31 December 2008, were sold to IPIC.

CEPSA's shares are traded on the continuous market on the four Spanish Stock Exchanges.

The Corporate Law expressly permits the use of the share premium account balance to increase capital and establishesno specific restrictions as to its use. There were no changes in 2009 or 2008 in the balance of this account, whichamounted to EUR 338,728 thousand.

b) Revaluation reserve

In 1996 CEPSA and several consolidated Group companies revalued their property, plant and equipment pursuant toRoyal Decree-Law 7/1996 of 7 June, and increased their equity by EUR 58,438 thousand and EUR 58,438 thousand,respectively. This latter figure was recognised under “Consolidated Reserves” on consolidation, which is included inretained earnings.

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The revaluation reserve also includes EUR 32,498 thousand relating to the revaluations made in 1979 and 1981 pursuantto State Budget Law 1/1979 and State Budget Law 74/1980, which can now be transferred to unrestricted voluntaryreserves. The balance of the “Revaluation Reserve, Royal Decree-Law 7/1996” account can be used, free of tax, toeliminate recorded losses and to increase capital. From 1 January 2007 (i.e. ten years after the date of the balancesheet reflecting the revaluation transactions) the balance of this account can be taken to unrestricted reserves, providedthat the monetary surplus has been realised. The surplus will be deemed to have been realised in respect of the portionon which depreciation has been taken for accounting purposes or when the revalued assets have been transferred orderecognised. If this balance were used in a manner other than that provided for in Royal Decree-Law 7/1996, it wouldbe subject to tax.

c) Reserves at consolidated companies

The breakdown, by company, of reserves at consolidated companies, which are included in “Retained Earnings”, at2009 and 2008 year-end, is as follows:


Fully and proportionately consolidated companies: CEPSA Estaciones de Servicio, S.A. 221,652 218,919 CEPSA Lubricantes, S. A. 25,796 25,894 CEPSA Portuguesa, S.A. 984 16,615 Proas, S.A. 11,239 11,170 CEPSA Química 656,904 654,314 Other Companies 176,611 168,382 Total fully and proportionately consolidated companies 1,093,186 1,095,294

Companies accounted for using the equity method: Compañía Logística de Hidrocarburos CLH, S.A. (12,544) (6,620)Other Companies 17,061 17,939 Total companies accounted for using the equity method 4,517 11,319

Total 1,097,703 1,106,613

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d) Translation differences

The detail, by company, of the balance of “Translation Differences” is as follows:

Company(Thousands of euros)

2009 2008

CEPSA International, B.V. (4,738) (3,417)Deten Quimica, S.A. 32,943 5,094 CEPSA Chimie Montréal, LP 4,735 3,785 CEPSA Chimie Bécancour, INC 2,728 2,212 CEPSA Colombia 32,495 49,917 Other companies (2,113) (2,916)

Total translation differences 66,050 54,675

The change in the balance of this heading in 2009 was basically due to the fluctuation in the year-end exchange ratesof the Canadian dollar, Brazilian real and US dollar.

e) Dividends

“Interim Dividend Paid” includes the dividends paid out of CEPSA's profit at 31 December 2009 and 2008 amounting toEUR 107,030 and EUR, for both years.

The shareholders at the Annual General Meeting on 26 June 2009 resolved to pay a dividend of EUR 1.00 per share outof 2008 profit which, after deducting the interim dividend already paid, gave rise to a final dividend of EUR 0.60 pershare. This dividend was effective on 7 July 2009.

Also the shareholders at the Annual General Meeting on 27 June 2008 resolved to pay a dividend of EUR 1.25 per shareout of 2007 profit which, after deducting the interim dividend already paid, gave rise to a final dividend of EUR 0.70 pershare. This dividend was effective on 7 July 2008.

The final dividend out of 2009 profit that CEPSA's Board of Directors will propose to the shareholders at the AnnualGeneral Meeting will not be deducted from equity until it has been approved by the shareholders.

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f) Minority interests

The detail of “Minority Interests” at 31 December 2009 and 2008 is as follows:

Minority interests 2009 2008(Thousands of euros) Equity Profit (Loss) Equity Profit (Loss)

Company C.M.D. Aeropuertos Canarios, S.L. 12,180 1,976 12,180 2,495 Deten Química, S.A. 21,415 11,120 21,854 7,111 Generadora Eléctrica Penínsular, S.A. 15,520 3,021 15,601 6,661 Other 4 - 3 -

Total 49,119 16,117 49,638 16,267

13. BANK BORROWINGS AND OTHER FINANCIAL LIABILITIES

The detail of the balances of current and non-current bank borrowings and other financial liabilities in 2009 and 2008is as follows:


Current Non-Current Total

Bank borrowings relating to finance leases 26,523 10,035 36,558 Other bank borrowings 714,105 1,099,566 1,813,671 Derivatives 1,756 - 1,756 Other financial liabilities 67,891 150,926 218,817

Total 810,275 1,260,527 2,070,802


Current Non-Current Total

Bank borrowings relating to finance leases 28,547 30,835 59,382 Other bank borrowings 709,841 885,681 1,595,522 Derivatives 7,611 - 7,611 Other financial liabilities 10,588 199,701 210,289

Total 756,587 1,116,217 1,872,804

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The detail by maturity of the bank borrowings and other financial liabilities at 31 December 2009 and 2008, is as follows:


Maturring in: 2010 2011 2012 2013 2014 Resto Total

Bank borrowings relating to finance leases 26,523 7,391 2,615 29 - - 36,558 Other bank borrowings 714,105 299,809 376,859 29,226 74,700 318,972 1,813,671 Derivatives 1,756 - - - - - 1,756 Other financial liabilities 67,891 35,251 13,337 13,567 17,753 71,018 218,817

Total 810,275 342,451 392,811 42,822 92,453 389,990 2,070,802


Maturring in: 2009 2010 2011 2012 2013 Resto Total

Bank borrowings relatingto finance leases 28,547 24,222 4,740 1,844 29 - 59,382

Other bank borrowings 709,841 168,291 307,855 65,298 7,310 336,927 1,595,522 Derivatives 7,611 - - - - - 7,611 Other financial liabilities 10,588 85,224 13,306 12,758 14,042 74,371 210,289

Total 756,587 277,737 325,901 79,900 21,381 411,298 1,872,804

The detail by maturity of the bank borrowings and other financial liabilities at 31 December 2009 and 2008, is as follows:

Financial Liabilities 2009 2008Current Non-current Total Current Non-current Total

Euro 501,038 749,635 1,250,673 379,659 472,662 852,321 Foreign currencies 308,369 510,892 819,261 374,509 643,555 1,018,064 Unmatured interest payable 868 - 868 2,419 - 2,419

Total bank borrowings and other financial liabilities 810,275 1,260,527 2,070,802 756,587 1,116,217 1,872,804

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The average annual nominal interest rate on the loans in euros was 1.39% in 2009 and 3.79% in 2008, and that on theforeign currency loans was 0.76% in 2009 and 2.99% in 2008. The weighted average cost of the financing received was1.09% in 2009 and 3.38% in 2008. The fair value of these financial liabilities coincides basically with their carrying amountas they relate mainly to loans at variable interest rates.

The loans denominated in US dollars are contracted directly or through US dollar forward sales. The interest ratespresented in the preceding paragraph include the effect of these forward sales. In accordance with its foreign currencyrisk management policy (see Note 22), the CEPSA Group has arranged loans in US dollars to finance certain investmentsin non-current assets that generate cash flows in US dollars and are accounted for as cash flow hedges. (see Notes3.k and 22)

The detail of the balances and changes in 2009 and 2008 in “Reserves for Fair Value Accounting Financial Assets andLiabilities” relating to these transactions is as follows:


Beginning balance 26,946 97,756 Gains or losses recognised directly in equity 28,387 (63,229)Transferred to income statement 956 (7,581)

Ending balance 56,289 26,946

At 31 December 2009 and 2008 the CEPSA Group companies had undrawn credit facilities totalling over EUR 700,000thousand and EUR 500,000 thousand, respectively. In addition to these amounts available, at those dates there were“Cash and Cash Equivalents” balances included under “Liquid Assets” in the consolidated balance sheets.

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A detail of the Group’s financial liabilities at 31 December 2009 and 2008, by nature and category, is as follows:


Financial liabilities Held-for trading Borrowings and Hedging by type / category financial liabilities payables derivatives Total

Bank borrowings - 1,109,601 - 1,109,601 Other financial liabilities - 150,926 - 150,926 Non-current - 1,260,527 - 1,260,527

Bank borrowings - 740,628 - 740,628 Derivatives 1,711 - 45 1,756 Other financial liabilities - 67,891 - 67,891 Current 1,711 808,519 45 810,275

Total 1,711 2,069,046 45 2,070,802


inancial liabilities Held-for trading Borrowings and Hedging by type / category financial liabilities payables derivatives Total

Bank borrowings - 916,516 - 916,516 Other financial liabilities - 199,701 - 199,701 Non-current - 1,116,217 - 1,116,217

Bank borrowings - 738,388 - 738,388 Derivados 7,386 - 225 7,611 Derivatives - 10,588 - 10,588 Current 7,386 748,976 225 756,587

Total 7,386 1,865,193 225 1,872,804

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14. TAX MATTERS

CEPSA and certain Group companies have filed consolidated income tax returns. Table I contains a list of the maincompanies in the tax Group in 2009.

The detail of the income tax expense is as follows:

In the consolidated income statements: (Thousands of euros) 2009 2008

Current tax expense Period tax expense 322,909 321,128 Adjustments to the tax expense for the period or prior years (7,329) (9,407)Deferred tax expense Related to the creation or reversal of temporary differences (43,124) (67,741)

otal tax expense recognised in the consolidated income statement 272,456 243,980

In the consolidated statement of changes in equity: 2009 2008

Deferred tax expense Related to the creation or reversal of temporary differences 9,347 (24,614)

Total tax expense recognised in equity 9,347 (24,614)

The income tax expense is obtained from the accounting profit before taxes as indicated below:


Accounting profit (before taxes) 663,261 534,992 Theoretical tax rate 198,978 160,498 Difference due to different tax rates 104,278 116,014 Permanent differences 15,358 16,515 Tax credits and relief applied (38,829) (39,640)Tax adjustment (7,329) (9,407)

Total income tax expense 272,456 243,980

The tax on remuneration of production activities in force in Algeria is deemed to be of the same nature as SpanishIncome Tax. The current tax rate is 38% on the gross annual remuneration in barrels of Saharan Blend crude oil,withheld and settled through the Algerian state-owned company Sonatrach, in the name and on behalf of CEPSA. Therelated tax payable in 2009 and 2008 amounted to EUR 191,074 thousand and EUR 230,852 thousand, respectively, andin 2009 and 2008, under Algerian law, included the tax payable for the new tax on exceptional profits which is higher ascrude price increases and came into force in August 2006.

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The “Difference Due to Different Tax Rates” includes mainly the effect of different tax rates to which CEPSA is subjecton income obtained in the exploration for and production of crude oil from the Algerian fields and attributed to itspermanent establishment. Other foreing institutions or subsidiaries have no significant influence on this ratedifferential.

The “Permanent Differences” arise mainly from the exemptions of revenues which have already been taxed abroad,capital gains on the transfer of certain assets and non-deductible expenses.

The “Tax Adjustment” amounts of EUR (7,329) thousand in 2009 and EUR (9,407) thousand in 2008 include the differencebetween the income tax expense recorded at 31 December 2008 and 2007, and the income tax expense per the final taxreturns for those years and other items such as the effect of applying temporary adjustment reversibility criteria forincome tax purposes and the effect of the assessments issued by the tax inspection authorities and other supplementaryassessments issued to various Group companies.

In calculating the income tax expense for each year, the Group took into account the applicable tax credits for dividenddouble taxation and certain activities and other tax incentives.

At 31 December 2009 and 2008, the CEPSA Group did not have any material unused tax credits.

In 2009 and 2008 the income qualifying for the reinvestment tax credit amounted to EUR 1,312 thousand and EUR 2,238thousand, respectively. This income was reinvested in 2009 and 2008.

As permitted by Article 35 of the Income Tax Law, the CEPSA Group took the following tax credits for investment inmeasures to reduce environmental impact in 2009 and 2008:

(Thousands of euros) General Tax Regime Canary Islands Tax Regime 2009 2008 2009 2008

Enviromental investments 31,150 41,459 - 21 Tax credit 1,246 2,488 - 5

At 31 December 2009 and 2008, certain companies in the consolidated tax Group had EUR 10,265 thousand and EUR24,995 thousand, respectively, of tax losses available for carryforward. The related tax assets were recognised only inthose cases in which it was reasonably estimated that their future recovery is assured.

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The detail of the balances of the deferred tax assets and liabilities is as follows, broken down according to origin:


Deferred tax assets Non-current assets 35,900 40,497 Tax loss carryforwards 5,330 10,515 Provisions 27,728 34,815 Other 19,879 44,013 Total deferred tax assets 88,837 129,840

Deferred tax liabilities Finance leases 67,749 63,143 Non-current assets 32,254 37,605 Hedges 11,484 19,945 Current assets 73,436 133,843 Other 43,649 21,284 Total deferred tax liabilities 228,572 275,820

The deferred tax liabilities arising from current assets include mainly the deferred tax liability arising from the differencebetween the carrying amount of inventories measured at average unit cost and their tax base measured at LIFO cost.In 2008 Royal Decree 1514/2007, which approved the New Spanish National Chart of Accounts, came into force requiring,inter alia, that the Group companies apply the average unit cost method of measurement in their individual financialstatements, since it does not permit the use of the LIFO method. For tax purposes, this change meant that the tax baseis the same as the carrying amount of the inventories. However, in accordance with Law 4/2008, of 23 December, which“abolishes the wealth tax, adopts monthly VAT refund arrangements for general use and introduces other amendmentsto tax legislation”, one-third of the adjustments arising from first-time application of the new accounting legislation maybe included in the taxable income for income tax purposes in each of the first three consecutive years. Consequently,at 31 December 2009, the balance of “Deferred Tax Liabilities” includes a third of the aforementioned difference, havingbeen included two–thirds in the taxable income for 2008 and 2009.

Assessments have been contested for various taxes, including the excise tax on oil and gas. The CEPSA Group has filedappeals against such assessments with the appropriate courts and has recorded a provision for the full amount thereof,together with the related late-payment interest accrued through 2009 year-end.

The years open for review by the tax authorities in connection with the taxes applicable to the Group vary for the differentconsolidated companies, although they are generally the years since 2002, except for the income tax of the CEPSA taxGroup which are the years since 2005.

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In 2008 the tax authorities completed their audit of the CEPSA Tax Group’s income tax for the period 2000 to 2004 andtheir review of the tax returns did not bring to light any discrepancies which might have given rise to liabilities for whichno provisions had been recognised.

CEPSA management does not expect any additional material liabilities for which provisions have not been recognisedto arise for the Parent or for the other consolidated Group companies as a result of the appeals filed or of inspectionof the open years.

In opinion of the Company´s Directors and its tax advisors, related parties transactions are carried at market value,transfer prices are adequately supported and it is estimated that there are not significant risks of future considerationliabilities in this aspect of those resulting liabilities for future consideration for the company.

15. GRANTS RELATED TO ASSETS

The changes in 2008 and 2009 in “Grants Related to Assets” and the balances thereof at year-end are as follows:


Balance at Other Transferred to Balance at 01.01.08 Additions Changes Retirements Income 31.12.08

Grants related to assets 69,913 628 3,904 - (10,121) 64,324 Greenhouse gas emission allowances 166 122,478 - (16) (116,833) 5,795 Total 70,079 123,106 3,904 (16) (126,954) 70,119


Balance at Other Transferred to Balance at 01.01.09 Additions Changes Retirements Income 31.12.09

Grants related to assets 64,324 10,756 996 (5) (9,600) 66,471 Greenhouse gas emission allowances 5,795 85,718 (64) - (76,469) 14,980 Total 70,119 96,474 932 (5) (86,069) 81,451

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The detail, by grantor entity, of the additions to “Grants Related to Assets” in 2009 and 2008 is as follows:


Grants received from - European Union - 126 - Central government 6,200 - - Autonomous Community governments 4,556 502 Total 10,756 628

The additions to “Greenhouse Gas Emission Allowances” include the market value of the emission allowances assignedfor no consideration at the date of assignment and the “Transferred to Income” column includes the valuationadjustment initially recognised for the amount recorded as an impairment loss on allowances received from theGovernment and the recognition in income of the value of the allowances assigned for CO2 emissions made in the year.(see Notes 4 and 25)

16. PENSIONS AND OTHER SIMILAR OBLIGATIONS

a) Defined contribution plans

For the period 2009 and 2008, CEPSA and several of its subsidiaries recognised the following expenses for definedcontribution obligations:

)

Defined obligations (Thousands of euros) 2009 2008

Retirement (pension plan) 10,333 8,278 Life insurance 4,257 4,457

Total 14,590 12,735

b) Defined benefit obligations

The net amounts of expenses and revenues recognised in the consolidated income statement and the variation indefined benefit obligations on the liability side of the balance sheet are as follows:

Defined obligations (Thousands of euros) 2009 2008

Balance at 1 January 11,016 10,789 Current service cost 2,305 2,355 Interest cost of benefit 348 364 Effect of reductions or settlements (2,683) (2,492)

Balance at 31 December 10,986 11,016

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The main assumptions used to determine the pension obligations and post-employment benefits under the plans ofCEPSA and several of its subsidiaries are as follows:

Company Store(Thousands of euros) 2009 2008

Discount rate 4% 4% Expected salary increase rate 2% 2%Mortality tables PEMF2000 PEMF2000

17. OTHER PROVISIONS

The detail of the changes recorded in 2008 and 2009 in “Other Provisions” and of the balances at 31 December 2008 and2009, is as follows:


Balance at Other Amounts Balance at01.01.08 Additions Transfers Changes Used 31.12.08

Provisions for third-party liability 54,759 7,322 11,466 (15,130) (35,845) 22,572 Environmental provisions 19,653 3,656 - - (6,223) 17,086 Other provisions 117,138 17,877 (10,789) 12,848 (22,591) 114,483 Total 191,550 28,855 677 (2,282) (64,659) 154,141


Balance at Other Amounts Balance at01.01.09 Additions Transfers Changes Used 31.12.09

Provisions for third-party liability 22,572 3,059 (286) (586) (3,535) 21,224 Environmental provisions 17,086 5,486 - - (4,881) 17,691 Other provisions 114,483 19,231 286 21,464 (75,016) 80,448 Total 154,141 27,776 - 20,878 (83,432) 119,363

"Provisions for Third-Party Liability" covers the contingencies arising from the Group companies' ordinary operationsthat might give rise to actual liabilities in their dealings with third parties. The main items were obligations to thirdparties relating to contractual undertakings and contingencies relating to lawsuits in progress. It also includes theprovisions recorded to cover possible tax contingencies arising from assessments signed on a contested basis andother tax contingencies in connection with the years open for review by the tax authorities.

“Environmental Provisions” includes the estimated amounts relating to legal or contractual liabilities or commitmentsacquired by the CEPSA Group to prevent, reduce or repair damage to the environment with a charge to professionalservices or repair and upkeep expenses. It also includes the estimated amounts for environmental action to remedy therisk of gradual soil pollution.

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"Other Provisions" includes other contingencies and provisions for the abandonment of crude oil production fields oncethe recoverable reserves have been extracted.

The main changes in 2009 related to the amounts used in relation to the finalisation of certain disputes, the mostsignificant of which were the agreements reached with the Brazilian tax authorities under the new regulatoryframework, and in 2008 related to the conclusion of the inspection of the CEPSA Tax Group’s income tax for 2000 to 2004(see Note 14).

The directors of CEPSA consider that the provisions recorded in the accompanying consolidated balance sheet coveradequately the risks relating to litigation, arbitration proceedings and other transactions described in this Note and,accordingly, they do not expect any liabilities additional to those disclosed to arise.

In view of the nature of the risks covered by these provisions, it is not possible to determine a reasonable schedule forthe related payments, if any.

18. OTHER NON-CURRENT LIABILITIES AND TRADE AND OTHER PAYABLES

The detail of the balances of “Other Non-Current Liabilities” and “Trade and Other Payables” in 2009 and 2008 is asfollows:


Non-Current Current Non-Current Current

Trade payables - 1,520,400 - 1,138,662 Payable to companies accounted for using the equity method - 283,635 - 257,041 Guarantees/deposits received 3,773 9,905 3,776 6,536 Other non-trade payables 27,803 207,331 21,122 244,783 Taxes payable 228 325,120 77,940 210,368 Provisions - 61,107 - 86,870

Total 31,804 2,407,498 102,838 1,944,260

“Provisions” includes at 31 December 2009 and 2008 amounts of EUR 57,757 thousand and EUR 82,718 thousand,respectively, relating to the obligation to deliver allowances for the CO2 emissions made, which are lower than theallowances assigned under the National Emission Allowance Assignment Plan. (see Notes 3-j and 4)

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19. RELATED PARTY TRANSACTIONS

Transactions between the Company and its subsidiaries, which are related parties, were eliminated on consolidationand are not disclosed in this Note. Transactions between the Group and its associates and joint ventures are disclosedbelow:

Transactions with associates and joint ventures


2009 2008

In the consolidated balance sheets: Trade and other receivables 171,377 224,890 Current and non-current loans 277,205 228,875 Trade and other payables 283,635 257,041

In the consolidated income statements: Revenue 1,036,854 1,694,165 Other operating income 628 3,068 Procurements 205,077 219,465 Other operating expenses 131,157 141,935 Finance income 5,961 7,191 Finance costs 296 1,067

Transactions and balances with associates and joint ventures relate basically to normal Group business operationsand were carried out on an arm's-length basis.

Lastly, “Trade and Other Payables” includes EUR 201,783 thousand and EUR 189,462 thousand relating to the excise taxon oil and gas accrued in December 2009 and 2008, respectively, which CEPSA paid to the tax authorities in January2010 and 2009, through Compañía Logística de Hidrocarburos CLH, S.A.

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Transactions with significant shareholders

The relevant transactions performed by the CEPSA Group with significant shareholders in 2009 were as follows:

Name of the Significant CEPSA Group Type of Type of Shareholder Company Relationship Transaction Amount

Banco Santander (*) CEPSA Comercial Services received and EUR 7,364 thousand.finance costs

Comercial Financial income EUR 4,947 thousand.

Corporate Dividends and other distributed profit EUR 50,870 thousand.

Grupo Total CEPSA Comercial Purchases, services and EUR 180,650 thousand of ;sundry expenses sales; EUR 1,071

thousand for servicesand sundry expenses.

Comercial Sales, services and EUR 180,650 thousand of ;sundry income sales; EUR 1,071 thousand

for services andsundry income.

Corporate Dividends and other EUR 130,668 thousand..distributed profit

International Petroleum CEPSA Corporate Dividends and other EUR 65,679 thousand..Investment Company beneficios distribuidos

Unión Fenosa, S.A. (*) CEPSA Comercial Purchases, services and EUR 25,036 thousand ofsundry expenses purchases; EUR 1,499

thousand for services andof services and sundry income..

Comercial Sales, services and EUR 5,693 thousandsundry income of sales; EUR 1,008 thousand

e ingresos diversos.

Corporate Dividends and other EUR 8,027 thousand..distributed profit

(*) For the period that the companies were linked by a significant.

The CEPSA Group and its directors and executives did not perform any relevant transactions in 2009 and 2008, otherthan those described in Note 20.

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20. REMUNERATION AND OTHER BENEFITS OF DIRECTORS AND SENIOR EXECUTIVES

The remuneration earned by the directors at the consolidated Group in 2009 and 2008 was as follows:

Remuneration(Thousands of euros) 2009 2008

Fixed remuneration 800 1,054Variable remuneration 218 310Attendance fees 288 433Bylaw-stipulated director emoluments 3,603 3,708Other items 12 1,844Pension funds and plans: contributions and obligations 943 750Total 5,864 8,099

On 27 June 2008 the Executive Chairman resigned and retired and was replaced by a non-executive Chairman.

Pursuant to Article 127 ter. 4 of the Spanish Companies Law, introduced by Law 26/2003, of 17 July, which amendsSecurities Market Law 24/1988, of 28 July, and the Consolidated Spanish Companies Law, in order to reinforce thetransparency of listed corporations, the Company's directors have made the disclosures to which the aforementionedarticle refers.

Following is a detail of the companies engaging in an activity that is identical, similar or complementary to the activitythat constitutes the company object of Compañía Española de Petróleos S.A. in which the members of the Board ofDirectors own equity interests, and of the functions, if any, that they discharge thereat:

Director Investee Line of Business % of Ownership Function

Mr. Michel Bénézit TOTAL, S.A. Energy Not significant Member of the Executive Committee - General Manager of Refining and Marketing

Mr. Eric de Menten TOTAL, S.A. Energy Not significant General Manager of Marketing Europe Mrs. Bernadette Spinoy TOTAL, S.A. Energy Not significant General Manager of

Styrene-Polymer purchase logistics Mr. Humbert de Wendel TOTAL, S.A. Energy Not significant General manager of corporate

development - Financial Division Mr. Patrick Pouyanné TOTAL, S.A. Energy Not significant General manager of Exploration and

Production -Research and Development Strategy

Also, pursuant to the aforementioned law, we set forth below the activities carried on by the members of the Board ofDirectors that are identical, similar or complementary to the activity that constitutes the company object of CompañíaEspañola de Petróleos S.A., and the duties they discharge at other subsidiaries and associates:

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System under Company through which the Activity which the Activity

Director Line of Business is Performed is Performed Position or Function at the Company Concerned

Mr. Michael Bénézit Integrated oil As an employee TOTAL S.A. TOTAL S.A. Member of the Executive Committee and company General Manager of Refining and Marketing

Mrs. Bernadette Spinoy Integrated oil As an employee TOTAL S.A. TOTAL S.A. General Manager of company Styrene-Polymer purchase logistics

Mr. Murtadha Al Hashmi Integrated oil As an employee IPIC IPIC General manager of Financial Division company

Mr. Eric de Menten Integrated oil As an employee TOTAL S.A. TOTAL S.A. General Manager company of Marketing Europe

Mr. Saeed Al Mehairbi Oil transport As an employee IPIC SUMED (Sued-Mediterranean Pipeline) Proyect management division director.

Mr. Khadem Al Qubaisi Integrated oil As an employee IPIC Chief Executive Officercompany

Mr. David Forbes Integrated oil As an employee IPIC Director of Strategy Departmentcompany

Mr. Patrick Pouyanné Integrated oil As an employee TOTAL S.A. TOTAL S.A. General manager of Exploration company and Production Research and Development Strategy

Mr. Humbert de Wendel Integrated oil As an employee TOTAL S.A. TOTAL S.A. General manager of company corporate development - Financial Division

Director Corporate Name of the Subsidiary Position or Function at the Company

Mr.Dominique de Riberolles CEPSA Química, S.A. Chairman

CEPSA Estaciones de Servicios, S.A. Chairman

CEPSA Chimie Bécancour Chairman

CEPSA Química Montreal LP Chairman

Detén Química S.A. Chairman

Petresa América Inc. Director

Interquisa Canada, Inc Director

CEPSA Gas Comercializadora, S.A. Director

Compañía Logística de Hidrocarburos CLH, S.A. Director

At 31 December 2009, the Board of Directors was composed by 13 members, one female and 12 males, and at 31December 2008, it was composed of 19 members, one female and 18 males.

Total remuneration of senior executives who were not simultaneously executive directors of the consolidated Groupamounted to EUR 6,535 thousand in 2008. At 2009 year-end are as follows:

Remuneration(Thousands of euros) 2009Fixed remuneration 4,295Variable remuneration 740Other items 532Pension funds and plans: contributions and obligations 1,733Total 7,300

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The number of member of Senior Executives has grown 14 in 2008 to 15 in 2009.

Senior executives receive an annual fixed and variable remuneration payment. The latter is calculated as a percentageof the fixed remuneration, with said percentage being conditional upon the level of achievement of the objectivesestablished for the year. These objectives, which are subject to measurement and control systems, are determined onthe basis of the earnings of the Consolidated Group, occupational safety rates, operating aspects of the business, suchas the performance of projects pursuant to established criteria relating to price, quality and deadline, and individualperformance.

21. GUARANTEE COMMITMENTS TO THIRD PARTIES AND OTHER CONTINGENT LIABILITIES

At 31 December 2009 and 2008, certain Group companies had provided guarantees, mainly for bank transactions andsupply contracts, the breakdown being as follows:


Public entities 155,837 149,732Suppliers/creditors and other 627,937 755,656Total 783,774 905,388

The guarantees to “Suppliers/Creditors and Other” relate mainly to guarantees provided by CEPSA to financialinstitutions for drawdowns against credit facilities granted to Group companies, which amounted to EUR 411,874thousand and EUR 583,915 thousand in 2009 and 2008, respectively. These amounts were recognised, by maturity, under“Bank Borrowings” on the liability side of the consolidated balance sheets.

At 31 December 2009, the Group had not pledged any financial assets as security for liabilities or contingent liabilities.

Long-term firm commitments to purchase, Cepsa Group at 31 December are as follows:

Procurements(Thousands of euros)

Subsecuent 2010 2011 2012 2013 2014 years Total

Purchase commitments: Liqued Natural Gas 394,000 351,399 324,699 244,598 244,598 1,956,782 3,516,076

These commitments have been quantified using the best estimates of Cepsa Gas Comercializadora (Brent 80$/bbl andan exchange rate $/€ 1.40)..

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22. RISK MANAGEMENT POLICY

Main risks associated with the CEPSA Group's operations

The CEPSA Group carries on its activities in environments marked by a series of external factors, the changes in whichcould affect the manner in which operations are performed and the results obtained therefrom. These activities aremanaged through the application of policies whose main objective, in accordance with the strategy established by theCompany’s management, is the optimisation of the ratio of costs to risks covered.

The strategic and budget planning processes involve estimating the effect of business risks and a sensitivity analysisis performed for the main variables in order to gain comprehensive insight on their impact.

CEPSA publishes an annual Corporate Governance Report which contains, among other matters, an extensivebreakdown of the economic, social and environmental actions performed and on their contribution to sustainabledevelopment, which Report was prepared in accordance with the directives of the Global Reporting Initiative (GRI).

The Board of Directors through the audit committee, CEO and general managers of the respective divisions, superviseand monitor risks on a regular basis, and adjust risk profiles, where necessary, depending on the circumstances. In thearea of environmental protection, safety and quality, the basic function of the P.A.S.C.A.L. Committee is to periodicallyreview the risks of this type and to propose, where appropriate, measures aimed at compliance or change. In the fieldof information security, a Corporate Security Committee is entrusted with monitoring and fostering compliance withinformation security measures.

The CEPSA Group has risk control systems in place that may affect the investments it makes and the activities it carrieson. Such systems are appropriate for the Group’s risk profile.

The main risks to which the Group is exposed can be grouped in the following categories:

Market risks

The nature of the CEPSA Group’s businesses entails a certain degree of sensitivity to the changes in and volatility of oiland gas prices, refining margins and energy product sales. In this respect, the Group's high degree of verticalintegration, which has increased in recent years, is a strategy which by itself minimises the risk arising from theeconomic cycles and their specific impact on the Group's business units or areas.

A rise in the level of crude oil prices has a positive impact on the earnings of the Exploration and Production division.However, this impact can be dampened by the application of certain clauses of the production share contract–typeagreements “Products Share Contract” (PSC) and their effect on the quantities of crude to be received.

Fluctuations in crude oil prices also have an effect on the results of refining and marketing operations, the scale ofwhich depends, among numerous other factors, on the speed with which price changes in energy products or basepetrochemical products at source can be relayed to the international and local finished goods markets.

In accordance with the sensitivity analysis performed, at 31 December 2009 and 2008, a 10 dollars increase in a similardates in the price of a barrel of oil would lead to an approximate increase in net profit without the effect of Non-Recurring elements (see note 24.c), of EUR 34 and EUR 48 million respectively.

Also, a 10 dollar cents increase in the refining margin per barrel would imply approximate growth in the aforementionedaggregate of EUR 9 million in both years.

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With respect to the risk of crude oil and products price changes in international markets, CEPSA arranges and operatesa price risk hedging system whereby it protects against the effects of the daily volatility of prices and variations of crudeand products stock’s that has been previously defined and reviewed annually to cover the needs for strategic stocks andminimum level of operations. The hedge of these fluctuations in the market is articulated by IPE Crude Brent Oil futuresmarket, compensating with sale positions, the excess of operative stocks and with purchase positions the defect ofoperative stocks.

Capital Management

Maintaining a sound equity structure has been set as a priority objective of capital management by the CEPSA Group.

This overall objective is implemented by controlling the level of borrowings in order to ensure, as it allows them totackle any possible changes in economic and industry-based circumstances and, above all, ensures readiness toappropriate financing enabling the Group take on developments and new profitable business opportunities which mayact as an additional driver of growth and contribute significant value for shareholders.

The changes in the level of borrowings are measured by the ratio of the CEPSA Group’s net borrowings to Equity, brokendown by origin:


Non-current financial liability 1,260,527 1,116,217 Current financial liability 810,275 756,587 Gross liability 2,070,802 1,872,804

Financial assets paid 83,800 66,900 Cash and cash equivalents 598,537 480,954 Net debt paid 1,388,465 1,324,950

Equity 5,352,792 5,205,072

Net debt paid / Equity 25.9% 25.5%

Foreign currency, interest rate and other financial risks

The Group's operations are exposed, in varying degrees, to risks of fluctuations in the financial markets.

The Group´s activities are generally sensitive to fluctuations in the euro exchange rate versus the US dollar, the currencyin which crude oil, and oil and petrochemical products are priced, with respect to the euro. Exposure to this kind of riskis hedged in accordance with the Group's internal policy. From the operational standpoint, is centralised and managedthe foreign currency risk exposure of the Group companies’ net global foreign currency cash flow position.

Also in the Group is centralised the managing of the recourse to financial markets for loans, investment of surplusesand financial instruments.

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In the case of foreign investments in long-term assets which will generate future cash flows in foreign currencies, theGroup minimises its foreign currency exposure by arranging financing in the same currency, which hedges, to a certainextent, the foreign currency risk assumed in the cash flows generated by such assets. This means that the foreigncurrency financing covers, to a certain extent, the foreign currency risk arising from the future cash flows generatedby these assets.

At 31 December 2009 and 2008 net debt in dollars equivalent to EUR 817 million and EUR 1,010 million, representing 39%and 54% respectively of total consolidated debt.

On the basis of the sensitivity analyses performed, at 31 December 2009 and 2008 average annual depreciation of theUS dollar against the euro of 5 dollar cents could give rise to a reduction of approximately EUR 29 million and EUR 32million, respectively, in net profit excluding non-recurring items (see Note 24.c) and an increase in equity, excluding theaforementioned effect on net profit, of EUR 18 million and EUR 19 million, respectively.

Operations are also sensitive to interest rate changes. The Group has arranged most of its debt at floating rates, takinginto account the low debt ratio and because it considers that this financing method will entail a lower cost at long term.

In relation to liquidity risk management, in order to manage potential short-term fund requirements, the Company hascredit facilities available, as detailed in Note 13 of the notes to the financial statements and available Treasury, to theundrawn balance of which does not bear interest.

In accordance with the sensitivity analysis performed, at 31 December 2009 and 2008, a 25 basic points increase ininterest rates relating to all periods and currencies would lead to a decrease in net profit of approximately EUR 3million.

The banks with which the Group operates are leading Spanish and international entities of renown; however, thecounterparty risk in investments and financial instruments contracts is analysed.

Risks relating to changes in the legislation applicable to activities and/or the industry

The activities carried on by the Group, in Spain or abroad, are subject to various legislation. The changes that might arisecould affect the structure under which activities are performed and the results generated by operations

Industrial risks, prevention and safety

The safety control system applied is included in the “Risk Prevention Manual” and its “Basic Standards”, in accordancewith the OHSAS 18.001-2007 international specifications. Also in place are action procedures that reflect the standardsdeveloped in accordance with best practices, which ensure the maximum possible level of safety, paying specialattention to the elimination of risk at source. The objective of this system is ongoing improvement in risk reduction,focused on various activities, such as work planning, the analysis and monitoring of corrective actions derived fromincidents and accidents, internal audits, periodic inspections of the facilities and supervision of maintenance work andoperations.

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Environmental risks

Certain of the Group’s activities have an impact on the environment through emissions into the air, water, soil andground water and also through the production and management of waste. Since 2007 this type of impacts are regulatedby the Integrated Pollution Prevention and Control Directive (IPPC) and its transposition into Spanish Law 16/2002. Inthis connection, all the Group’s industrial plants were awarded their Integrated Environmental Permits, which involverigorous control over their processes with the aim of minimising impact on the environment. Nevertheless, for manyyears now, one of Cepsa's longstanding primary objectives has been to minimise the impact of its activities on theenvironment in which it operates its industrial plants, which is reflected in its internal environmental protection policiesand is regulated by the Basic Environmental Standards.

A summary of the measures adopted in order to minimise impacts, by area, is as follows, by vectors:

Air – Internal procedures are applied with the aim of controlling and managing impacts and control networks havebeen implemented, in relation to both emissions and inmissions, consisting of continuous measurements. The dataobtained is sent in real time to the competent authority.

Discharges into waterways – the Group has industrial waste treatment plants at all of its facilities which allow wastedischarged into waterways to be controlled and significantly reduces the impact on the environment. As in the case ofair emissions, the data relating to the parameters of industrial waste are sent in real time to the competent authorityand environmental controls are also performed on both the waterways and sediments.

Soil/ground water – All the facilities are equipped with piezometric control networks which show the state of the soiland ground water at any given time and allow prompt measures to be taken in the event of an incident, thus minimisingthe impact on this area.

Waste – In its activities Cepsa has established a preventative policy regarding the production of waste, encouraging itsreduction, reuse, recycling and recovery with the aim of protecting the environment and human health.

Protection against Accidental Marine Pollution – The Group carries out all the actions geared towards compliance withthe provisions of the Domestic Contingency Plan for Accidental Marine Pollution and those specified in internalprocedures for the prevention and solution of this type of pollution. The Group carries out all the actions required toimprove the operations of the maritime terminals or facilities, minimising the risk arising from activities.

Exploration and crude oil production - In its operations in Algeria, Colombia, Egypt and Peru, the CEPSA Group appliesstrict environmental criteria in order to minimise the impact of its activities with the utmost respect for the naturalenvironments in which it operates and the indigenous communities in these areas.

Since 1995, Cepsa has been carrying out analyses and assessments of the environmental risks of its activities with theaim of managing and controlling them in order to reduce possible incidents which could lead to significant impacts onthe environment or biodiversity. In this connection, the aforementioned analyses were carried out at various Groupplants which were adapted to UNE 150008:2008 standard on Analysis and Assessment of Environmental Risks, abenchmark standard in Spain.

Also, all of Cepsa's large industrial plants are equipped with environmental management systems certified by externalentities. The primary objective is to obtain certification for the few activities which are still uncertified.

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In this connection, claims may be filed against the CEPSA Group by affected parties for environmental damage causedby its operations inside or outside of its facilities. As far as it is currently aware, management considers that theaccounting provisions recognised in this connection and the insurance policies arranged will cover all possibleoutcomes. Management has yet to determine, on the basis of the related legislation to be enacted, the amount of thefinancial guarantees that could be required as a result of the application of the Regulation partially implementing theEnvironmental Liability Law at certain of the Group’s plants.

The amounts of the financial guarantees will be determined as soon as the regulations implementing the law and theenvironmental liability regulations are enacted.

Also, certain of the Group’s production facilities must comply with the requirements of the regulations affectinggreenhouse gas emissions. In 2008 and 2009 the emissions from the plants affected by this regulation, verified byAENOR, were, overall, slightly less than the allowances granted under the National Allocation Plan.

Equity risk

The Company has taken out insurance to cover the risk of damage to property, including the breakdown of machineryand the control of crude-oil wells involved in exploration and production; the risk of loss of profits arising from damageto property; third-party liability of both CEPSA and its employees or directors during the performance of activities andderiving from damage to property or personal injury to third parties or employees caused by occupational accidents andthe risk of loss or damage during the transport of crude oil, products and equipment.

Customer credit risks

Commercial loans and collections are managed in accordance with periodically updated “Internal Regulations andProcedures”. This regulation determines commercial credit limits for each customer, establishes the most appropriatecollection instruments, includes the actions to be performed for managing default and the monitoring and control ofthe assigned credit limits.

The Group also uses risk analysis computer systems to process internal and external data in an integrated andautomated manner. Such data are assessed by applying the models established to classify each customer’s commercialrisk and assign the related credit limit. Insurance policies have also been taken out to cover the risk of customer defaultin certain commercial areas.

Following is a detail of the past-due receivables that had not been provisioned and of total unmatured receivables,included under “Trade and Other Receivables” at 31 December 2009.


Debts not past due 2,103,561 1,647,416 Debts 0-30 days past due 112,114 275,195 Debts 30-90 days past due 44,649 89,594 Debts 90-180 days past due 38,965 39,637 Debts more than 180 days past due 18,647 8,035 Total trade and other receivables 2,317,936 2,059,877

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As discussed previously, credit insurance policies have been arranged that cover the risk of default on a portion of thepast-due receivables that have not been provisioned. Also, guarantees have been provided that cover another portionthereof.

Risks related to the security of information

CEPSA has a security organisation in charge of ensuring the availability, integrity, confidentiality and auditability of theinformation required for the correct performance of the Group's activities with an adequate level of risk and cost.

The Group has an Information Security Management System based on the reduction of risk, which was awarded thehighest ISO 27001 international certification.

Other risks

The CEPSA Group has various litigation in process in relation to its business, including tax and competition disputesand is also subject to tax inspections for the years still open for review.

Although the final outcome of these matters cannot be foreseen, the Group’s management considers that, based oncurrent information, the provisions recognised adequately cover risks of this nature.

The audits of income tax for 2000 to 2004 of the CEPSA Tax Group were completed in the first quarter of 2008 and nodiscrepancies arose in the tax returns reviewed which might give rise to liabilities for which provisions had not beenrecognised.

23. DERIVATIVES

Pursuant to the risk management policies, the CEPSA Group uses derivative financial instruments to hedge exposureto foreign currency, interest rate and commodity price (basically crude oil and oil products) risks on future cash flows.

The types of derivatives used are normally forward contracts to hedge foreign currency risk, swap contracts for interestrate risk and futures and swaps to hedge commodity price risk. All of these derivatives mature is less than one month,which means that the change in their fair value resulting from changes in the assumptions used for their measurementis scantly significant.

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The detail of derivatives at 31 December 2009 and 2008 is as follows:


Notional or Notional orFair Value contractual amount VFair Value contractual amount

Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities s

Derivatives Foreign currency forwards 292 100 296,220 5,685 5,520 2,555 259,076 55,013 Crude oil futures 226 818 11,793 6,383 - 3,620 - 22,964 Oil product futures 814 256 6,308 14,814 - 99 - 1,233 Oil product swaps 1,947 582 65,762 64,832 721 2,058 - 83,362 Total derivatives 3,279 1,756 380,083 91,714 6,241 8,332 259,076 162,572

The notional amounts of the contracts entered into do not reflect the actual risk assumed by the Group, since theseamounts only constitute the basis on which the derivative settlement calculations were made.

24. SEGMENT REPORTING

a) Business segment reporting:

The CEPSA Group organises and manages its businesses through four business segments:

• Exploration and Production, which includes oil and gas exploration and production operations

• Refining and Distribution, which includes supply, refining and distribution operations.

• Petrochemicals which includes production, distribution and marketing.

• Gas and Power which includes the cogeneration of electricity and the distribution and retailing of electricity andnatural gas.

The selling prices between the business segments are similar to market prices and the amounts of income, expenses,assets and liabilities were calculated before the eliminations on consolidation, except for the internal eliminations ofeach business segment.

The financial data shown below were obtained using the same methodology and internal reporting structures as thoseestablished to provide management information and to measure the profitability of the business segments, applied ona uniform basis with 2008.

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Segment reporting at 31 December 2009 and 2008Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)


Primary segment reporting Information excluding Non-Recurring Items

Exploration & Refining & Gas & Intra-Group Non-Recurring Consolidatng31/12/09 Production Distribution Petrochemical Power Eliminations Total Items Total

Income

RevenueRevenue from external customers 632,306 15,446,527 1,887,567 398,498 - 18,364,898 18,364,898Intra-Group revenue 80,403 866,613 40,530 116,074 (1,103,620) - -Total revenue 712,709 16,313,140 1,928,097 514,572 (1,103,620) 18,364,898 18,364,898Excise tax on oil and gas charged on sales - (2,280,753) - - - (2,280,753) (2,280,753)Revenue without excise tax on oil and gas 712,709 14,032,387 1,928,097 514,572 (1,103,620) 16,084,145 16,084,145Procurements and Changes in inventories of finished goods and work in progress (36,088) (11,967,636) (1,369,906) (398,185) 895,387 (12,876,428) (385,900) (13,262,328)Other operating income and expenses (204,392) (1,685,242) (415,262) (53,522) 208,233 (2,150,185) (14,990) (2,165,175)

Result 472,229 379,509 142,929 62,865 - 1,057,532 (400,890) 656,642Changes in operating allowances - (11,283) (6,916) (1,770) (19,969) 544,811 524,842Depreciation and amortisation charge (263,053) (249,266) (81,871) (21,687) (615,877) (615,877)Allocation to profit or loss of grants related to non-financial assets and others (20) 10,214 10,616 21,717 42,527 42,527Impairment and gains or losses on disposals of non-current assets 26,391 (16,099) (2,968) (3,915) 3,409 (37,086) (33,677)

Profit from operations 235,547 113,075 61,790 57,210 467,622 106,835 574,457Share in profits of equity companies - 32,860 2,962 (222) 35,600 35,600Net financial profit 14,160 37,398 51,558Impairment and gains or losses on disposals of financial instruments 1,646 1,646Consolidated profit before tax 519,028 144,233 663,261Income tax (237,808) (34,648) (272,456)Profit/loss for the year from - - -discontinuing operationsConsolidated net profit for the year 281,220 109,585 390,805

Assets and liabilities

Non-current assets by segment 1,002,420 3,527,331 743,251 309,600 5,582,602 5,582,602Share capital in equity companies 0 76,676 7,298 4,952 88,926 88,926

Total non-current capital invested 1,002,420 3,604,007 750,549 314,552 - 5,671,528 5,671,528

Working capital 949,430 3,935,471 996,165 492,469 6,373,535 367,677 6,741,212

Cash flow statement

Payments due to investments 205,230 659,195 34,755 86,916 986,096 986,096 Proceeds from disposal 29,737 27,668 5,492 249 63,146 63,146Cash flows from operating activities 290,415 324,071 158,988 55,108 828,582 (400,891) 427,691

68


Primary segment reporting Information excluding Non-Recurring Items

Exploration & Refining & Gas & Intra-Group Non-Recurring Consolidatng31/12/08 Production Distribution Petrochemical Power Eliminations Total Items Total

Income

Revenue Revenue from external customers 642,272 21,619,026 2,293,066 561,135 - 25,115,499 25,115,499 Intra-Group revenue 61,284 1,250,458 67,024 137,547 (1,516,313) - - Total revenue 703,556 22,869,484 2,360,090 698,682 (1,516,313) 25,115,499 25,115,499 Excise tax on oil and gas charged on sales - (2,284,935) - - - (2,284,935) (2,284,935)Revenue without excise tax on oil and gas 703,556 20,584,549 2,360,090 698,682 (1,516,313) 22,830,564 22,830,564 Procurements and Changes in inventories of finished goods and work in progress 30,884 (17,974,881) (1,703,130) (565,897) 1,355,280 (18,857,744) 194,833 (18,662,911)Other operating income and expenses (153,118) (1,967,399) (474,316) (45,550) 161,033 (2,479,350) (2,479,350)

Result 581,322 642,269 182,644 87,235 - 1,493,470 194,833 1,688,303 Changes in operating allowances - (30,134) (19,273) (272) (49,679) (544,212) (593,892)Depreciation and amortisation charge (250,885) (232,135) (84,373) (20,417) (587,810) (587,810)IAllocation to profit or loss of grants related to non-financial assets and others 1,360 40,965 16,763 8,189 67,277 67,277 Impairment and gains or losses on disposals of non-current assets 47 (27,065) (7,747) (8,712) (43,477) (7,363) (50,840)

Profit from operations 331,844 393,900 88,014 66,023 879,781 (356,742) 523,039 Share in profits of equity companies 34,487 3,219 (214) 37,482 37,482 Net financial profit (26,250) (26,250)Impairment and gains or losses on discontinuing operations 711 711 Consolidated profit before tax 891,734 (356,742) 534,992 Income tax (351,002) 107,022 (243,980)Profit/loss for the year from de explotaciones discontinuadas - - - Consolidated net profit for the year 540,732 (249,720) 291,012

Assets and liabilities

Non-current assets by segment 1,080,803 3,231,206 804,424 260,228 5,376,661 5,376,661 Share capital in equity companies - 81,784 8,076 5,174 95,034 95,034

Total non-current capital invested 1,080,803 3,312,990 812,500 265,402 - 5,471,695 5,471,695

Working capital 1,051,932 3,846,979 1,029,518 344,958 6,273,387 256,440 6,529,827

Cash flow statement

Payments due to investments 638,647 621,903 24,599 71,832 1,356,981 1,356,981 Proceeds from disposal 2,051 43,135 1,324 1,860 48,370 48,370 Cash flows from operating activities 351,371 569,060 183,083 66,035 1,169,549 169,834 1,339,383

69

Set out below is a detail of the most significant aggregates of the exploration and evaluation activity:


Result Profit from operations (42,722) (69,668)

BalanceNon current assets 197,834 32,262

Cash flow statements Payments due to investments 92,061 62,670 Proceeds from disposal 29,461 - Cash flows from operating activities before tax (2,829) (7,202)

b) Geographical segment reporting:

The breakdown, by geographical area, of net revenue, net property, plant, equipment, intangible assets and investmentsis as follows:


Revenue from Net intangible assets and Additions Investment insales to external customer property, plan and equipment non-current assets

31/12/09 31/12/08 31/12/09 31/12/08 31/12/09 31/12/08

Spain (*) 13,853,176 19,598,322 4,089,730 3,741,511 787,591 798,705 Other EU countries 2,251,332 2,778,457 126,821 137,064 5,575 2,959 Africa 482,133 737,272 464,280 479,878 74,724 98,953 America 1,216,668 1,619,842 678,288 767,611 144,408 648,396 Rest of the world 561,589 381,606 - - - -

Total consolidated 18,364,898 25,115,499 5,359,119 5,126,064 1,012,298 1,549,013

(*) The data under "Revenue forcsales to external customers" in Spain in 2009 and 2008 includes excise taxes

70


c) Information on non-recurring items:

The breakdown, by business segment, of the main items composing this heading is as follows:


Non-Recurring Items

Exploration & Refining & Gas &Production Distribution Petrochemical Power Total

Profit from operationsDifference in valuation and replacement cost - 197,917 (34,523) (4,483) 158,911 Impairment losses on non-current assets - (3,479) (33,607) - (37,086)Other non-recurring items - - (14,990) - (14,990)Total - 194,438 (83,120) (4,483) 106,835

Profit before tax Difference in valuation and replacement cost - 197,917 (34,523) (4,483) 158,911 Impairment losses on non-current assets - (3,479) (33,607) - (37,086)Other non-recurring items - - 22,408 - 22,408 Total - 194,438 (45,722) (4,483) 144,233

Consolidated net profit Difference in valuation and replacement cost - 138,541 (24,166) (3,138) 111,237 Impairment losses on non-current assets - (2,435) (15,901) - (18,336)Other non-recurring items - - 16,684 - 16,684 Total - 136,106 (23,383) (3,138) 109,585


Non-Recurring Items


Profit from operationsDifference in valuation and replacement cost - (297,705) (54,980) 3,306 (349,379)Impairment losses on non-current assets - (3,133) (4,230) - (7,363)Total - (300,838) (59,210) 3,306 (356,742)

Profit before tax Difference in valuation and replacement cost - (297,705) (54,980) 3,306 (349,379)Impairment losses on non-current assets - (3,133) (4,230) - (7,363)Total - (300,838) (59,210) 3,306 (356,742)

Consolidated net profit Difference in valuation and replacement cost - (208,394) (38,486) 2,314 (244,566)Impairment losses on non-current assets - (2,193) (2,961) - (5,154)Total - (210,587) (41,447) 2,314 (249,720)

71

As discussed in Note 3-s, non-recurring items include the difference in the value of inventories between the averagecost method – used in the consolidated financial statements - and the replacement cost method – used to measurebusiness segments –, thus facilitating the analysis of business segment performance and comparison between years.In this sense, the consolidated net result excluding Non-recurring Items used for sensitivity analysis also excludes thedifference mentioned before. (see Note 22)

The breakdown of “Difference in valuation and replacement cost”, as is follow:


Difference in valuation and replacement cost


Profit from operations Inventories changes - (339,955) (38,030) (7,915) (385,900)Inventories provision changes - 537,872 3,507 3,432 544,811 Total - 197,917 (34,523) (4,483) 158,911


Difference in valuation and replacement cost


Profit from operations Inventories changes - (239,578) (51,466) 6,721 194,833Inventories provision changes - (537,283) (3,514) (3,415) (544,212) Total - (297,705) (54,980) 3,306 (349,379)

25. OPERATING INCOME AND EXPENSES

The detail of the various items of operating income and expenses relating to 2009 and 2008 is as follows:

Revenue(Thousands of euros)

2009 2008

Sales 15,768,031 22,473,847 Services provided 356,458 405,262 Sales returns and volume discounts (40,344) (48,545)Excise tax on oil and gas 2,280,753 2,284,935 Total 18,364,898 25,115,499

72


The income generated by exchanges of strategic stocks with other operators, not included in “Revenue” in 2009 and2008 amounted to EUR 616,978 thousand and EUR 1,569,335 thousand, respectively.

“Sales” includes EUR (1,366) in 2009 and EUR 8,573 in 2008 relating to the recognition in income of the exchangedifferences recognised in equity and arising from cash flow hedges of certain of the Group’s income. (see Notes 13 and3-k)

Other operations income (Thousands of euros)

2009 2008

Grants 3,262 1,903 Other operating income 40,686 33,981 Total 43,948 35,884

Procurements (Thousands of euros)

2009 2008

Purchases (12,774,485) (18,706,442) Change in inventories (77,684) (127,153) Total (12,852,169) (18,833,595)

Staff costs (Thousands of euros)

2009 2008

Wages and salaries (406,635) (425,384)Pension contributions and life insurance premiums (14,590) (12,735)Other staff costs (109,642) (116,625)Total (530,867) (554,744)

The average number at 31 December 2009 and 2008, the number of employees, by professional category and sex, wasas follows:

Labour force by professional category (Average Number of Employees )

2009 2008

Executives/Deparment Heads 642 666 Other line personnel 3,352 3,285 Skilled employees/Assistants/Clerical staff 7,813 7,858 Total 11,807 11,809

73

At 31 December 2009 and 2008, the number of employees, by professional category and sex, was as follows:

Labor force by professional category Number of Employees )

2009 2008

Women Men Women MenExecutives/Department Heads 77 560 73 581Other line personnel 768 2,625 745 2,594Skilled employees/Assistants/Clerical Staff 3,010 4,663 3,052 4,770Total 3,855 7,848 3,870 7,945

The detail of the “Other operating expenses” relating to 2009 and 2008 is as follows:

Other operating expenses (Thousands of euros)

2009 2008

Outside services received (1,300,469) (1,420,996)Transport and freight (318,643) (491,082)Taxes other than income tax (60,253) (43,609)Environmental expenses (19,492) (16,447)Other operating expenses (78,324) (87,228)

Total (1,777,181) (2,059,362)

The following should be pointed out in relation to “Other Operating Expenses”:

The fees for financial audit services provided to the various companies composing the CEPSA Group and subsidiariesby the principal auditor and by other entities related to the auditor in 2009 and 2008 amounted to EUR 1,639 thousandand EUR 1,657 thousand, respectively. The audit fees charged by other auditors participating in the audit of the variousGroup companies totalled EUR 478 thousand and EUR 396 thousand, respectively.

Additionally, the fees for other professional services provided to the various Group companies by the principal auditorand by other entities related to the auditor during 2009 and 2008 amounted to EUR 89 thousand and EUR 513 thousand,respectively, whereas the fees charged for such services by other auditors participating in the audit of the various Groupcompanies totalled EUR 103 thousand and EUR 70 thousand, respectively.

74


The detail at 31 December 2009 and 2008 of "Allocation to Profit or Loss of Grants Related to Non-Financial Non-Current Assets and Other Grants” is as follows:

Allocation allowances (Thousands of euros)

2009 2008

Allocation of CO2 emission allowances (see Note 15) 76,469 116,833 Allocation of capital allowances 9,352 10,121 Total 85,821 126,954

In 2009 and 2008 the detail of impairment losses and gains or losses on the disposal of non-current assets recognisedwas as follows:

Impairment and gains or losses on disposals of financial instruments (Thousands of euros)

2009 2008

CO2 emission alowances impairment (seeNote 4) (18,778) (43,410)Other operating income impairment (see Note 6) (37,086) (7,363)Impairment result on nos-current assets 22,187 (67)Total (33,677) (50,840)

Noteworthy under “Gains or Losses on the Disposal of Non-Current Assets” in 2009 was the sale of 50% of theexploration rights of the South Alamein block in Egypt, with the Group maintaining ownership of the remaining 50% asoperator.

26. LEASES

The Group acquired the use of certain assets through finance and operating leases.

The most significant operating leases relate to the rental of buildings, plant, tankers for the transport of crude oil andoil products and service stations leased from third parties.

In 2009 lease expenses under operating lease arrangements totalled EUR 142,963 thousand. Contingent paymentsrecognised in the consolidated income statement amounted to EUR 4,733 thousand.

75

The future maturities of the amounts payable under operating leases at 31 December 2009 and 2008 are as follows:

Maturing in: Operating Leases 31.12.09(Thousands of euros)

2010 145,453 2011 135,057 2012 129,373 2013 108,016 2014 59,232 2015 and subsequent years 221,361 Total payments 798,492

Maturing in Operating Leases 31.12.08(Thousands of euros)

2009 139,328 2010 136,975 2011 104,570 2012 103,293 2013 85,338 2014 and subsequent years 346,656 Total payments 916,160

The main items of property, plant and equipment held under finance leases are two double-hull crude oil tankers,butane gas distribution cylinders and other plant. (see Note 6)

The future maturities of the amounts payable under finance leases at 31 December 2009 and 2008 are as follows

Maturing in Finance Leases 31.12.09(Thousands of euros)

2010 26,957 2011 7,558 2012 2,653 2013 29 2014 - 2015 and subsequent years - Total future payments 37,197 Less interest (639)Present value of minimum lease payments 36,558

76


Maturing in: Finance Leases 31.12.08(Thousands of euros)

2009 29,570 2010 24,996 2011 4,906 2012 1,881 2013 29 2014 and subsequent years - Total future payments 61,382 Less interest (2,000)Present value of minimum lease payments 59,382

27. FINANCE COST OF NET BORROWINGS AND OTHER FINANCE INCOME AND COSTS

The detail of the finance cost of net borrowings and other finance income and costs in 2009 and 2008 is as follows:

Finance cost of net borrowings (Thousands of euros)

2009 2008

Finance income 26,198 38,875 Finance costs (25,345) (61,535)

Capitalised finance costs 11,310 9,400 Total 12,163 (13,260)

Other finance income and costs (Thousands of euros)

2009 2008

Income from equity investments 241 401 Gains (losses) on current financial assets (72) - Gains (losses) on derivatives transactions (2,124) (12)Deferred interest allocated to income 248 240 Exchange differences 3,989 (15,017)Other finance income 62,518 35,911 Other finance costs (25,405) (34,513)Total 39,395 (12,990)

77

28. ENVIRONMENTAL MATTERS

Information on the environment for 2008 and 2009 is as follows:

Environmental Investments (Thousands of euros)

Balance at Additions/ Disposals/ Other Balance at 01.01.08 Charges Amounts Used Changes 31.12.08

Environmental assets 246,481 96,163 (684) 45,669 387,629 Accumulated depreciation of environmental assets (131,270) (13,778) 445 (6,029) (150,632)Total 115,211 82,385 (239) 39,640 236,997

Environmental Investments (Thousands of euros)

Balance at Additions/ Disposals/ Other Balance at 01.01.09 Charges Amounts Used Changes 31,12.09

Environmental assets 387,629 48,098 (3,431) 1,185 433,481 Accumulated depreciation of environmental assets (150,632) (15,932) 3,305 759 (162,500)Total 236,997 32,166 (126) 1,944 270,981

The environmental investments were calculated in 2002 in accordance with the definition contained in the SpanishAccounting and Audit Institute (ICAC) Resolution of 25 March 2002, approving the rules for the recognition, measurementand disclosure of environmental matters in financial statements.

With a view to contributing to Sustainable Development the CEPSA Group has programmes in place for the ongoingimprovement of its production processes, its reduction of waste water effluents, the elimination of effluent spills andits management of solid waste. To such end it has implemented and keeps updated an Environmental ManagementSystem whereby it can ensure compliance with its legal obligations with the aforementioned commitments of ongoingimprovement. The investments relating to the environment reflect the commitment acquired by the Company as aresult of environmental targets.

The most significant environmental assets are the sulphur recovery plants, plants for the treatment of amino acidsand acidified water, waste water treatment plants (chemical and biological) and technical improvements to productionplant equipment in order to achieve enhanced energy efficiency and the reduction of COV and NOX emissions.

78


Environmental provisions (Thousands of euros)

Balance at Additions/ Disposals/ Balance at 01.01.08 Charges Amounts Used 31.12.08

Provision for environmental activities 11,807 2,181 (4,748) 9,240 Provision for environmental contingencies and obligations 7,846 1,475 (1,475) 7,846 Total 19,653 3,656 (6,223) 17,086

Environmental provisions (Thousands of euros)

Balance at Additions/ Disposals/ Balance at 01.01.09 Charges Amounts Used 31.12.09

Provision for environmental activities 9,240 5,486 (4,881) 9,845 Provision for environmental contingencies and obligations 7,846 - - 7,846 Total 17,086 5,486 (4,881) 17,691

“Provision for Environmental Activities” includes the CEPSA Group's best estimates of the contractual or legalobligations and commitments to prevent, reduce or repair damage to the environment with a charge to professionalservices or repairs and upkeep expenses.

“Provisions for Environmental Contingencies and Obligations” includes provisions for environmental action to remedythe risk of gradual soil pollution, the only risk not covered by the insurance policies taken out by the CEPSA Group. Theamounts used in the year related mainly to extraordinary expenses incurred in the treatment of soils.

Environmental expenses (Thousands of euros)

2009 2008

Rent and fees 16 132 Repairs and upkeep 1,742 1,722 Transport 164 164 Other services 12,084 10,773 Additions for environmental provisions 5,486 3,656 Total outside services 19,492 16,447

“Other Services” includes mainly the expenses relating to the inerting of waste at CEPSA's facilities amounting to EUR3,166 thousand in 2009 and EUR 3,128 thousand in 2008.

29. EVENTS AFTER THE BALANCE SHEET DATE

No significant event took place from 31 December 2009 to the date when these consolidated financial statements wereauthorised for issue.

30. EXPLANATION ADDED FOR TRANSLATION TO ENGLISH

These consolidated financial statements are presented on the basis of IFRSs, as adopted by the European Union.Certain accounting practices applied by the Group that conform with IFRSs may not conform with other generallyaccepted accounting principles.

79

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82


Table II The detail of the main companies comprising the CEPSA Group as at 31 December 2009:

Name Country Operator Activity % of OwnershipOurhoud Argelia Sonatrach Exploration and Production 39.76%Timimoun Argelia Total Exploration & Production Algerie Exploration and Production 11.25%Tiple Colombia CEPSA Colombia Exploration 70.00%Garibay Colombia CEPSA Colombia Exploration 50.00%Puntero Colombia CEPSA Colombia Exploration 70.00%Cabrestero Colombia CEPSA Colombia Exploration 70.00%Merecure Colombia CEPSA Colombia Exploration 70.00%El Edén Colombia CEPSA Colombia Exploration 50.00%El Portón Colombia CEPSA Colombia Exploration 50.00%Los Ocarros Colombia CEPSA Colombia Exploration 50.00%El Sancy Colombia CEPSA Colombia Exploration 50.00%Cebucán Colombia PETROBRÁS Exploration 30.00%Balay Colombia PETROBRÁS Exploration 30.00%Cop 14 Colombia Metapetroleum Exploration 37.50%Cop 12 Colombia Metapetroleum Exploration 30.00%SJ & RP Colombia HOCOL Exploration 33.33%Caracara Colombia CEPSA Colombia Exploration and Production 70.00%CPR Espinal Colombia PETROBRÁS Exploration and Production 16.67%La Cañada Norte Colombia Ecopetrol Exploration and Production 16.67%Block 127 Perú CEPSA Perú SA Exploration 80.00%Block 114 Perú CEPSA Perú SA Exploration 60.00%Block 131 Perú CEPSA Perú SA Exploration 70.00%North Barhein Egipt ENI Exploration 25.00%South Alamein Egipt CEPSA Egypt SA, BV Exploration 50.00%Rodaballo Spain Repsol Exploration and Production 15.00%Casablanca Spain Repsol Exploration and Production 7.40%Montanazo Spain Repsol Exploration and Production 7.00%Boquerón Spain Repsol Exploration and Production 4.50%

83

Management Discussion & Analysis of 2009 for CompañíaEspañola de Petróleos, S.A. and Subsidiary Companies (CEPSA Group)at December 31, 2009 and 2008Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)

OPERATING ENVIRONMENT

The oil industry in 2009 was affected by a sharp drop in demand for oil, gas and petroleum products, as a result ofadverse global economic conditions. Despite this circumstance, crude prices steadily treaded upwards throughout theyear, firmly underpinned by OPEC production restraints, stronger demand in Asia and positions taken on energy futuresmarkets ahead of a turnaround in the economy.

European benchmark Brent Blend, which started out the year at $36.55/bbl, rose consistently during 2009 until reaching$77.67/bbl on December 31st. In spite of this increase, the annual average stood at $61.5/bbl, sharply less than themedian price of $97/bbl in 2008.

Persistently feeble economic activity, especially in OECD member countries, prevented the spike in raw material pricesfrom being passed along fully to petroleum product prices.

Looking at developments in Diesel/Brent spreads in 2009, they continued to be very weak, with the yearly average at$69.2/t, considerably below the average of $207.2/t recorded in 2008. This substantial erosion in margins, prompted bythe steep fall in demand for middle distillates on account of the economic downturn and its effects on the transportationindustry, had a negative impact on earnings from refining activities, which are struggling with the industry’sovercapacity.

As a result of this trend in product/crude spreads and the rise in crude purchasing formulas, refining margins droppedto all-time lows. Margins, as published by the International Energy Agency – IEA – for the area where CEPSA’s refineriesare located (Ural Med Cracking and Ural Med Hydroskimming), fell in the period; as regards hydroskimming, from –$2.5/bbl in 2008 to -$3.4/bbl in 2009 while the conversion (Cracking) margin plunged from $7/bbl to $1.5/bbl in 2009.

As for the U.S. dollar against the euro, its value continued to decline throughout 2009, with the annual average at$1.39/€; nonetheless, this exchange rate was up 5% when compared to the rate in the same period of 2008, whichstood at $1.47/€.

Key Economic Variables 2009 2008 Variation %Brent price in $/barrel 61.5 97.0 -35.49 -36.6%Exchange rate $/€ 1.39 1.47 -0.08 -5.5%

ACTIVITY

Exploration & Production

In the upstream segment, CEPSA’s crude oil production from its working interests in 2009 totaled 116.9 thousand BOPD,5% lower than in 2008. Similarly, the Company’s entitlement in the period, understood to be the amount assigned toCEPSA after applying contractual conditions and before paying taxes, amounted to 20 million barrels, climbing 15%from the previous year.

CEPSA added production from the Caracara block in Colombia as of March 2008. This new contribution came in additionto sales of barrels produced in the Company’s Algerian acreages, which, as a result of applying production-sharingconditions, were significantly higher in 2009 than in 2008 due to lower crude oil prices in the current year.

Furthermore, CEPSA continued its intensive exploration efforts in Algeria (Timimoun block which as of October hasbegun the development phase to produce gas starting in 2013), Colombia (16 blocks, 11 as operator), Peru (4 blocks, allas operator) and Egypt (2 blocks, 1 as operator).

Total capital and exploration investments stood at €214 million in the year.

Refining & Marketing

The decline in petroleum product consumption led to oversupply in the marketplace, especially in OECD membercountries, which, compounded by worse crude supply and marketing conditions, gave way to an unprecedented plungein downstream earnings.

CEPSA’s refinery throughput in 2009 amounted to 20.3 million tons, lower (-6%) than 2008’s level. This drop was dueto the decision to reduce processing at the Company’s refining facilities, in order to tailor the volume to prevailingeconomic conditions.

As for marketing activity, CEPSA’s sales totaled 26.5 million tons in 2009, slipping 1% from the amount sold in 2008. Asfor motor fuel sales, they declined 4.9% vis-à-vis the same period a year earlier, which in turn had dropped 5% fromthe year before.

Capital spending in the downstream segment, totaling €594 million in the period, was primarily assigned towards theconstruction of new Crude and Hydrocracking units in the La Rábida Refinery, slated to start up in 2010, and newVacuum and Mild-Hydrocracking units in the Gibraltar-San Roque Refinery, which will significantly raise thecompetitiveness of these refineries.

As regards greenhouse gas emissions, noteworthy was that for the fifth year in a row, there was a favorable balanceunder the National Allocation Plan, and there was no need to purchase emission allowances outside.

Petrochemicals

Petrochemical product sales in 2009 totaled 3 million tons, sliding 4% from the same period of 2008, reflecting thedownturn in this industry across-the-board.

Despite the dismal operating environment for this business, efforts to scale back fixed and variable costs as a resultof synergies achieved by merging the various activities in this division into a single company, CEPSA Química S.A., madeit possible to partially offset the erosion in margins and activity.

Capital expenditures in the area totaled €34 million in the year.

| Annual Report 2009 | Management Discussion & Analysis

84

85

Gas & Power

Electricity sales in 2009 amounted to 3,273 GWh, slipping 6% from the year before, in line with weaker domestic demandfor electricity.

In 2009, electricity sales prices to the pool averaged €37/MWh, 43% less than the year before. The downswing in pricescontinued into the fourth quarter, posting their lowest levels since 2004.

As for natural gas retailing activities carried out through the affiliate CEPSA Gas Comercializadora, S.A. (35% CEPSA-owned), sales totaled 21,338 GWh in the year, with a 4% drop in activity vis-à-vis the same period of 2008, consistent withdeclining natural gas demand in Spain.

Capital expenditures in the year, totaling €101 million, were allocated towards the construction of cogeneration unitsin Lubrisur Plant in San Roque, Asesa in Tarragona and the La Rábida Refinery, and the construction of the deepwatergas pipeline between Algeria and Spain (Almería) by the company MEDGAZ, which is slated to come on-stream in 2010.

RESULTS

The CEPSA Group’s financial statements for the period ended December 31, 2009, have been prepared in compliancewith International Financial Reporting Standards (IFRS), which are mandatory for the accounts of certain groups ofcompanies pursuant to Spanish law.

Highlights of the consolidated financial statements for full-year 2009, expressed in millions of euros, are as follows:

Information by segments excluiding non-recurring items Exploration & Refining & Gas &(millons of euros) Production Marketing Petrochemicals Power 31/12/2009 31/12/2008Net sales to external customers

Total 632 15,447 1,887 399 18,365 25,115Total excluding excise tax on oil & gascharged to sales 632 14,361 1,887 399 17,279 22,831

Operating income by segments 236 113 62 57 468 880% change from previous year -28.9 -71.3 -29.5 -13.6 -46.8

Average Cost – Replacement Cost and other non-recurring items 107 -357Other income and expenses 88 12

Consolidated income before taxes 663 535Corporate income taxes -272 -244Gains/(losses) from discontinued operations 0 0

Consolidated net income (before minority interests) 391 291

Income attributable to: Shareholders of the parent company 375 275Minority interests 16 16

Operating income from all business segments, excluding non-recurring items, stood at 468 million, 46.9% less thanthe figure posted in 2008.

As regards the caption of “non-recurring items”, the breakdown is as follows:

Non-recurring items (Millions of €) 31/12/2009 31/12/2008Asset impairment -37 -8Difference in inventory valuation (Average Cost – Replacement Cost) 159 -349Other non-recurring items -15 -

Within this caption, the most significant item is the difference in valuing company-owned inventory at replacementcost, used as a business segment performance indicator and an internal measure in reporting to the Company’sgoverning bodies, versus the Average Cost method applied under IFRS. This difference amounted to €159 million in 2009,driven by the surge in crude oil and distillate product prices in the year, versus a negative - €349 million in 2008.

Consolidated pre-tax income amounted to €663 million, 23.9% higher than the year before. Net income attributable toshareholders of the parent company totaled €375 million, equivalent to an EPS (Earnings Per Share) of €1.40, up 35.9%from the figure posted in 2008.

FINANCIAL AND EQUITY POSITION

At December 31, 2009, the CEPSA Group’s consolidated assets totaled €10,347 million, 7.2% higher than at year-end2008.

Out of this figure, non-current assets, which include tangible fixed assets, intangible assets and long-term financialinvestments, amounted to €5,707 million at the end of December 2009, €162 million more than the figure recorded ayear earlier.

The Group’s capital employed came to €6,741 million at year-end 2009, the breakdown by business segments being asfollows:

Información by segments (Millons of €) Exploration Refining & Gas & Total& Production Distribution Petrochemicals Power Consolidated

Capital Employed at 31-12-09 949 4,344 957 491 6,741Capital Employed at 31-12-08 1,052 4,117 1,014 347 6,530Variation -103 227 -57 144 211

Equity attributable to shareholders of the parent company, before the final dividend distribution, at December 31, 2009,amounted to €5,287 million, funding 78.4% of the capital employed at this date.

During the year, CEPSA’s cash flow from operating activities amounted to €1,196 million and financial debt rose by€132 million. These funds enabled financing capital expenditures and other long-term assets at €986 million anddistributing a dividend payment of €292 million.

Total debt levels continued to be very restrained, as reflected in the debt-to-equity ratio, which came to 25.9% in theyear as a whole.


86

87

MAJOR RISKS ASSOCIATED WITH THE CEPSA GROUP’S ACTIVITY

The CEPSA Group’s activities, due to their nature, are exposed to a series of external risks and factors that can affectthe way operations are conducted and the results obtained thereof. In order to mitigate this impact, the CEPSA Groupimplements a general risk policy that seeks to optimize the risk/reward tradeoff, consistent with the strategy establishedby the Group’s Executive Management.

As part of the planning and budget processes, the effects of business risks are assessed and a sensitivity analysis ismade for key variables, in order to have a complete and comprehensive view of their impact on the Group.

Each year, CEPSA publishes a Corporate Responsibility Report that contains, among other matters, a broad and detaileddescription of the actions carried out by the CEPSA Group in social, economic and environmental areas and itscontribution to sustainable development throughout the year. This report is prepared following the guidelines of theGlobal Reporting Initiative (GRI).

The Board of Directors, the Chief Executive Officer, as well as the Executive Managers of the different business divisions,supervise and regularly control risks, and adapt, wherever feasible, their profile to prevailing circumstances. In thearea of Environmental Affairs, Safety and Quality, CEPSA’s PA.S.CAL (Environmental Protection, Safety and Quality)Committee’s basic function involves the periodic review of the CEPSA Group’s environmental, occupational health andsafety and quality management and its associated risks, proposing any needed changes or adjustments. In the area ofInformation Security, there is a Corporate Security Committee whose aim is to monitor and oversee implementation ofinformation security measures.

The CEPSA Group has established risk control systems that may affect the development of the Company’s investmentsand activities and which are consistent with the Group’s risk profile.

The key risks encompassed in the “Control System” are as follows:

Market Risks

The very nature of the businesses engaged in by the CEPSA Group involves a certain degree of sensitivity to prevailingtrends and volatility in oil and gas prices and refining and marketing margins. Accordingly, the Group’s high level ofvertical integration, strengthened in recent years, is one tool that can enable the Company to counteract and, if possible,override the cyclicality of the oil industry and ease the effects this can have on one or another of the Group’s differentsegments or areas.

For instance, an increase in crude oil prices has a positive impact on upstream earnings, even though the extent of thiseffect can be limited by the application of contractual terms and conditions under Production-Sharing Contracts (PSC)and their constraints on the amount of crude available for sale.

Fluctuations in the price of crude oil can likewise have an effect on refining and marketing operations, the dimensionsof which are mostly determined by how swiftly these price changes can be passed along to international and localfinished product markets.

As regards risks associated with price trends for crude oil and products on global markets, the CEPSA Group maintainsand operates a comprehensive hedging system that insures it against the impact of price volatility and crude andproduct inventory variations as compared to a previously-defined level of inventory that is reviewed on a yearly basiscovering the minimum strategic stock and operating requirements. These variations are hedged on the Brent IPEfutures market, with forward sales offsetting surplus volumes of targeted inventories, and forward purchases offsettingvolumes that stand below the targeted inventories.

Capital and Financial Risk (Exchange Rate, Interest Rate, etc.) Management

The Group’s activities, to varying degrees, are exposed to risks stemming from movements on financial markets.

The Company strives to maintain a sound financial and equity position and the appropriate risk controls to be able tosuccessfully overcome challenging or shifting scenarios in the oil industry and global marketplace, and particularly tohave the funds available to capitalize on future developments and attractive new business opportunities that will providea springboard and momentum for further growth and yield significant long-term, sustainable value for its shareholders.

The Group’s businesses are, to a large extent, sensitive to fluctuations in the exchange rate between the euro and theUS dollar, which is the currency in which most crude oil and petroleum and chemical products are priced. The Groupstrives to minimize the impact of this exchange risk on commercial transactions carried out. From an operational pointof view, the Company centralizes and manages exchange risk from the net overall cash flow position in foreigncurrencies of all the Group’s companies.

The arrangement of financing options and risk hedging instruments, as well as the investment of surplus funds, arealso centralized in the Group.

In the case of foreign investments in fixed assets which generate future cash flow in foreign currencies, the Groupseeks to minimize its exchange risk exposure by financing these capital expenditures in the same functional currency.In other words, its debt in foreign currencies to some extent covers the exchange risk exposure it has from cash flowgenerated by these assets.

The Company’s activities are also sensitive to interest rate fluctuations. As a result, the Group has arranged most ofits financial debt at a floating rate, bearing in mind its currently low debt ratio, the stable environment for interest ratesin euros and the fact that it considers that this financing model will entail a lower cost over the long run.

In order to manage liquidity risks, the CEPSA Group maintains credit facilities and surplus cash to ensure it will be ableto handle its current financial liabilities and meet any funding needs that may arise.

The CEPSA Group works with leading and highly-reputable Spanish and international financial entities, although itadditionally analyzes the counterpart risk of negotiating investments and financial instruments.

Risks Related to Changes and Developments in Regulations Applicable to Petroleum-related Activities and/or theOil Industry

The Group’s businesses both in Spain and abroad are subject to a wide variety of laws and regulations. Any changesthat may arise can affect these activities both in their structure and their earnings and results.

Industrial Risks, Prevention and Safety

The CEPSA Group has a safety management system as stated in its “Risk Prevention Manual” and “Basic Regulations”,pursuant to international OHSAS 18001-2007 standards. Likewise, it has established procedures to follow, reflectingindustry-wide, generally-accepted best practices, that guarantee the highest possible levels of safety, paying specialattention to the elimination of risks at source. The system in place is aimed at ongoing improvement in risk reduction,relying on a number of activities, such as work planning, analysis and monitoring of remedial actions related toincidents and accidents, internal auditing, routine inspections of facilities and supervision of maintenance andoperational work.


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Environmental Risks

Some of the CEPSA Group’s operations generate impacts on the environment, such as those related to emissions ofair pollutants and discharges into waterways, soil and groundwater as well as during the production and disposal ofwastes. Since 2007, these impacts have been regulated by the IPPC (Integrated Pollution Prevention and Control)Directive, which has been transposed into Spanish legislation by Act 16/2002. Accordingly, all of the CEPSA Group’smajor industrial facilities have been awarded Integrated Environmental Authorizations which entail rigorous control overits processes with the aim of minimizing environmental impacts. Notwithstanding the above, one of CEPSA’s keypriorities throughout the years has been to conduct its industrial operations in a safe and environmentally-friendlymanner, as reflected in its internal Environmental Protection policy and governed by its Basic Environmental Rulesand Regulations.

In short, measures adopted to minimize environmental impacts, by categories, are the following:

•Air emissions – Internal procedures are applied to manage and control impacts and control networks have beenput into place for both inmissions and emissions, using measuring stations whose data are reported to theauthorities in real time.

•Water discharges – Industrial effluent treatment plants have been deployed at all industrial sites to control waterdischarges, thereby considerably minimizing their impact. As in the case of air emissions, data on industrial effluentparameters are provided to the authorities in real time; and measures are implemented to control the receptorbody, both as regards waters and sediments.

•Soils/Groundwater – All of the Group’s industrial plants have piezometer networks to allow ongoing monitoring ofthe condition of soils and groundwater, enabling a rapid response to any possible incidents and as a result,minimizing their impacts.

•Wastes – CEPSA has established a preventive policy with regard to the production of wastes which encourages thereduction, reuse, recycling and recovery of wastes in order to enhance environmental protection and the safetyand health of surrounding communities.

•Accidental Marine Pollution – Measures are put into effect to comply with the provisions contained in InternalContingency Plans for Marine Pollution Accidents (PICCMA) and in internal procedures to prevent and control thistype of pollution. Steps are taken to improve the operational capabilities of Maritime Terminals and Facilities,minimizing risks inherent in their activities.

•Crude oil exploration & production – In its upstream operations in Algeria, Colombia, Egypt and Peru, the CEPSAGroup applies stringent environmental principles, guidelines and strategies to minimize the impact of its activitiesand ensure utmost respect to the environment and the surrounding indigenous communities where it conducts itsbusinesses.

Since 1995, CEPSA has been proactively working on the analysis and assessment of environmental risks stemmingfrom its activities in order to ensure their effective management and control, reducing possible incidents that may leadto significant impacts on the environment and its biodiversity. In this respect, these tests and reviews were conductedat the Group’s various plants and sites, all of which are compliant with UNE 150008:2008 standards on EnvironmentalRisk Analysis and Assessment, the benchmark standard in Spain.

Additionally, all of the CEPSA Group’s major industrial facilities have environmental management systems certified byindependent accrediting agencies. One of its key priorities at this time is to complete the certification of the fewremaining activities that are still not in possession of this accreditation.

The CEPSA Group may be a party to claims or litigation in connection with environmental damages caused by itsactivities both within and outside its sites and facilities. Although future costs are indeterminable, based oncurrently-available knowledge, Management feels that these contingencies are adequately covered with theaccounting provisions created for such purposes and different kinds of liability insurance policies. Depending onfuture legislation in this regard, the specific amounts of the financial guarantee that may arise as a result of theenforcement of the regulations under the Environmental Responsibility Law in certain Group facilities have yet to bedetermined.

The amounts covered by the financial guarantees will be specified as soon as the provisions of the law and the rulesand regulations of environmental responsibility are developed.

Additionally, a number of the Group’s productive facilities are required to comply with regulations that affectgreenhouse gas emissions. Both in 2008 and 2009, emissions from all the plants and units affected by thislegislation, and which have been verified by AENOR, were slightly lower than the volume of emission allowancesassigned in the National Allocation Plan.

Property and Casualty Risks

The CEPSA Group is insured against risks involving material damages, including machinery failures and the control ofcrude exploration and production wells; injuries to workers from occupational accidents; loss of profit stemming frommaterial damages; civil liability, both for the companies of the CEPSA Group as well as their employees in performingtheir jobs and arising from material damages or personal injuries; and loss or damage in the transportation of crudeoil, products and equipment.

Customer Credit Risks

The CEPSA Group has established a commercial credit and collection management policy, regulated through its“Internal Standards and Procedures” that are periodically updated, which include determining commercial credit limitsfor each customer; establishing the appropriate collection instruments; laying out procedures to follow in case ofdefaults; and monitoring and controlling assigned credit limits.

Furthermore, computerized risk analysis systems are used to globally manage and automate internal and externaldata, evaluating them by applying models established for classifying each customer’s commercial credit risk and theassignment of their credit limit. Notwithstanding the above, insurance policies have been arranged to cover the risk ofcustomer payment defaults in certain commercial areas.

Information Security Risks

CEPSA has a security organization in place to guarantee the availability, integrity, confidentiality and auditability of theinformation required to ensure the smooth development and progress of the Group’s activities and with the acceptablecost and risk.

The Company has an Information Security Management System based on minimizing security risks, which has beenawarded international ISO 27001 certification.

Other Risks

The CEPSA Group is involved in a variety of legal proceedings related to its businesses, including tax and antitrust-related lawsuits and is likewise subject to tax inspections for years that are still liable for inspection.

Although the results of these matters are unforeseeable, Management considers that, based on current information,provisions made for such contingencies reasonably and prudently cover these risks.


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Inspections by tax authorities to review the years spanning 2000 to 2004 with regard to the corporate income taxes paidby the CEPSA Tax Group were completed in the first half of 2008, and no discrepancies were detected in the tax returnsunder review that could lead to non-provisioned liabilities.

MATERIALIZED RISKS

No material asset or equity losses occurred during the year. On the other hand, trends in doubtful trade debts improvedfrom the previous year and the appropriate allowances were made in this connection.

The implementation of ongoing improvements in risk control systems is enabling the Company to steadily reduce thefrequency of accidents, particularly in the area of occupational safety, and noteworthy is that the frequency rate (numberof lost-workday injuries for each million hours worked) fell from 4.65 in 2008 to 3.59 in 2009, meaning a year-on-yeardecline of more than 22%.

IDENTIFICATION AND DESCRIPTION OF THE PROCESSES OF COMPLIANCE WITH REGULATIONS THAT AFFECT THECEPSA GROUP.

The energy sector in which CEPSA conducts its businesses is basically governed by Hydrocarbons Act 34/1998 of October7th; RDL 15/1999 of October 1st, approving measures to deregulate the market, implement structural reforms andincrease competition in the oil and gas sector; RD 16/2002, on Integrated Pollution Prevention and Control; RD 1716/2004of July 23rd regulating the obligation to maintain minimum security stocks of petroleum products, the diversificationof natural gas supplies and the Corporation for Strategic Reserves of petroleum products; RD 398/1996 of March 1st andsubsequent regulations on automotive gasoline and diesel specifications; RDL 6/2000 of June 23rd on urgent measuresto intensify competition in markets for goods and services; Act 9/2006, of April 28th on the evaluation of the effects ofcertain environmental plans and programs; RD 61/2006 of January 31st setting gasoline, diesel, fuel oil and LPGspecifications and regulating the use of certain bio-fuels and the sulfur content in specific marine fuels; RD 679/2006,of June 2nd, regulating used oils management; RD 1370/2006 of November 24th, which approves Spain’s GHG emissiontrading allowances for 2008-2012; EU Council Decision of October 14, 2004, regarding the signature, on behalf of theEuropean Community, of the Stockholm Convention on Persistent Organic Pollutants; European Directive 2008/1EC,passed by the European Parliament and Council on January 15, 2008, concerning integrated pollution prevention andcontrol (IPPC); Act 26/2007 of October 23rd on environmental responsibility which transposes Directive 2004/35/EC ofthe European Parliament and Council of April 21, 2004; RD 2090/2008 of December 22nd approving Regulations thatpartially develop the aforementioned Act; RD Law 1/2008 on environmental risk assessment and Act 34/2007 on airquality and atmospheric protection.

In environmental matters, CEPSA has included the requisites of applicable legislation in its “Basic EnvironmentalRegulations” and “Internal Procedures”. Likewise CEPSA has strengthened its commitment to the environment throughthe development of its “Biodiversity Regulations” which regulate measures to be adopted to preserve habits andspecies in communities where the Company operates.

Noteworthy is that CEPSA has implemented an environmental management system, certified according to UNE-EN ISO14001 and Regulation 761/2001 of the European Parliament and Council regarding the voluntary participation oforganizations in an Environmental Management and Audit System (EMAS), in most of its activity centers by independentagencies which in turn are accredited by the Spanish Ministry of Industry, Tourism and Commerce’s ENAC (NationalAccreditation Bureau). As for petrochemicals in the CEPSA Group, the Company has voluntarily adhered to theResponsible Care® scheme, a proactive program put into practice by the worldwide chemical industry to demonstratethe strides made by leading businesses in the areas of health, safety and the environment, through associated codesand regulations.

With regard to occupational risk prevention, CEPSA has a set of “Basic Rules for Industrial and Occupational RiskPrevention” which apart from complying with legislation in this area, also include guiding principles and policies neededto achieve the highest standards of safety in its operations; the “Corporate Management Manual for the Prevention of

Industrial and Occupational Risk Prevention”; and other action guidelines that guarantee solid safety performance inthe entire productive process, from plant design to product marketing.

RESEARCH & DEVELOPMENT ACTIVITIES

The Technology area’s key focus is developing and implementing technological innovations and improvements thatenhance CEPSA’s competitive position and improve the quality of its products. In order to achieve this goal, the ResearchCenter continued to work towards advancing the Company’s reservoir of scientific and technical know-how and expertiseto further its productive processes. This Center is also actively involved in a number of key research projects, chiefamong which are those related to the production and use of bio-fuels, and in the study of new alternatives forcapitalizing on these products.

This activity is basically undertaken at CEPSA’s new Research Center in the Scientific-Technological Park of the Alcaláde Henares University (Madrid), which was completed and became operational at the end of 2008.

HUMAN RESOURCES

At December 31, 2009, employees of CEPSA and its controlled companies numbered 11,703 people, 112 fewer than ayear ago, due to adjustments made in the workforce in the petrochemicals division.

CEPSA gives top priority to the professional growth and development of its workforce, the improvement of their skillsand capabilities and their increased training and awareness of issues related to safety, quality and environmentalprotection. Instructional hours provided in the period remained in line with those for the same period a year ago, mostof which belonged to in-house plans and programs.

TREASURY STOCK

Neither CEPSA nor any of the companies making up the CEPSA Group directly or indirectly acquired, sold or ownedshares of Compañía Española de Petróleos, S.A. in 2009.

SIGNIFICANT EVENTS FOR THE CEPSA GROUP IN THE YEAR

First-Half 2009

• On March 25, 2009, Banco Santander filed a Significant Event with the Spanish Securities Market Commission(CNMV) reporting the agreement reached with International Petroleum Investment Company (IPIC) based in AbuDhabi, United Arab Emirates, one of CEPSA’s core shareholders, for the sale of the Bank’s 32.5% stake in CEPSA.Similarly, Unión Fenosa also filed a Significant Event with the Spanish stock market regulator, referring to theaforesaid notification by Santander, that as a result of the mandate that the utility company had given Santanderto act on its behalf to make a joint sale, it was also selling IPIC its 5% interest in CEPSA under the same conditionsas the ones reached between IPIC and Santander. Additionally, IPIC also notified the CNMV, in connection with thetransaction, that among the conditions precedent for the purchase-sale agreement was the granting of adispensation by the CNMV from having to make a public tender offer (PTO) on shares, as provided for Article 4.2of Royal Decree 1.066/2007. Notwithstanding the above, IPIC likewise reported that it has the right to waive thiscondition. As a result of these transactions, which Banco Santander added were still subject to regulatory approvaland financing, IPIC would own 47.016% of the Company’s share capital, as far as CEPSA was aware.

• On May 27, 2009, CEPSA announced that Pedro López Jiménez tendered his resignation as a Director of theCompany, representing UNIÓN FENOSA.


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• On June 26, 2009, the Company issued a release on the Annual General Meeting of Shareholders and theresolutions adopted therein, noteworthy being the approval of the 2008 Financial Statements and MD&A’s, the full-year dividend payout of €1 per share, with the final dividend of €0.60 payable July 7th and the ratification or re-election, where applicable, of the Directors Santiago Bergareche Busquet, Joël Vigneras, Jean-Luc Guiziou, JuanRodriguez Inciarte and Ernesto Mata López.

Second-Half 2009

• On July 30, 2009, IPIC, the Santander Group and UNIÓN FENOSA notified the Spanish Securities MarketCommission (CNMV) on the completion of the transaction filed as a Significant Event on March 25, 2009, as wellas IPIC’s intention of requesting the aforementioned market regulator to grant it a dispensation from having tomake a public tender offer (PTO) on all shares of CEPSA, as provided for in Articles 60.2 of the Securities MarketAct and 4.2 of Royal Decree 1066/2007. The purchase-sale agreement with the Santander Group and UNIÓNFENOSA, S.A. for 37.527% of CEPSA’s share capital would be subject to a cancellation provision if suchdispensation was not granted.

• On August 20, 2009, International Petroleum Investment Company (IPIC) submitted at request to the CNMV for adispensation from having to make a Public Tender Offer on shares of Compañía Española de Petróleos, S.A. Thisdispensation was granted by the CNMV on September 15, 2009.

• On October 1, 2009, the Company reported that significant changes were made to CEPSA’s Board of Directors,with the resignations tendered by the Directors Alfredo Saénz Abad, Fernando de Asúa Álvarez, Juan RodriguezInciarte, Ernesto Mata López, Joël Vigneras, Jean-Luc Guiziou and José Luis Leal Maldonado. Incoming Directorsprovisionally co-opted onto the Board included Khadem Al Qubaisi and David Forbes, both representing IPIC.Khadem Al Qubaisi was also appointed Vice Chairman of the Board and member of the Nomination andCompensation Committee.

• On October 7, 2009, CEPSA announced that it had received authorization from the Algerian authorities for theTimimoun Gas Project Development Plan. Operated by a joint organization made up of CEPSA (11.25% interest),Sonatrach (51% interest) and TOTAL (37.75% interest), this project, located in south-western Algeria, includes thedrilling of around 40 wells and is slated to come on-stream in 2013, with a gas output volume of 5 million cubicmeters a day (1.6 BCM/year).

• On November 25, 2009, CEPSA’s Board of Directors, at its meeting held on this date, approved an interim dividenddistribution of €0.40 per share, payable December 14, 2009.

OUTLOOK

The strategy laid down by the CEPSA Group, and implemented in recent years, is primarily targeted towards balancingand diversifying earnings contributions from its different business segments through their organic growth.

The Group also strives to maintain a sound financial and equity position and the proper risk controls to be able tosuccessfully override challenging or shifting scenarios in the oil industry and global marketplace, and particularly tohave the funds available to capitalize on future developments and attractive new business opportunities that will providea springboard for further growth and yield significant long-term, sustainable value for its shareholders.

Over the coming years, CEPSA plans on implementing a capital spending program in its different business segmentsthat basically involves the following actions and objectives:

As regards the upstream area, the Company’s goal is to consolidate the level of proprietary reserves over the long run,through investments in producing fields, exploration programs and/or the acquisition of reserves to build up its assetportfolio in a variety of designated geographical areas. In seeking to meet this objective, CEPSA has finalized the processto acquire the exploration and production rights on the Caracara Block in Colombia and has obtained an extension ofthe contract to operate the RKF field in Algeria.

In petroleum product and basic chemical manufacturing, a sizeable capital expenditures plan is being put into place tobetter meet changing market demands, reducing the shortage of gas oils and other middle distillates and raisingchemical production. Investments will be made across the board in the Company’s refining facilities but the bulk willbe earmarked towards the La Rábida Refinery (Huelva), where targeted investments exceed ¤1,100 million, with thesenew capital projects scheduled to come on-stream in 2010, in addition to new Vacuum and Mild Hydrocracking units atthe Gibraltar-San Roque, which will significantly increase the competitiveness of these facilities. Other key strategicplans include efficiency and operational enhancements in the company’s three refining platforms and the developmentof environmentally-friendly biofuel components for blending with gasoline and motor diesel.

As far as downstream objectives are concerned, the Group is steadfastly focused on consolidating its presence in itstraditional and niche markets, harnessing and driving synergies in activities with high added value and proactively anddynamically pursuing growth opportunities in other markets in our area of influence.

In petrochemical intermediates, the merger of the Company’s chemical affiliates into a single company called CEPSAQuímica has led to improved efficiency and cost-containment, which are key strategic objectives in this area, consideringthe current business environment.

Lastly, CEPSA’s strategy in its Gas & Power segment, as regards natural gas, is to establish proprietary supply sources,raising its total market share in natural gas and completing the construction, start-up and operation of the MEDGAZpipeline that will connect Algeria to Europe via Spain, in which CEPSA’s shareholding comes to 20%. In the powerbusiness, the primary goal is to add to our CHP or cogeneration capabilities for the Group’s industrial plants.

SUBSEQUENT EVENTS

No significant events or noteworthy developments occurred up to the time of the approval of the summarizedconsolidated financial statements by the Board of Directors.

OTHER INFORMATION

Additional information, the inclusion of which is mandatory for listed companies in their management reports, as setout in the Securities Market Act 6/2007, is provided in the Management Discussion & Analysis of Compañía Españolade Petróleos, S.A.


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