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REPORT 2004 ANNUAL REPORT 2004 ANNUAL REPORT 2004 ANNUAL REPORT 2004 ANNUAL

AVENIDA DEL PARTENÓN, 12CAMPO DE LAS NACIONES, 28042 MADRID

PHONE +34 913 376 000

WWW.CEPSA.COM


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INGLES-00 Portada informe anual 22/6/05 12:02 Página 1

EARNINGS AND FINANCIAL POSITION

CEPSA’s robust commercial and industrial activity in the yearbrought sales and operating revenues to 14,688 million euros,while EBITDA stood at 1,306 million euros, up 21% from theyear before, excluding the impact of non-recurring items.

In 2004, CEPSA’s cash flow figure amounted to 1,066 millioneuros, which were used to fund a CAPEX program totaling539 million euros and a dividend distribution of 260 millioneuros. Shareholders’ equity came to 3,300 million and the netdebt level was reduced, leading to a debt-to-equity ratio of30%, versus 37% at year-end 2003.

The Company’s capital expenditures, 54 million euros morethan the previous year, were primarily assigned to thefollowing plans and projects:

• Continuing operations in oil fields in Algeria and crude oiland gas exploration activities, mainly in Northern Africa.

• Adapting our refineries to new commercial productspecifications effective as of January 2005, in fulfillment ofEU legislation on sulfur limits to produce cleaner-burningfuels. In order to meet these mandates, it was necessary tobuild new hydrodesulfurizing facilities and upgrade andexpand existing units.

To Our Shareholders:

I am pleased to announce that in 2004, CEPSA deliveredrecord earnings performance yet another year, posting a netincome of 650 million euros, 6.2% higher than 2003’s figureand 34% more if we exclude non-recurring items.

Allow me to first review the global operating environment inwhich CEPSA conducted its activities, and also mention someitems of interest.

The oil sector was driven by two key factors that shaped theyear: the upward momentum in crude oil prices and theeuro/dollar exchange rate.

Benchmark Brent averaged $38.2 per barrel in 2004, surging32% from the previous year. While our crude oil salesbenefited from these higher prices, some of our othersegments were adversely impacted, due to the sharp increasein raw material costs.

The dollar’s value slipped from a median exchange rateagainst the euro of 1.13 in 2003 to 1.24 in 2004. This relativestrength in the European currency meant lower sales pricesin euros for products priced in US dollars. However, trendsin other revenues in euros managed to somewhat cushionthis impact, as did the improvement in net financial incomein connection with the write-off of part of our dollar-denominated debt.

Letter from the Chairman

CEPSA 2004 ANNUAL REPORT 1

INGLES-01 CEPSA 04 (34 pág prin 22/6/05 12:03 Página 1

• Achieving earlier-than-scheduled compliance with the newEU Directive on bio-fuels, deploying a second ETBE plant atthe “La Rábida” Refinery to manufacture bioethanol-basedgasoline components.

• Carrying on with the development of the Company’slogistical and commercial networks, specifically in the retailnetwork, bottling plants and LPG cylinder inventories.

We should recall that CEPSA managed to raise consolidatednet income by 83% over the last five years (2000-2004), whilepursuing a capital spending plan totaling 3,200 million eurosin the same period.

SHARE VALUE

In 2004, CEPSA’s share price averaged 28.37 euros, with theyear-end price at 29.70 euros. Compared to the previous year,the Company’s shares rose 2.2 euros, or 8%, and taking thelast five years as a reference, the cumulative appreciation was204%.

This trend continued into the first quarter of 2005, withCEPSA’s shares trading at 31.21 euros at the end of March.

DIVIDEND

On the strength of the year’s earnings figures and theCompany’s solid performance and growth prospects, CEPSA’sBoard of Directors will submit a proposal to the AnnualGeneral Meeting of Shareholders to increase the annual cashdividend payment up to 1 euro per share, 5.3% higher than thedividend distributed in 2003 and representing a payout ratio of41% of consolidated earnings.

OUR FUTURE AND OUR COMMITMENT

One of our core missions is to generate wealth: for ourshareholders, who have continued to place their trust andconfidence in us, and who sustain us with their support,loyalty and cooperation, and for society as a whole, to which wemake our contribution by creating more jobs. As an example,CEPSA increased its workforce by 235 employees in 2004 dueto our expanding businesses activities and the start-up of newproductive units.

Undoubtedly, oil companies are operating in an increasinglymore complex, challenging and evolving environment, not onlyas a result of well-publicized changes in product specifications

and limitations on emissions in fulfillment of the KyotoProtocol, but also because of greater demands for integrityand accountability that go beyond strict legal compliance.

CEPSA is keenly aware of society’s expectations and strives tobe responsive to the public’s concerns. That is why we arecommitted to achieving profitable business growth hand inhand with responsible actions and conduct.

We firmly believe it is possible to manage our industrialoperations soundly, reliably and efficiently while at the sametime adhering to best practices and stringent monitoring ofour environmental performance, and we have demonstratedthat we can run our productive facilities in a way thatguarantees the highest safety standards. We remain steadfastin this commitment and determined to consistently improveon our achievements and excel in all measures.

As an expression of our principles and policies, CEPSApublished its first Sustainability Report that sets out, in adetailed, rigorous and transparent way, our work, actions andaccomplishments in addressing a wide range of issues, andour focus on making broad economic growth and developmentcompatible with safeguarding the environment and ensuring abetter quality of life for the communities where we operate.

To respond to our customers’ needs and bolster our marketpositions, we intend to invest more than 3,300 million eurosover the next five years. These expenditures will be chieflytargeted at the following actions and measures:

• Increasing our level of oil and gas reserves.

• Expanding our refining capacity and its conversion level tomeet the growing demand for certain products and the rawmaterial requirements of our petrochemical activities.

• Boosting yields and broadening our global presence andposition as a world-class player in petrochemicalintermediates.

• Continuing with the development of our gas and powerbusinesses.

• Focusing on ongoing improvements in environmental andsafety performance in our facilities.

Underlying our ability to deliver results and meet our targetsare the contributions and efforts of CEPSA’s more than 10,000employees, who make up a talented, qualified and skilledworkforce dedicated to the progress and success of theCompany’s projects.

Letter from the Chairman

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This is our commitment: to continue our journey towardsprofitable growth and job creation that we embarked ontime ago, offering vital energy supplies and superior, moreefficient and cleaner products, relentlessly pursuingenvironmentally-sound and safe operations in all ourfacilities, capitalizing on our core businesses whilegaining ground in new areas, and developing newactivities in synergy with our existing ones in order todiversify our assets and resources, expand our businessesacross the globe and create long-term, sustainable valuefor our shareholders.

In this report, you will find comprehensive and detailedinformation on CEPSA’s commercial and industrialactivities, broken down by business segments, along withthe legally-required documents and opinion report fromour independent auditors.

Carlos Pérez de Bricio OlariagaMadrid, March 2005



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Key Figures

NET INCOMEMillions of euros

800

600

400

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356435

461

612

650

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DIVIDENDEuros per share

1.0

0.8

0.6

0.4

0.2

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0.46

0.600.69

0.95 1.00

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OPERATING INCOME (EXCLUDING NON-RECURRING ITEMS)Millions of euros

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800

600

400

200

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613 625 484

746

923

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Key Figures of the CEPSA Group 2004 2003 2002 2001 2000

Results (Millions of euros)Sales & operating revenues 14,688 13,199 11,459 11,664 12,174Sales & operating revenues (1) 12,519 11,056 9,407 9,713 10,305EBITDA 1,306 1,292 764 892 907Operating income 923 925 484 625 613Operating income (excluding non-recurring items) 923 746 484 625 613Consolidated net income 650 612 461 435 356Dividend declared by CEPSA (2) 268 254 185 161 124Return on average equity (ROAE) (%) 21.00 22.60 19.28 20.55 19.29Return on average capital employed (ROACE) (%) 15.13 15.11 12.86 13.52 12.87

Financial Data (Millions of euros)Share capital 268 268 268 268 268Shareholders’ equity (3) 3,292 2,898 2,518 2,263 1,968Capital employed 4,510 4,206 4,049 3,655 3,241Operating cash flow 1,075 1,028 660 850 760Total cash flow 1,066 1,060 777 860 789Capital & exploration expenditures 539 485 709 932 525

Financial Data per Share (in euros)Cash flow 3.99 3.96 2.91 3.21 2.95Net income 2.43 2.29 1.72 1.62 1.33Cash dividend 1.00 0.95 0.69 0.60 0.46Pay-out ratio (%) 41 42 40 37 35

Stock Market DataAverage price per share (euros) 28.37 25.67 16.58 11.80 9.37Year-end price per share (euros) 29.70 27.50 17.39 12.49 9.20Year-end market capitalization (millions of euros) 7,947 7,358 4,653 3,342 2,462Dividend yield (%) 3.52 3.70 4.16 5.09 4.94P/E ratio (on average share price for the year) 11.67 11.22 9.63 7.28 7.04

Operating Data (millions of tons/year)Refining capacity 22.2 22.2 22.0 22.0 21.0Treated crude oil 20.9 21.1 20.5 19.8 19.8Product sales (4) 29.0 27.9 25.8 25.3 24.5

(1) Not including excise taxes on oil & gas.(2) For comparative purposes, 2004’s figures include dividend proposal to be submitted for approval to the Annual General Meeting of Shareholders.(3) Before final dividend payment for the year.(4) Without including crude oil sales.


Honorary ChairmanMR. ALFONSO ESCÁMEZ LÓPEZ

Chairman & Chief Executive OfficerMR. CARLOS PÉREZ DE BRICIO (*) (***)

Vice-ChairmenMR. JEAN-PAUL VETTIER (*) (***)MR. ALFREDO SÁENZ (*) (***)

Board MembersH.R.H. CARLOS DE BORBÓN-DOS SICILIAS,INFANTE DE ESPAÑAMR. NASSER AHMED ALSOWAIDIMR. JOSÉ LUIS LEAL MR. MOHAMED NASSER AL KHAILY (*) (**)MR. JUAN RODRÍGUEZ INCIARTEMR. ERNESTO MATA MR. VINCENT MÉARY (**)MR. PIERRE KLEIN (*)MR. MENNO GROUVEL (*)MR. JACQUES POREZMR. FERNANDO DE ASÚA (**)MR. JEAN PRIVEYMR. ANTONIO BASAGOITI MS. BERNADETTE SPINOYMR. DOMINIQUE DE RIBEROLLES

Secretary of the Board of Directors,Executive Committee and Audit CommitteeMR. FERNANDO MARAVALL

Vice-Secretary of the Board of Directors,Executive Committee and Audit CommitteeMR. ALFONSO ESCÁMEZ

(*) Executive Committee member(**) Audit Committee member(***) Nominations and Compensation Committee member

(1) Configuration of the Board of Directors at March 29, 2005,the date on which the 2004 Financial Statements, Management Discussion & Analysis and Proposal for Profit Distribution of Compañía Española de Petróleos, S.A. (CEPSA) were formulated and approved.

(2) At the Board of Directors meeting held on February 4, 2005,Mr. Demetrio Carceller Arce tendered his resignation as a Board member.

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Board of Directors (1) (2)



1) Chairman & Chief Executive OfficerMR. CARLOS PÉREZ DE BRICIO

2) Executive Director and Senior Vice-PresidentCorporate Planning, Control and Oil MarketingMR. DOMINIQUE DE RIBEROLLES

3) Senior Vice President - Exploration & Production andCorporate ManagementMR. FERNANDO MARAVALL

4) Senior Vice President - Corporate Technical DivisionMR. MANUEL ABOLLADO

5) Vice President - Supply, Trading, Bunker and AviationMR. JOSÉ MARÍA MÚGICA

6) Vice President - Human Resources and Legal AffairsMR. JUAN RODRÍGUEZ FIDALGO

7) Vice President - PetrochemicalsMR. FERNANDO ITURRIETA

Secretary of the Executive Management CommitteeMR. JUAN MANUEL FERRERAS

SENIOR ADVISORS

Vice President - SpecialtiesMR. JOSÉ E. ARANGUREN

Vice President - Retail/Wholesale OperationsMR. FRANCISCO CALDERÓN

Vice President - Refining & PlanningMR. IGNACIO GÓMEZ

Vice President - Institutional RelationsMR. JOSÉ MARÍA MARÍN

Vice President - Exploration & Production MR. PEDRO MIRÓ

Executive Management Committee

1 2 3 4 5 6 7


09 Exploration & Production12 “MEDGAZ” Project13 Trading, Refining, Marketing and Basic Chemicals19 Gas & Power21 Petrochemical Intermediates24 Corporate Area31 CEPSA and the Stock Market

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Summary ofCEPSA GroupActivities


Key upstream operations in Algeria continued to be focusedon the Sahara Desert, in three geographically-differentiatedbasins: “Berkine”, “Timimoun” and “Béchar”, located in thecentral-eastern, southwestern and central-western regions,respectively, of the country.

In the “Berkine” Basin, CEPSA operates two major fields inBlock 406A known as RKF and OURHOUD, the former beingentirely located within the confines of the Block and thelatter, which by size is the second largest discovery in Algeria–total recoverable reserves at the start of its developmentwere estimated to be 842 million barrels of crude oil for theduration of the license period–, straddles two adjacent blocks,404 and 405, belonging to other operators, so thatOURHOUD is both developed and operated as a unitizedfield by a consortium made up of the owners of theaforementioned blocks, with CEPSA’s equity interest comingto 39.75%.

The “Timimoun” and “Béchar” blocks are currently in theexploration phase, with work being at a more advanced stage inthe former field.

CEPSA additionally has interests in four Blocks, located in theUpper Magdalena River Valley of Colombia, one of whichinvolves operating small crude oil producing fields while work inthe other three is still in exploratory phases.

Below is a description of CEPSA’s international upstreamactivities.

ALGERIA

Block 406AThis block measures 1,640 square kilometers, with totalrecoverable reserves at the start of its development and for theduration of the license period coming to 576 million barrels ofcrude oil, 98 million belonging to RKF and 478 million toOURHOUD; of the total amount, 438 million barrels werepending recovery at year-end.

Out of these reserves, CEPSA’s entitlement, based on its equityinterest, during the period established in the production-sharingcontract (PSC) comes to roughly 171 million barrels.

The appraisal of the aforementioned reserves is part of aprocess, subject to ongoing review, that does not in any wayinclude recoverable reserves beyond the operating licenseperiod. As it is governed by a PSC, the estimate of CEPSA’sentitlement, applying the established contractual andeconomic conditions, is the amount that existed when theestimate was calculated, and may vary as a result of the effectthat the prevailing crude oil price has on cost-recoverymechanisms set out in the contract.

RKF FieldThis field, which started up in 1996 and in which CEPSA hasa 100% working interest, yielded 7.5 million barrels of crudeoil in 2004, up nearly 4% from a year earlier, having thereforemaintained plateau production for 7 years. Aggregate outputsince the field came on stream totals 55.6 million barrels.


Exploration &Production

INTERNATIONAL UPSTREAM


Throughout the year, work continued towards developing thePlan to upgrade the field, integrating the results of twowells drilled in 2003, which confirmed the increase in thefield’s extension, and consequently, its higher reserves,awaiting a definitive appraisal. This Plan includes theexpansion of surface and subsurface facilities (wells), havingalready performed the basic engineering to raise gasinjection capacity in order to maintain adequate pressurelevels.

As part of the subsurface facilities, work began towards theend of the year to drill a development well, with positiveresults based on the geological data obtained. Production testsand a second injection well are slated for 2005.

Additionally, in order to gain better structural knowledge ofthe field, a 3D seismic survey was undertaken, which willcover the entire production permit to get more accurateinformation on the field’s extension as well as to locate newproduction and injection wells.

Another component of the aforementioned upgrading planwas the start-up of construction of a new living base inJuly, scheduled for completion in mid-2005, with enoughcapacity to accommodate the staff assigned to theproduction facility.

Capital & exploratory expenditures in 2004 amounted to 7million euros, mainly targeted at building the new base,conducting the aforementioned drilling, enhancing safety andensuring environmentally-sound operations.

OURHOUD FieldThis field, which began full production in 2003, is 25kilometers long and 6 kilometers wide, with the productivereservoir interval located in the Upper Triassic (TAG-I)formation, at a depth spanning 2,800 to 3,100 meters, witha recorded net hydrocarbon pay of between 30 and 60meters.

During the year, output averaged 225,000 BOPD, equivalentto 20% of Algeria’s total production. This amount isconsistent with the authorized production ceiling for thefield, with 2004’s operational highlights being as follows:crude oil production, 81.8 million barrels; injected gas, 767million cubic meters; injected water, 13.6 million cubicmeters.

The field’s current facilities include wells, a pipeline grid anda central area for processing the crude oil, as well as systemsfor re-injecting the associated gas and treated water toenhance oil recovery. By the end of 2004, a total of 28 crudeproducing wells, 19 water injection wells and 3 gas injectionwells were in operation. Of these, 11 new wells were drilled inthe year, 6 of which were for crude production, 4 for waterinjection and 1 for water production.

TIMIMOUN BlockCEPSA, in a joint operation with TOTAL (15% and 85%interests, respectively), conducts E&P activities in Blocks325A and 329 of the Algerian Sahara.

The seismic surveys performed in 2003, as well as geologicaland field engineering studies, resulted in two exploratorywells called Iraharen-4 and 5, drilled in 2004, confirming theexistence of a natural gas field. In the Iraharen-5 well, whichis over 2,000 meters deep, production tests were undertaken,the results of which yielded more than 17.5 million cubic feetof dry gas per day.

A more accurate appraisal of the Block will require 3Dseismic acquisition, as well as the drilling of severalexploratory and delineation wells, which are scheduled tobegin in the first quarter of 2005.

BÉCHAR BlockIn November 2004, news was officially published thatSONATRACH had awarded the CEPSA/TOTAL consortium(20% and 80% stakes, respectively) Blocks 309b1, 310b1,311b1 and 319b1 in the Béchar Basin.

The exploration permit was granted for a period of two yearsand may be extended into a production contract, with seismicsurveys due to begin in 2005.

Exploration & Production

10


COLOMBIA

CEPSA’s key operations in this country were mainly focusedon the Upper Magdalena River Valley, in the so-called“Espinal”, “San Jacinto”, “Río Paez” and “Achira” Blocks.

In the “Espinal” Block (CEPSA, 16%; ECOPETROL, 50%; andthe operator PETROBRAS, 34%), several small productionfields are being operated, which yielded CEPSA a netentitlement of 249,000 barrels in 2004. In order to halt itsdeclining production, work was performed aimed at upgradingthe wells and processing facilities, and drilling a newdevelopment well, which is due to come on stream in January2005.

In the “San Jacinto”, “Rio Paez” and “Achira” Blocks,exploratory work is underway by the consortium made up ofCEPSA, 33.33% and HOCOL, 66.67%, acting as operator, andplans are to carry out 2D and 3D seismic surveys to delineateand quantify a series of already-identified exploratoryprospects, and based on this information, decide on thesubsequent drilling of wells. 2D seismic acquisition is plannedfor early 2005.

EGYPT

CEPSA has begun activities in this country aimed atbroadening its international upstream portfolio. Highlights ofthe year include the following: signature of an agreement withthe Italian oil company ENI, to acquire a 30% interest in anexploration license on the “South Feiran” Block, in shallow

waters of the Gulf of Suez; signature of an agreement withthis same company to take part, as a consortium (CEPSA,20%; ENI, 80%) in the bid-round for the “North Bahrein”Block in Egypt’s Western Desert basin, which was awarded tothe CEPSA/ENI partnership in February 2005, pending finalapproval by the Egyptian Parliament; and performance ofstudies to participate in licensing rounds organized by thestate-owned Egyptian oil company EGPC to tender new blocksin the Western Desert.

DOMESTIC UPSTREAM

CEPSA E.P., a wholly-owned subsidiary of CEPSA thatmanages and develops oil and gas exploration and productionprojects in Spain, primarily focused its activities on the off-shore Mediterranean “Casablanca” field, located near thecoast of Tarragona. Output in 2004 totaled 1.6 million barrelsof crude oil, with CEPSA E.P.’s entitlement, based on itsequity interest, at 128,000 barrels.

This affiliate filed for two permits through the Department ofIndustry of the Catalonian regional government, whichpublished this request in the “Diari Oficial de la Generalitatde Catalunya”, to conduct oil and gas exploration in theCatalonian Pyrenees (East and West Vallfagona). Thesepermits are still being processed and results of the award areforthcoming.


Millions of euros

Exploration & Production 2004 2003

Net crude oil sales (millions of barrels)(*) 11.4 17.9Capital & exploration expenditures 58 67EBITDA 344 527Operating income (*) 244 394

(*) In 2003, besides the amount attributable to the year, 5.7 million barrels of crude oil belonging to the recovery of lifting rights fromprevious years were sold. This sale had a non-recurring impact of 179 million euros on operating income.


This project is being developed by MEDGAZ, a company thatwas set up to study, promote, build and operate a new sub-seanatural gas pipeline linking Algeria directly to Europe viaSpain. Its current shareholding structure includes thefounding partners, CEPSA and SONATRACH, each with a20% interest, and TOTAL, BP, ENDESA, IBERDROLA andGAZ DE FRANCE, with 12% shares, respectively.

Progress was made in the year towards carrying outscheduled activities, including the completion of the project’sbasic engineering (FEED – Front End Engineering & Design);the performance of geotechnical, geophysical and seismicmarine surveys; and the filing of the Environmental ImpactAssessment (EIA) and dossiers for government authorization.Plans are to begin with the next stage of the project, whichwill involve undertaking the detailed engineering andbuilding the pipeline, expected to be completed in 2008.

The MEDGAZ Project was included by Spain’s FinanceMinistry in the document titled “Planning of Gas and PowerSectors. Development of Transportation Networks 2002-2011”.In addition, the Ministry of Industry, Tourism and Traderesolved to classify the project as “A” (maximum priority) inthe review of Spain’s energy plan to be conducted in the firsthalf of 2005, so as to subsequently proceed with itsadministrative processing.

MEDGAZ was likewise included in the List of Projects ofPriority Interest in Trans-European Networks, in the energysector, proposed by the European Parliament and theEuropean Union Council. It was also placed in the EuropeanCommission’s “Quick Start” Program of cross-border high-impact projects.

12

"MEDGAZ"Project


In 2004, global crude oil production totaled roughly 79 millionBOPD, up nearly 5% from the year before. OPEC successivelyraised its output quotas during the year, as did other oilproducers, together achieving the highest production levelsseen in recent years.

The crude oil market was characterized by sharply volatileand upward price movements, with Brent DTD tradingbetween a low of $29 per barrel in February and an all-timerecord high of $52 in October, with the year-on-year increaseaveraging $9.4 per barrel, or 32.5%. This surge in prices wasbasically driven by supply concerns stemming from the fear ofpotential disruptions caused by geopolitical tensions and civilunrest in several producing countries; rising consumption,especially in East Asia; low stockpiles in western countries,where demand was fueled by economic expansion; and theactivity of hedge funds and other speculators betting on thepossibility of higher prices, which in turn exacerbated pricepressures in the oil market.

In this operating environment, a total of 20.6 million tons ofcrude oil (149.7 million barrels) were unloaded at CEPSA’srefineries in 2004, in line with the previous year’s volume.

Looking at crude oil sourcing, 36.1% came from the PersianGulf; 35.3% from countries in West Africa, 10% from theCaribbean/Mexico; 9.6% from Russia; 8.7% from NorthernAfrica; and the rest from European countries.

Additionally, CEPSA acquired 6.8 million tons of oil andchemical products, primarily gas oils and fuel oils, 9.5% morethan the year before, to meet the needs of its expandingcustomer base.

REFINING

CEPSA conducts its core refining operations at its 3 wholly-owned refineries in Spain: Tenerife, located in Santa Cruz deTenerife; “Gibraltar” in San Roque (Cádiz); and “La Rábida” inPalos de la Frontera (Huelva), with nameplate distillationcapacities of 4.5, 12 and 5 million tons of crude oil per year,respectively. Furthermore, CEPSA has a 50% interest in theshare capital of Asfaltos Españoles, S.A. “ASESA”, which owns arefinery in Tarragona, chiefly engaged in the production ofasphalt, with a nominal throughput capacity of 1.4 million tonsper year. All together, total available treatment capacity,including the stake in ASESA, amounts to 22.2 million tons peryear, accounting for 33.4% of Spanish refining capacity.

CEPSA’s refineries are operated using a plant-wideoptimization model, which allows maximizing synergies fromtransfers between the refineries of intermediate feedstock andproducts and from the high level of integration betweenrefining and petrochemical operations at the “Gibraltar” and“La Rábida” sites.

In 2004, 20.9 million tons of crude oil were processed at theCompany’s facilities, similar to the year before. Out of totaltonnage treated, the Tenerife Refinery processed 4.1 milliontons of crude oil; “Gibraltar”, 11.8 million tons; “La Rábida”,4.3 million tons and 700,000 tons corresponding to CEPSA’sstake in the ASESA Refinery. Median refinery utilization was94.2%, 6 percentage points higher than the national average,excluding CEPSA, and more than 9 points greater than theglobal average.


Trading, Refining,Marketing andBasic Chemicals

SUPPLY AND TRADING


Throughout the year, legally-required maintenanceturnarounds were completed, as well as scheduled shutdownsto inspect equipment and clean furnaces and exchangers. Inaddition, the necessary revamps were carried out to adaptgasoline and gas oils to meet new specifications placing sulfurlimits at 50 ppm and 10 ppm aimed at producing cleaner-burning fuels, effective as of January 1, 2005. CEPSA achievedcompliance with these new mandates by November 1, 2004,ahead of schedule, in order to make the necessary turnovers inthe qualities of its strategic and obligatory stocks.

Noteworthy capital spending projects included the following:the start-up of a new diesel desulfurizing unit (HDS-5) at the“Gibaltar” Refinery, with a capacity of 25,000 barrels per day;the retrofitting and expansion of the H-3 diesel desulfurizingunit at the “La Rábida” refinery, up to a capacity of 42,000barrels per day; and the modification and expansion of theHDS-1 diesel desulfurizing facility at the Tenerife Refinery, upto 17,000 barrels per day. Additionally, the new unit fordesulfurizing FCC naphtha, using PRIME-G© technology, wasplaced on stream at the “La Rábida” Refinery, as was thefractionating zone of the similarly new SHU (selectivehydrogenation unit) in the “Gibraltar” Refinery. In all cases,these facilities were brought on line incident-free, with recordtimes between the dates of mechanical completion and thedates of obtaining on-spec products.

A variety of technical improvements and upgrading were likewiseachieved, chief among which were the following: at the“Gibraltar” Refinery, the revamping of the naphtha Unifiningunit, which coupled with the enhancements introduced the yearbefore in the splitter, allowed sustaining a feed of 33,000 barrelsper day in the R-56 Platformer simultaneously with a feed of12,000 barrels per day in the RZ-100 unit; the increase in

hydrogen recovery; the expansion of deisobutanizing capacity,with the resulting increment in alkylate production, in additionto the upgrading of the facilities that hook-up to CLH’s pipelineand the continued implementation of the OMS project, toautomate movements in the tank area. At the Tenerife Refinery,work carried on to install several air coolers, a new tank wascompleted, with a 15,000 m3 capacity for electrical diesel, and theatmospheric section of the Foster unit, expanded up to 15,000barrels per day, was brought on line. And at the “La Rábida”Refinery, a site-wide control system in the lube plant wasinstalled and its gradual extension to the petrochemical facilitieswas concluded; air preheating systems for furnaces in theFurfural, Deparaffining, Vacuum and SDA units were deployedand the project for gas oil blending automation was accomplished.

A number of other key projects were finalized in 2004: in the“Gibraltar” Refinery, the expansion of the product wharf andconnections to the combined cycle power plant belonging toNUEVA GENERADORA DEL SUR; in Tenerife, thecompletion of the project to boost LPG recovery and theinstallment of electrical frequency shifters to improve unitavailability; and in the “La Rábida” Refinery, the start-up ofthe ETBE plant, with a productive capacity of 34,000 tons peryear, using bioethanol and olefinic components from the FCC.

Additionally, CEPSA continued to harness increasinglygreater financial benefits from the three PIP (ProfitImprovement Program) projects aimed at optimizing yield andprocess performance and improving refinery margins, as wellas from the MIP (Maintenance Improvement Program) projectin its key parameters.

Thanks to the high level of refinery capacity utilization, aswell as the implementation of plans to upgrade productivity,the value added from refining in 2004 averaged €29.5/ton,37% higher than the year before.

DISTRIBUTION & MARKETING

CEPSA sold 25.5 million tons of oil products in 2004, 400,000tons more than the year before.

The business environment was sharply influenced by risinginternational petroleum product prices, a feeble US dollar andan increase in competition which prompted some operators toexit the Spanish market.

The retail tax, both nationwide and by regions, which waslevied in the Autonomous Communities of Asturias, Catalonia,

Trading, Refining, Marketing and Basic Chemicals

14


Galicia and Madrid, continues to be a reason behind theredistribution of sales, as a result of the price distortionswhen comparing geographical areas.

Noteworthy also was the continued displacement of retailsites due to new road infrastructures, which is forcingcompanies to allocate spending towards building new motorfuel outlets.

Compounding these factors are more rigorous environmentaland safety standards for service stations, the existence ofmore stringent and restrictive regulations and the greaterweight of local governments in concessions and authorizationsto build stations in new sites, which is driving investment andoperating costs upward.

RETAIL/WHOLESALE OPERATIONS

At the end of 2004, CEPSA’s retail network in Spain andPortugal numbered roughly 1,700 outlets. The Companycontinued to focus on leveraging its presence on the domesticmarket to reasonably protect its share, building up its non-oilbusinesses to deliver revenue growth as a way of improvingreturns on its investments and consolidating its position as aleader in customer service, particularly as regards loyaltyschemes for private motorists.

Ongoing efforts were made to optimize CEPSA’s network,selectively targeting capital spending towards refurbishingand upgrading its fuel outlets, concentrating on largerstations and adding convenience stores and other non-fuelservices, as well as shedding less attractive retail assets.

On the wholesale side, the target was to maintain a steadyand competitive presence and market share, withmanagement focusing on providing superior customer serviceas well as securing the loyalty of clientele.

As part of this positioning as a customer-oriented marketer ofmotor fuels, reflected in the catchphrase “¿Qué Necesitas?”(“What Do You Need?”), in February 2004, CEPSA launched theloyalty/frequent shopper card “PORQUE TU VUELVES”(“BECAUSE YOU RETURN”) tailored to private motoristcustomers at the Company’s retail network. The fact that by theend of the year over 1 million cards were in circulation, doublethe original target, is evidence of the success of this initiative.As regards the fleet driver segment, CEPSA’s TRANS CLUBcustomer loyalty card ended the year with a membership of300,000, showing continued growth and expansion.

Furthermore, the work done by the “Internal CustomerOmbudsman” service, created at the end of 2003, has providedan invaluable tool for the Company to become more aware of

consumers’ concerns and perceptions and support their needs,and also use these as indicators of customer satisfaction andsources of product and procedural innovation andbenchmarking in this business division.

In addition, a network-wide high-speed data transmissionsystem called CEPSA NET has been instrumental in creatingbetter, quicker and leaner management of all types oftransactions, as well as a more efficient use of marketing,customer loyalty, securitization and payment tools.

CEPSA has also been a pacesetter in developing andmarketing a new high-performance innovative range of motorfuels grouped under the name “Óptima”, which improve fuelefficiency, are more environmentally-friendly and lengthenengine life. In 2004, “Óptima” diesel was launched in 325service stations, and proved to be a winner with customers.

As regards training, programs were implemented in CEPSAESTACIONES DE SERVICIO/VENTAS DIRECTAS,CEDIPSA and PROMIMER aimed at providing staff with thenecessary skills and know-how in sales and sector-relatedareas. Over 700 employees took part in these courses, andanother 5,000 were involved in e-learning and distancetraining initiatives. Noteworthy was also the upgrading of the“Saturn Program” providing incentives to retail network staffthrough a card that has increasingly-more advancedfunctionalities.

CEPSA maintained its leadership position in the non-fuelsales segment and drove further growth in its DEPASO storesby advancing a new brand and image design and making theswitch to the concept of a “Service Store”, versus thetraditional “Convenience Store”. It is also in the process ofdeveloping a second store format called MINISTOP as well asopening stores in urban areas outside service stations, knownas “city-shops”. Franchised and company-owned stores are runby the wholly-owned affiliate PROMIMER, which had nearly800 stores by the end of 2004. Sales and operating revenuescontinued to improve, rising 11% from the previous year.

As regards payment tools, CEPSA launched new CEPSASTAR and CEPSA FLOTAS cards, with added features andsafety and technological innovations. For example, CEPSASTAR, intended for fleet drivers, has a security PIN ensuringthat only authorized persons can use the card, therebymaking transactions more secure. Furthermore, CEPSA wasthe first oil company to issue an in-vehicle device called anOBE (Vía T) that allows its users to make electronic paymentson toll roads.

As regards environmental and quality initiatives, CEPSAcontinued to put into practice a plan, begun in 1993, toidentify environmental risks in its retail network,



undertaking the third phase in 2004, the target of which is toassess the extent of impacts on the subsoil, an area in whichthe Company has been an industry-leader. Noteworthy alsowas the signing of agreements with the AutonomousCommunities of Asturias, the Balearic Islands, Extremaduraand Galicia, to issue certifications that accredit theenvironmental nature of investments made, which entitle theCompany to the corresponding tax deductions.

CEPSA was likewise the first and only oil company in Spainto successfully launch and operate a nationwide “Heating OilFurnace Replacement Plan”, providing value added servicessuch as remote control, teleprocessing and a comprehensiveheating plan.

As regards the Company’s loyalty scheme targeting users ofdiesel for farm equipment, known as AGRO CLUB, which iscurrently in the process of being upgraded, it increased itsmembership from the year before by 15%. AGRO CLUB hasalso continued being actively present in some of the mostimportant agricultural and stock breeding fairs in support ofthese sectors.

In June 2004, CEPSA, RACE and BANESTO signed astrategic agreement to jointly offer assistance and otherservices to motorists. As a result of this alliance, customersnow have a number of offerings available to them, chiefamong which is the “RACE PORQUE TU VUELVES” card,that combines the perks and benefits of roadside assistanceand other RACE motor vehicle products with those includedin CEPSA’s “PORQUE TU VUELVES” program.

BUNKER FUELS

CEPSA continued to consolidate its position as a leadingbunker fuel supplier on the Spanish market, selling 6.6 milliontons of bunker fuels in 2004, 1.6% more than the previousyear. It also advanced its share in the Panamanian market,with sales amounting to 700,000 tons.

A highlight of the year was the start-up of fuel oil supplies atthe Port of Barcelona, whose activity in the Mediterraneanhas witnessed spectacular growth in recent years, especiallydue to greater traffic from cruise-liners, a position that itexpects to strengthen in 2005.

In furthering its goal of complying with the most rigorousenvironmental standards, CEPSA began using a thirddouble-hulled tanker in 2004, operating in the Port ofGibraltar, in addition to the other two that operate out of theAlgeciras Bay.

AVIATION FUELS

As one of Spain’s main aviation suppliers, CEPSA sold 2.5million tons in the domestic aviation market in 2004.

Notable achievements in the year include the start-up of jetfuel deliveries at the Canary Island airports of La Gomeraand Hierro, and on the mainland, at the Logroño airport,and the concessionary licenses awarded to S.I.S., a jointventure with SHELL ESPAÑA, to provide into-planeservices at the Málaga, Seville and Alicante airports,expected to begin operating in 2005, when the recently-completed new supply facility in Fuerteventura is also dueto come on line.

ASPHALT

CEPSA produces asphalt at its Tenerife and “La Rábida”refineries, as well as in ASESA’s refinery in Tarragona, with atotal nominal capacity of 1 million tons per year. Sales aremade through the wholly-owned subsidiary PROAS, acompany which distributes these products from the refineriesand 9 proprietary terminals, where asphalt derivatives andother special products for the construction sector are likewisemanufactured.

In 2004, PROAS sold over 1 million tons of asphalt,generating revenues of 175 million euros, 76% from sales onthe domestic market and 24% from exports.

Capital expenditures in 2004, amounting to over 4 millioneuros, were primarily assigned towards acquiring a terminal


16


in Gijón (Asturias) as well as unloading facilities in Motril(Granada), Alcúdia (Mallorca) and Alicante. Additionally, the9,200-ton asphalt tanker “Mar Almudena” was replaced by thetwo 5,400-ton tankers, “Mar Paula” and “Mar Victoria”,thereby improving transport operations.

Other achievements in the year include ISO 14001certification awarded to PROAS for its EnvironmentalProtection Management System at its Alcalá de Henares(Madrid), Tarragona and Valencia terminals, and thecommencement of a new research project, sponsored by theMinistry of Environmental Affairs, to be undertaken over athree-year period, aimed at applying rubber from used tirestowards the conversion of asphaltic bitumen.

LUBRICANTS

The CEPSA Group has two base stock and paraffinmanufacturing plants located at the “La Rábida” Refinery andin LUBRISUR –an affiliate in which CEPSA holds an interestof 65%– in addition to a blending and bottling facility locatedin Algeciras, in which finished lubricants are produced andbottled.

During the year, CEPSA’s “La Rábida” Refinery yielded120,000 tons of base stocks and 2,100 tons of paraffin, whilethe LUBRISUR facility produced 214,000 and 26,000 tons ofthese products, respectively. Therefore, the combined outputexceeded 278,000 tons, in line with last year’s levels.

Retailing activity is carried out by the 100% affiliate CEPSALUBRICANTES, as well as through wholly or majority-ownedcompanies such as LUBRISUR, ATLÁNTICO, LUBRITURIA,LUBRINER, and PETROJAÉN.

Aggregate sales of lubricants, base stocks, paraffin, greasesand other related products by CEPSA LUBRICANTEStopped 310,000 tons; LUBRISUR sold 267,000 tons; and therest of the companies mentioned, 20,000 tons. All together,consolidated sales amounted to roughly 339,000 tons,climbing 8.7% year-on-year.

CEPSA LUBRICANTES, a leader on the Spanish lubricantsmarket, distributes its products under the brand namesCEPSA and ERTOIL, with 51% assigned to the domesticmarket, where a variety of other automotive products andaccessories for both passenger vehicle and fleet drivers aresold.

Capital spending in the year, amounting to 3.6 million euros,was essentially earmarked towards deploying state-of-the-arttechnologies, enhancing productivity in industrial operationsand strengthening marketing performance.

In 2004, AENOR, the company that audits the CEPSAGroup’s quality system, ratified CEPSA LUBRICANTES’certification for compliance with international ISO 9001:2000standards, as well as certification for fulfillment of ISO/TS16949, which includes the requirements of ISO 9001 as wellas industry-specific standards for the automotive supplychain. Noteworthy also was that the Company carried out thenecessary formalities and measures to adapt the qualitycertification awarded by the Spanish Defense Ministry to newPECAL/AQAP 120 specifications.

LIQUEFIED PETROLEUM GASES

CEPSA markets the Group’s liquefied petroleum gases (LPG)through its wholly-owned subsidiary CEPSA GAS LICUADO(formerly called CEPSA ELF GAS), which began bottlingactivity in 1999, with over 260 million euros invested sincethat time to expand its production and bottling capacity. Thisaffiliate, which in 2004 sold more than 15.5 million canisters,currently owns 12 storage and decanting facilities nationwide;9 of these sites bottle the 12.5 kg. butane canisters, 11 and 35kg propane containers and the 12 kg. automotive LPGcontainers.

In December 2004, bottling activity began at the Zuera(Saragossa) plant, completing the Company’s bottlinginfrastructures. This site will supply customers in Aragón andNavarre, as well as in neighboring areas of the provinces ofValencia and Castille-León.

Bottled propane and butane are now sold in the autonomouscommunities of Andalusia, Murcia, Valencia, Galicia, Madrid,Aragón, Navarre, Cantabria, Castille-La Mancha,



Extremadura, Asturias, as well as in some regions ofCastille-León, and plans are to extend retailing activity tothe rest of the country.

Butane and propane canisters are delivered either door-to-door through a network of over 100 distributors, or can bebought directly in more than 1,500 outlets, 700 of whichbelong to CEPSA’s service station network.

CEPSA GAS LICUADO has a customer base for bottledpropane and butane exceeding 1.5 million. The Company alsosupplies bulk propane to over 6,000 installations and pipedpropane to 40,000 residential customers.

In 2004, nearly 300,000 tons of propane and butane were sold,up over 57,000 tons, or 24%, from the previous year. Sales andoperating revenues totaled almost 200 million euros in theyear, considerably higher than in 2003.

CEPSA IN PORTUGAL

CEPSA operates in Portugal through its 100% affiliate CEPSAPORTUGUESA, engaged in the distribution and marketing ofmotor fuels, asphalt, lubricants, bunker fuel, propane andaviation products in the Portuguese market. This subsidiarysold nearly 900,000 tons in 2004, generating sales revenues ofover 530 million euros, up 9.5% from the year before.

By the end of the year, CEPSA’s Portuguese retail networknumbered 153 service stations, 3 of which began operating in2004. Motor fuel sales amounted to nearly 700,000 cubicmeters, while other product sales totaled around 350,000 tons.

Expenditures stood at 17 million euros in the year, largelyassigned towards expanding and upgrading the retailnetwork.

Highlights in this area include the continuation of kerosenedeliveries to operators at the Faro Airport, while plans are tobegin wholesale operations to airlines sometime during thefirst half of 2005, once the corresponding operating license hasbeen awarded.

CEPSA IN MOROCCO

CEPSA has been pursuing its business activities in Moroccothrough CEPSA MAGHREB and PETROSUD, chiefly in thefishing sector in the Port of Agadir, having extended theterminal’s operating license for another 3 years.

Fishing diesel sales climbed 23% from the previous year, despitedeclines in global consumption, on account of extended periodsof downtime for biological turnarounds in the area’s fishinggrounds. Marine lube sales rose 40% from the year before.

Apart from these activities, CEPSA supplied Moroccanoperators with nearly 450,000 tons of gasoline, diesel fuelsand liquefied petroleum gases in 2004, with a year-on-yearincrease of 49%.

BASIC CHEMICALS

In 2004, CEPSA produced over 1.2 million tons of basicchemical components (primarily propylene, solvents, and BTX- benzene, toluene and xylene) at its “Gibraltar” and “LaRábida” refineries, up 19% from the previous year, largely as aresult of new production units that were placed on stream inthe year.

Sales, which encompass a range of over 70 products, amountedto nearly 1.5 million tons, 8% higher than the previous year.Nearly 600,000 tons were allocated to CEPSA’s petrochemicalaffiliates and over 550,000 tons were sold abroad. Revenuesfrom basic chemical sales, driven by the rebound in spot andcontract prices on these products, due to rising demand, totaled832 million euros, up 39% from the year before.

CEPSA ITALIA and CEPSA U.K., wholly-owned subsidiariesoperating in Italy and the United Kingdom, together sold over133,000 tons of basic chemical products, similar to 2003’svolumes, maintaining their shares in their respective marketsand increasing their sales and operating revenues by morethan 15%.

18

Millions of euros

Refining, Marketing and Basic Chemicals 2004 2003

Oil and basic chemical product sales (millions of tons) 26 25Capital expenditures in the year 402 306EBITDA 748 607Operating income 576 458



CEPSA’s strategy in the natural gas segment is pursuedthrough ventures such as MEDGAZ (see Exploration &Production), CEPSA GAS COMERCIALIZADORA and GASDIRECTO, the highlights of which are explained in thecorresponding sections below.

CEPSA GAS COMERCIALIZADORA

CGC, a company whose shareholders include CEPSA, TOTALand SONATRACH (35%, 35% and 30% interests, respectively)is engaged in commercializing natural gas and electricalpower.

Company sales in 2004 came to 15,082 GWh of natural gas,generating revenues of 193 million euros, up 7% from the yearbefore, in an operating environment characterized byincreasingly greater competition in the natural gas retailingsector in Spain.

As part of its long-term agreements with its shareholders,SONATRACH and TOTAL, the company imported 14,936GWh in LNG shipments in 2004, and regassified, transportedand distributed gas by virtue of existing TPA contracts withENAGAS and GAS NATURAL.

According to information published by Spain’s National Energy Commission (CNE), CEPSA GASCOMERCIALIZADORA’s share of the liberalized marketcame to roughly 5% in 2004. This market accounted for 80%of gas consumption in the year, compared to 69% in theprevious year.

GAS DIRECTO

CEPSA is also active in the natural gas distribution sectorthrough its 40% stake in GAS DIRECTO, in partnership withUNION FENOSA, which holds the remaining 60%. Thecompany is authorized by the government to supply gas invarious townships of Madrid, Galicia, Castille-La Mancha andCastille-León.

In 2004, GAS DIRECTO delivered natural gas to over 2,300residential, commercial and industrial customers, 35% morethan the previous year. The amount of gas distributedlikewise rose 15% from 2003. Sales and operating revenuestotaled nearly 6 million euros in 2003, with a year-on-yearincrease of 19%.

Highlights of the year include the construction of a 17.5 km,16 bar gas pipeline between the towns of Arteixo and Laracha(A Coruña).

As of 2005, exclusivity in distributing natural gas in anytownship will no longer be permissible, and therefore a seriesof agreements were signed throughout 2004 to expand thecompany’s gas distribution network to new propertydevelopments and fast-growing areas of Madrid, which willentail over 100,000 new deliveries.


Gas & Power

NATURAL GAS


ELECTRICAL POWER

Changes in Spain’s legal framework for the electricity sectorpaved the pay for the liberalization of power generation andretailing, the creation of a production market, theestablishment of third-party access to transmission anddistribution networks, as well as incentives to the sale of powerfrom cogeneration facilities on this same market. In this newregulatory environment, CEPSA has become an active playerin the electrical power segment, enabling the Company tocapitalize on synergies with its other businesses. A descriptionof key electricity-related activities can be found below.

NUEVA GENERADORA DEL SUR

NUEVA GENERADORA DEL SUR (a 50/50 joint venturebetween CEPSA and UNIÓN FENOSA) operates a naturalgas-fired combined cycle power plant located on the premisesof CEPSA’s “Gibraltar” Refinery, with two power generatingsets, each one having a single-shaft configuration, usingleading-edge technologies in its gas turbines, and with thecapacity to supply steam to the adjacent refining facilities.

In 2004, construction of the facility was completed andcommercial operations of the two sets began at the end ofJune and July, respectively, pursuant to Resolutions of theGeneral Directorate of Energy & Mining Policies, which led totheir inclusion in the registry of electrical power productionfacilities in Spain. Total authorized output comes to 750 MW.

Production from the start-up of commercial operations ofNGS’ plant until the end of the year totaled 1,932 GWh, with

a 99% rate of availability since the time of reception of thegenerating sets from the manufacturer. Simultaneously, thepower plant produces medium and low-pressure steam, aswell as demineralized water, for use in the “Gibraltar”Refinery’s processes.

COGENERATION (CHP)

In order to enhance energy efficiency at its refineries andproduction sites, CEPSA has five cogeneration or CHP(combined heat and power) facilities to produce bothelectricity and useful heat (see table below for details of theseunits), meeting part of the thermal energy requirements ofthe Company’s industrial processes.

Power production from these units came to 1,727 GWh in2004, equivalent to 86% of peak production capacity, and 3.8million tons of steam were generated, used in the CEPSAGroup’s plants and refineries.

In 2004, CEPSA’s cogeneration companies were restructuredand accordingly, DETISA, GEGSA, GETESA and GEMASAsold their cogeneration plants to the wholly-owned affiliate ofDETISA called GENERACIÓN ELÉCTRICA PENINSULAR(GEPESA), in which SONATRACH has agreed to acquire a30% shareholding.

DETISA continued developing its power retailing activities toend consumers throughout the year, having acquired 36 GWhof electricity on the market for such purposes. This companyalso acts as a sales agent for the power generation unitsunder the Special Regime, having managed the sale of 1,322GWh in 2004 .

20

Authorized output Power production Steam production inCompany Year of start-up Mw in GWh thousands of tons

Detisa 1990 50 349 1,111Gegsa 1993 74 606 1,155Getesa 1996 41 301 505Cotesa 1994 38 259 594Gemasa 1997 27 212 406

Total 230 1,727 3,771

Millions of euros

Gas & Power 2004 2003

Natural gas sales (in GWh) 15,082 13,416Capital expenditures in the year 40 33EBITDA 37 27Operating income 20 17

Gas & Power


In addition to engaging in the refining, marketing anddistribution of petroleum products, CEPSA is also activelyinvolved in the petrochemicals segment, either directly orthrough its affiliates, and produces both basic chemicals andpetrochemical intermediates, chiefly based on aromaticproducts, harnessing the benefits provided by the high level ofintegration between refining operations and chemicalproduction. This structure, together with the partial use ofproprietary technologies, afford unique competitiveadvantages that enable the Company to drive profitability inthe value chain.

The CEPSA Group has manufacturing facilities for theproduction of chemical products in Spain, Canada and Brazil,marketing the company’s output on all five continents aroundthe globe.

The Group’s aggregate chemical output in the year stood at3.4 million tons of products, nearly 700,000 tons, or 25.3%,more than the year before. Out of total sales, practicallycoinciding with tonnage produced, 68% were channeled toexport markets.

DETERGENT PRECURSORS

PETRESA, a 100%-owned affiliate, produces and sells linearparaffin and linear alkylbenzene (LAB), a raw materialpredominantly used as the active cleaning agent inbiodegradable household and industrial detergents. The

company’s main production facility is located in San Roque(Cádiz), with a capacity to manufacture 220,000 tons per yearof LAB.

In addition, PETRESA has a 51% stake in PETRESACANADA INC. (SOCIÉTÉ GÉNÉRALE DE FINANCEMENTDU QUEBEC owns the remaining 49%) situated inBécancour, in the province of Quebec, Canada, where itsproduction capacity amounts to 120,000 tons per year of LABand which is operated using industry-leading proprietaryDETAL technology. Practically all of the plant’s output is soldon NAFTA markets (Canada, United States, and Mexico).

PETRESA also holds a majority interest of 72% in DETÉNQUIMICA (PETROBRAS is the second core shareholder), thepremier Brazilian producer of LAB in Latin America,headquartered in Camaçari, State of Bahía, Brazil, where ithas a production facility whose capacity has been expanded to220,000 tons per year.

In 2004, PETRESA continued its co-operative efforts with theSlovakian chemical company PETROCHEMA, A.S. and theFrench company IFRACHEM, to produce sulphonic acidslated for Central European markets. PETRESA also carriedon its commercial relations with SARUHAN, in Turkey,providing it access to the Ukrainian market, and with ICC inJamaica, through which it has been able to enlarge itspresence in Latin America.

As a result of its business strategies and world-class assetportfolio, PETRESA managed to raise its product sales,achieving a total output of 855,000 tons, with consolidatedsales revenues amounting to 450 million euros, 12% higherthan a year earlier.


PetrochemicalIntermediates


Despite commercial pressures, market shares weremaintained in the different geographical areas where thecompany operates, with favorable earnings performance inline with the previous year’s levels, albeit somewhat hinderedby rising prices on raw materials used in manufacturingprocesses and increasing energy costs, which were not fullypassed along to end prices. Compounding these pressures wasthe strength of the euro against the US dollar, the currency inwhich commercial transactions for petrochemical products arepriced, in a market, such as PETRESA’s, that is largelyexport-based.

During the year, over 3 million euros were assigned to quality,safety and environmental expenditures, with the companymaintaining all of its certifications and accreditations in theseareas.

Among the milestones achieved in the year, noteworthy wasthat PETRESA’s San Roque plant obtained OHSAS(Occupational Health and Safety Assessment Series)certification for its safety management system and alsoapplied for Integrated Environmental Authorization;PETRESA CANADA was granted C-TPAT (US Customs-Trade Partnership Against Terrorism) certification and theQMI, North America’s leading management system registrar,ratified that the company meets OHSAS-18001 standards.Other noteworthy achievements include the Brazilian prize,awarded to DETEN for the second year in a row, called “CincoEstrelas do Premio Polo de Segurança, Saude, Higiene y MeioAmbiente” which distinguishes the company as a leader in theCamaçari industrial complex in applying preventivemeasures, and the “Gold Trophy for quality management

programs in Bahia”, a version of the Malcolm BaldridgeQuality Award, attesting to its outstanding organizationalperformance, as well as recognizing the quality and dedicationof its management and workforce.

POLYESTER PRECURSORS

INTERQUISA, a wholly-owned subsidiary whose 750,000tons-per-year production facilities are located in San Roque(Cádiz), specializes in the manufacturing and sale of purifiedterephthalic acid (PTA), dimethyl terephthalate (DMT) andPurified Isophthalic Acid (PIA) used as raw materials toproduce different types of polyester for textile fibers, easily-recyclable PET (polyethylene terephthalate) bottles andcontainers and other applications.

INTERQUISA also has a 51% shareholding in INTERQUISACANADA L.P. (the remaining 49% belonging to theSOCIÉTÉ GÉNÉRALE DE FINANCEMENT DU QUÉBEC)which in turn has a plant in Montreal, Canada, completed in2003, to manufacture 500,000 tons per year of PTA, havingoperated practically at peak design capacity throughout theyear.

The combined output of both facilities topped 1.2 million tonsin 2004, enabling INTERQUISA to be firmly positioned as amajor player in its niche European and international markets,meeting the demands of its increasingly expanding customerbase. As for the breakdown of its sales, 66% of the Spanishplant’s output was sold on European Union markets (36%domestic, 30% exports) and 34% in other areas, primarilyTurkey and China; the Canadian plant mainly supplied NorthAmerican markets, and to a considerably smaller degree,Asian markets.

During the year, INTERQUISA’s sales and operating revenuesin Spain came to 470 million euros, climbing 24% from theyear before, and in Canada, the figure amounted to 452million Canadian dollars; in both cases, margins improved,despite the effect of a much weaker US dollar, the currency inwhich commercial operations are priced. In 2004,INTERQUISA positioned itself as the second leading supplierof PTA and PIA in the western world.

Capital expenditures in the year were earmarked towardsimproving operational safety and efficiency, and complyingwith the most stringent environmental mandates.

Petrochemical Intermediates

22


PHENOL-ACETONE

ERTISA, a 100% CEPSA affiliate, has its manufacturingfacilities in Palos de la Frontera (Huelva), where it produceschemical intermediates such as cumene, phenol, and acetone,as well as methyl amines, alpha methyl styrene and otherderivatives, predominantly used in making new-generationplastics.

Aggregate output of phenol and acetone came to 550,000 tonsin 2004, similar to last year’s figure, while capacity utilizationstood at roughly 95%. If we factor in other productsmanufactured by this subsidiary, total output was 568,000tons.

Sales of ERTISA’s product range exceeded 692,000 tons, withsharply improved sales revenues, rising over 37% year-on-year. Margins also shored up, due to strong and growingdemand for phenol and acetone, primarily sustained byincreasing consumption of Bisphenol A/Polycarbonate. Out oftotal sales, 38% were sold at home and the rest abroad.

Among the projects commissioned in this area, we shouldhighlight completion of a new flare, as well as the capacity

expansions underway through the construction of new units,thus enabling ERTISA to raise its output of cumene, phenoland acetone, which will amount to 800,000, 550,000 and342,000 tons per year, respectively, as soon as these facilitiescome on stream.


Millions of euros

Petrochemical Intermediates 2004 2003

Sales of petrochemical intermediates (millions of tons) 3.4 2.9Capital expenditures in the year 29 71EBITDA 177 131Operating income 83 56


At December 31, 2004, 2,823 people were working in theparent company CEPSA. As regards the CEPSA Group, whichincludes subsidiaries, the active workforce numbered 10,534people, with the median age and years of service being 42.48and 14.87, respectively. Compared to the previous year, therewas an increase of 235 employees, mainly as a result ofgreater activity in upstream businesses, as well as in theCompany’s commercial and industrial areas, due to the start-up of new production units.

In line with the policies pursued in recent years, in 2004,CEPSA’s Human Resources Division continued toimplement initiatives in support of the professional growthand development of its personnel working in the Group’sdifferent areas and units, and to ensure that the Company’sorganization and business strategies are well aligned,within a labor environment that seeks to build commonground between management, employees and theirrepresentatives.

In order to achieve these goals, CEPSA’s HR Division reviews,supports and coordinates the tasks of recruitment andselection, hiring, performance appraisal, education, trainingand development, in line with human resources planning andforecasts. Likewise, it oversees and reviews compensationschemes and the provision of employee services and benefitsin a way that is responsive to the needs of employees andtheir families and can generate greater personnel satisfactionand motivation. One of the fundamental components of theCompany’s human resource planning process is thedevelopment of succession plans that are being undertaken inCEPSA’s production centers.

Furthermore, HR policies at CEPSA are aimed at havingworkers extend their length of service until reaching thestandard retirement age, monitoring and developing theprofessional careers of older workers who are not only aninvaluable asset to the Company due to their skills andexperience but can also act as mentors and pass on thisreservoir of experience and knowledge to younger generationsof employees. As a part of its retirement planning policies, theCompany also offers early retirement plans to thoseemployees who voluntarily seek and are eligible for it,especially in technical areas where they are subject tophysically demanding job conditions, particularly those whowork continuous shifts.

Collective bargaining in the year was conducted in anenvironment that encourages systematic and effectiveemployee-management co-operation and communication,based on a longstanding model of orderly and peaceful laborrelations that seek to achieve consensus. These policies arereflected in the signature of collective agreements for multi-annual periods, in addition to regular meetings held betweenmanagement and worker representatives to reviewcontractual terms and conditions. In 2004, collectiveagreements for a minimum duration of four years weresigned in CEPSA (“La Rábida” Refinery), ATLÁNTICO,PETROSUR, CEPSA AVIACIÓN and CMD AEROPUERTOSCANARIOS.

In order to ensure that its workforce is kept abreast ofdevelopments in the marketplace, with the skills andcritical knowledge needed to successfully compete in theglobal arena, CEPSA considers training, both in-house and

24

Corporate Area

HUMAN RESOURCES


external, an essential tool. As a result, over 463,000instruction hours were provided in the year, 324,000 ofwhich were in-house, focusing particularly on the followingprograms: ongoing training of technical know-how andexpertise in production facilities; refining & petrochemicaloperations courses at the Company’s refineries and chemicalplants; safety, quality and occupational risk preventionawareness; executive leadership development throughbetter use of performance management tools; crisiscommunication training for communication managers; salestraining targeted at giving workers the skills, tools andabilities that provide added value; support for developmentof the “IMAN” project, aimed at improving customers’perception and service offered to them at the retail networkas well as improved management of DEPASO stores;computer and SAP R/3 IS-OIL software training; andcontinued training in online “e-learning” methods to takeadvantage of the wide range of possibilities offered by newtechnologies.

In compliance with provisions of the Spanish GovernmentRuling 1.588/1999 of October 15th regarding theinstrumentation of pension and other commitments andobligations to employees and their beneficiaries, the CEPSAGroup fully externalized the commitments it has with itsactive and retired employees through pension plans orinsurance policies. The Company provides defined benefitplans for contingencies such as death or disability and definedcontribution plans for retirement.

TREASURY AND FINANCES

The CEPSA Group’s financial management strives toconsistently maintain a strong balance sheet, secure requiredliquidity and align funds to capital expenditures.

In 2004, the CEPSA Group’s net interest-bearing liabilitieswere reduced by more than 60 million euros, with the year-end figure coming to 967 million euros, equivalent to 29.4%of consolidated shareholders’ equity, which turned out to bemore than 6 points lower than at the end of the previousyear, when the debt-to-equity ratio was 35.5%. If we includecorporate pension liabilities, the ratio of net interest-bearing debt to consolidated shareholders’ equity fell 6.3points, coming to 30.3% at the end of 2004 (versus 36.6% atDecember 31, 2003 and 59.2% at December 31, 2002).

Out of the year-end debt figure, 82% was arranged at floating

rates, 11% at fixed rates and the remaining 7% at floatingrates but hedged to limit upward risks.

Financing in foreign currencies, practically all in USdollars, amounted to an exchange value of 628 millioneuros, accounting for 58% of the CEPSA Group’s grossfinancial debt.

The average interest rate on outside financing continued todecline, slipping to an all-time low in 2004 of 2.01% (comparedto 2.13% in 2003 and 2.82% in 2002). Noteworthy in the yearwas that over 60 million euros were recorded in positiveexchange differences, mainly stemming from the write-off ofloans in US dollars, basically in connection with fundsassigned to E&P projects.

In 2004, the CEPSA Group formalized a 6-year leasingarrangement for the acquisition of a new double-hulled tankerto transport crude oil, with the principal amounting toUS$50.7 million; with this latest addition, the Company hasacquired four double-hulled tankers under leasingarrangements in recent years, which are bareboat charteredto the shipping company that operates these vessels, who thentime-charters them to CEPSA. The paid-off principal of theseleasing transactions comes to US$106.2 million, with theremaining principal balance, including purchase options, atUS$100.6 million.

Likewise in 2004, leasing arrangements were made to finance



butane canisters, for a maximum amount of 50 million euros,in addition to the lease arranged in 2003, totaling 20 million.At the end of the year, the outstanding principal on thesetransactions, including purchase options, came to 39.7 millioneuros.

As for liquidity, the CEPSA Group has cash levels consistentwith the Company’s capital spending and operationalrequirements. At December 31, 2004, interest-free creditlimits available from financial entities totaled 623 millioneuros.

TECHNOLOGICAL RESEARCH & DEVELOPMENT

Throughout the year, CEPSA’s technology division continuedits efforts towards advancing the Company’s operational andtechnological performance, key factors in ensuring acompetitive edge in an industry that is constantly evolving.This area focused its activities on building or convertingproductive facilities, developing applied technologies anddefining future projects, in order to accomplish the Company’sgoals and strategies.

CEPSA’s Research Center continued to provide technical

support to the Group’s productive and commercial centers,through the development and upgrading of technologiesdeployed in all of its facilities. A number of pilot plants wereset up, noteworthy being the one engaged in furtheringoxidation processes for aromatic chemical products. At thesame time, new initiatives were explored in upstream-relatedactivities. The Center is also certified pursuant to ISO 17025standards as an Oil Testing Laboratory, evidencing the highquality of the work methods used.

In 2004, progress was made in deciding on a new site forCEPSA’s Research Center, which will be completed in 2005and located adjacent to the Alcalá de Henares Universitycampus, near Madrid.

Among the projects that the Research center was involved induring the year was the “Concorde Project”, whose goal is tostudy and coordinate activities for the development of metallicoxide-based catalysts.

As regards Technology Development, this department focusedits activities basically on new projects, noteworthy being thelight naphtha reformer at the “La Rábida” Refinery, which atthe end of the year was still under construction. It alsoworked on forecasting the impact on the Group’s operationsfrom AUTO OIL 2005 specifications, and conductingpreliminary assessments to boost middle distillate productionand refining capacity.

CEPSA’s Engineering Department completed projects toadapt fuels to the aforementioned mandates at the Group’srefineries and likewise played a key role, due to itsinnovative technology, in a project related to frequencyconverters in the Tenerife Refinery, which could potentiallyuse electrical power from the grid as an alternative tointernally-generated power. It also completed the remodelingof the “Gibraltar” Refinery’s wharf.

Overall, the Engineering unit supervised over 1.8 millionconstruction hours, with an injury frequency index that stoodbelow 6, much less than the sector’s average. The goal is tofurther reduce this safety performance indicator, andaccordingly, an occupational risk prevention plan called “ZeroAccidents”, within this unit’s control and oversight, was putinto practice.

As regards technology and manufacturing procurements, inaddition to procurement and contracting management forconstruction projects, this area of the Company alsodeveloped an ambitious program of implementing frameworkagreements and standardized contracts for goods andservices, which have generated considerable cost savings asa result.

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ENVIRONMENTALPROTECTION, SAFETY &QUALITY (PA.S.CAL)

Throughout the year, new refining facilities werecommissioned and other existing ones were expanded, inorder to meet newly-mandated specifications on sulfurlimits in gasoline and gas oils effective as of 2005.Similarly, a new 34,000 ton-per-year ETBE (ethyl tertiarybutyl ether) plant –in addition to the existing 50,000 tpaETBE unit at the “Gibraltar” Refinery– came on stream atthe “La Rábida” Refinery in 2004. This facility, a jointundertaking between CEPSA and ABENGOA, is engaged inthe production of cleaner-burning bio-fuels using cereal-based ethyl alcohol. As a result, CEPSA’s total ETBEoutput now covers 6% of gasoline sales on the Spanishmainland.

Despite the commissioning of these industrial units, strideswere made in reducing total sulfur dioxide (SO2) emissionsfrom the refineries; efforts continued towards monitoring andtesting VOC’s (volatile organic compounds) emanating fromdifferent sources, in order to adopt the necessary measures;new agreements were signed with the Spanish Government,both at the local and regional level, noteworthy being projectsinvolving the conservation and enhancement of naturalhabitats, the restoration of the Primera de Palos Lagoon inHuelva and the publication of a natural habitat guide for theprovince of Huelva, in addition to a scheme to evaluate thephytoremediation of perennial crop soils after being mixedwith refinery sludge.

Furthermore, the use of natural gas in the Group’s industrialplants was fomented, retrofitting furnaces for this purpose,and progress was made on reducing atmospheric emissionsand waste generation, leading to much improvedenvironmental performance and significant cost savings.

And in what has now become a regular event, the CEPSAGroup had notable success with its 12th EnvironmentalConference, which included the participation of topgovernment officials, particularly from Spain’s Ministry ofEnvironmental Affairs, as well as industry leaders amongits speakers, who addressed timely topics such as airquality, emissions trading, proposed REACH regulationsand their impact on the chemical industry, the distributionof motor and other fuels and its environmental impact andSpanish regulations on contaminated soil recovery. CEPSAalso continued with its “Green Mailbox” scheme, a contestheld to reward the best environmental proposal submittedby employees working in the Company’s industrialfacilities.

In the area of occupational health, legal audits wereconducted on the occupational risk prevention systems ofERTISA and PETRESA, both of which were officially certifiedfor their compliance with mandated specifications. As regardssafety, audits performed on the “Gibraltar” Refinery, ERTISAand PETRESA, leading to certification pursuant tointernationally-recognized OHSAS 18001 safety standards, aswell as the renewal of this certification for the Tenerife and“La Rábida” Refineries, attest to the Company’s outstandingperformance in this area. Additionally, CEPSA set up avariety of educational programs and initiatives to raiseawareness among its personnel on accident prevention, inorder to be able to better pinpoint, control and minimizeworkplace hazards. As a way of further improving safety inthe Company’s facilities, efforts were aimed at specifying andimplementing best practices in this area and also inconnection with the transportation of hazardous merchandise,liaising with government agencies in order to propose possibleimprovements in current legislation.

The port facilities of CEPSA’s three refineries also achievedcertification in 2004, ahead of the established deadline, incompliance with the requirements of the International Shipand Port Facility Security (ISPS) Code, a new comprehensivesecurity regime that seeks to establish an internationalframework of cooperation to detect and take preventivemeasures against security incidents affecting ships or portfacilities used in international trade.

As regards Quality Management, work was completed in 2004to adapt all of the systems implemented in CEPSA’srefineries, CEPSA AVIACIÓN and CEPSA LUBRICANTES tonew PECAL/AQAP 120 “NATO Quality AssuranceRequirements for Production”, ensuring the highest and most



rigorous quality standards. Likewise, all certificates wererenewed by the General Directorate of Armaments andMaterial belonging to the Spanish Ministry of Defense, as aprior step to the renewal of certification for kerosene JP-8.

At the end of 2004, the CEPSA Group was in possession of 34Quality Management System certifications, and also duringthe year, an assessment team from the EUROPEANFOUNDATION FOR QUALITY MANAGEMENT (EFQM)proposed the “La Rábida” Refinery as a candidate for theEuropean Prize for Business Excellence. This Refineryobtained the “Recognized for Excellence” (R4E) level, whichentitles use of the EFQM logo together with the slogan“Recognized for Excellence”.

INFORMATION TECHNOLOGY

During the year, 70 projects were completed, as set out in thecorporate Strategic Systems Plan, using the most advancedtechnological standards, with a common architecture inequipment, programs and communications. The result is ahigh level of integration in processes and data, chiefly basedon the corporate SAP R/3 IS-OIL software system, togetherwith specific solutions for the gas, electrical power and C-storebusinesses. Continued efforts were also made to protectinformation assets, ensure the continuity of activity andenhance service quality through implementation of the“Information Security Plan” and the development ofcompanywide bandwidth communication networks.

Noteworthy was that a new data management system forindustrial plant maintenance was deployed at CEPSA’srefineries which, using industry-leading storage technologies,

make it possible to analyze information gathered and monitorefficiency indicators. Likewise a document managementsystem, including drawings, maps and plans of the Company’sfacilities, was put into place, providing support to theexecution of projects in the petrochemical plants andrefineries and enabling communication with contractorsthrough CEPSA’s website.

After witnessing the success of a new portal for CEPSA GASLICUADO in 2003, in support of the company’s piped gasmarketing activities, it was also extended to the company’sbottled gas business in 2004, enabling greater integration andstreamlining of processes with distributors. In addition, newcutting-edge systems were installed to forecast demand andoptimize distribution for the natural gas retailing activities ofCEPSA GAS COMERCIALIZADORA, thereby improvingsupply and capacity reserve decisions, while at the same timeproviding significant savings in logistical costs.

In the Company’s Portuguese affiliate, CEPSAPORTUGUESA DE PETRÓLEOS, the integration of all of itsbusiness lines under the corporate enterprise businessapplication solution SAP R/3, which encompasses supportmodules for financial, sales, distribution, procurements andmaterial management functions, was successfully completed,unifying the management systems of CEPSA’s Portuguese andSpanish retail networks under one global model.

In the Exploration & Production segment, a new TechnicalData Management System was put into place which providesaccess, through a portal, to geological, geophysical, field, welldrilling, production and services information on the RKF fieldand specific software systems for well drilling, production andservices were replaced by standard applications used in theoil industry.

In the area of lubricants, implementation of the SAPenterprise business application solution in our subsidiaryATLÁNTICO, including information flows between thiscompany and CEPSA LUBRICANTES, as well as thedeployment of new business models, were completed. InPetrochemicals, further integration was achieved in B2Bprocesses, both with customers and logistical suppliers, whichnot only leads to reduced transaction costs but also betterinformation quality. And in the retail network, the newcustomer loyalty card “PORQUE TU VUELVES” wassuccessfully launched, which requires processing aconsiderable volume of data.

Moreover, centralized audit and occupational risk preventionsupport systems were implemented, covering a large portionof the Company’s facilities, consistent with the CEPSAGroup’s goals of achieving ongoing improvement in safety-related performance.

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28


CEPSA AND COMMUNITYINVOLVEMENT

Mindful of its role as a socially-responsible corporate citizen,CEPSA published its first “Sustainability Report”, a documentthat embodies the Company’s core belief in responsiblegrowth, entailing a major step forward in its mission tointegrate the principles of sustainability into the Company’sdaily activities and a move towards greater transparency andaccountability.

Consistent with these targets, CEPSA strives to make apositive and lasting contribution to the welfare and prosperityof the communities, both at home and abroad, in which itoperates, continuing with its long and distinguished trackrecord of active involvement in social, cultural and athleticprojects and initiatives.

A topic of particular interest to the Company isenvironmental protection, and accordingly it has put intopractice specific targeted programs in this area. BecauseCEPSA firmly believes that conservation awareness needs tobe nurtured among younger generations, it organized a seriesof educational activities aimed at fostering respect for theenvironment, such as “World Wetlands Day”, for primaryschool students in Huelva, and in tandem with the CanaryIslands Government, it prepared a special edition of thejournal “New Planet” for young learners. One of the mostrecent initiatives has been a program called “Journey towardsSustainable Development”, with the participation of 3,000secondary school students on the Island of Tenerife,enlightening them through educational workshops on howthey can help care for the environment.

As part of its contributions to social services and programs,CEPSA engaged in collaborative efforts with a number of non-profit and charitable organizations to help underprivilegedcommunities both in Spain and in developing countries. In2004, CEPSA donated medical equipment to Algerianhospitals in Hassi Messaoud and Ourargla in order toimprove their prenatal services.

In the academic world, CEPSA continued its cooperation andagreements with various universities, through which it helpsorganize courses, seminars and research projects, as well asprovide scholarships and endowments in recognition ofoutstanding scholarly achievements. In partnership with thePolytechnic University of Madrid, CEPSA carried on itssupport of technical advancement, research, training andprofessional development of gifted teachers, engineers,students and graduates of mining engineering in Spain, andin association with the Higher Technical School of MiningEngineering in Madrid, it is working on a study to assess the

impact of manganese and cobalt cations on the subsoil;additionally, it lends support to the San Pablo-CEU UniversityFoundation in organizing a variety of activities such as the3rd Summer Courses in Burgo de Osmo (Soria) on historicalheritage. CEPSA also manages academic exchange programsand provides an extensive trainee program at the Company’straining centers located in its key production facilities toallow recent graduates the chance to develop their skills andknowledge with firsthand experience in a corporateenvironment. Outside Spain, it promotes academic exchangeprograms with a number of countries that do not haveprograms financed by other organizations and institutions.

In the cultural arena, CEPSA cooperates with a number ofhighly prestigious and renowned scientific, technical andcultural entities. Noteworthy was its ongoing collaborationwith the famed “Prince of Asturias Foundation”, which on ayearly basis grants awards for prominent contributions insciences, humanities, technical and scientific research, publicaffairs and sports by individuals, groups or institutions aroundthe world. Likewise, CEPSA continued its efforts aimed atpreserving Spain’s rich artistic legacy, such as its patronage ofthe “Friends of the Prado Museum” Foundation, whose goal isto promote, encourage and sponsor cultural activities inconnection with this Museum. Another accomplishment in thisarea was the funding provided to restore paintings by theSevillian artist Juan de Díos Fernández in St. Mary’sMonastery in La Rábida,, Huelva. CEPSA’s initiatives toadvance artistic and cultural awareness, particularly in music,include its continued sponsorship of the Canary Islands MusicFestival, one of Europe’s most celebrated classical musicevents held each winter.



As regards the world of sports, CEPSA continued itssponsorship of athletic activities, focusing especially on thepromotion of a wide variety of sports and recreationalprograms for young people, such as soccer, rowing andfencing, and funding and support of different clubs andteams. Some projects in this area include the Little LeagueSoccer Tournament in La Línea de la Concepción, Cádiz,and the school to teach sailing techniques through theCanary Islands Sailing Federation in Tenerife, in whichhundreds of children ages 7 to 15 were able to learn aboutthese sports.

In support of its commercial activity in connection with theworld of racing, CEPSA carried on sponsoring the “CEPSATruck Races”, and once again ranked first place in theSpanish Cup, Super-truck category, for the 6th straight yearand finished 4th in the European Truck RacingChampionship, with 6 podiums and 2 first prizes. CEPSA alsoparticipated in the world of single-seat motor racing, andteamed up as a sponsor with the Epsilon Euskadi team, whichtakes part in the World Series auto races, the stepping stoneto the renowned Formula 1; this team managed to get anhonored third place in this event, and its pilots came out 4thand 7th in the final classification.

CEPSA was also proactive in encouraging greater globalcooperation and dialogue by organizing and sponsoringmeetings, seminars, roundtables and forums for discussionand exchange regarding technical, environmental andsocioeconomic matters, in order to serve the public at large.These encounters are mainly undertaken through theCompany’s participation in a variety of associations.

In order to contribute towards international research andstudy, CEPSA is a member of the Board of Trustees of theComplutense Institute for International Studies and theElcano Royal Institute for Global and Strategic Studies, whichis becoming a major international think tank on global issues.In 2004, CEPSA also took part in the Spanish-PortugueseForum, an organization that seeks to build closer ties betweenthe societies of both countries, as well as in otherinternational meetings on energy-related topics, and itlikewise collaborated with the Luso-Spanish Foundation,whose mission is to jointly develop activities and promotebilateral contacts between Portugal and Spain.

CEPSA is also actively involved in leading forums andinstitutions of the European Union through its membership inEUROPIA (The European Oil and Petrochemicals IndustryAssociation), where it holds the office of Vice-Chairmanship;APPE (Association of Petrochemicals Producers in Europe),and CONCAWE (Conservation of Clean Air and Water inEurope – the oil companies’ European organization forenvironment, health and safety).

CEPSA likewise is a member of the OME (MediterraneanEnergy Observatory), which encompasses oil industry leadersin the Mediterranean region, and belongs to the Spain-Northern Africa Club. At home, CEPSA is a member of avariety of associations in connection with its differentbusiness activities, such as FEIQUE (Spanish Federation ofChemical Industries) and AOP (Association of Oil ProductOperators). The Company similarly cooperates in thedevelopment of the Spanish energy sector, with itsmembership on the Hydrocarbons Advisory Council of theNational Energy Commission.

CEPSA similarly has a prominent role in the Spanish EnergyClub (ENERCLUB), whose President since December 2004 isCEPSA’s Chairman & CEO, Mr. Carlos Pérez de Bricio. ThisClub acts as a forum for exchanging ideas and information onthe energy sector.

In November 2004, the Spanish Committee of the WorldPetroleum Council (WPC), in which CEPSA holds the office ofSecretariat, saw its efforts succeed when Spain was chosenover other candidates to host the 19th World PetroleumCongress in Madrid in 2008, marking the 75th anniversary ofthis global energy institution.

Additionally, through its membership in associations such asthe Spanish Confederation of Employers (CEOE) and theConfederation of Andalusian Employers (CEA), as well as invarious Chambers of Commerce and Industry, CEPSA isactively and dynamically involved in proposals, measures anddecisions that seek to promote economic and businessdevelopment in Spain.

Corporate Area

30


The share capital of Compañía Española de Petróleos, S.A.(CEPSA) amounts to 267,574,941 euros, divided into267,574,941 bearer shares with a face value of 1 euro each,represented by book entries.

All of CEPSA’s outstanding shares are officially traded on thefour Spanish Stock Exchanges and listed on the ContinuousMarket, with weightings on the Madrid Stock ExchangeGeneral Index, the Energy & Utility Index, and the Oil, Gasand Other Energy Sources Index of 1.199360%, 5.793556%and 12.420237%, respectively.

In 2004, CEPSA shares traded within a range of 30.90-25.50euros, with the year-end share price coming to 29.70 euros,climbing 2.2 euros, or 8.6%, from a year earlier. Forcomparative purposes, and looking at the share priceperformance over the last five years, CEPSA’s sharesappreciated 204%, compared to the IBEX 35 IndustrialAverage, which fell 22%, and the General Average of theMadrid Stock Exchange, which was down 4.90%.

A total volume of 8,789,585 CEPSA shares were traded on themarket in 2004, equivalent to 3.28% of the share capital andwith a market value of 249.4 million euros. Shares weretraded on all sessions, with 100% liquidity.

At the close of the year, CEPSA’s market capitalization cameto 7,947 million euros, rising 589 million euros from 2003. NetEarnings Per Share (EPS) came to 2.43 euros, up 0.14 eurosfrom the year before.

The expected dividend distribution to shareholders on 2004profits, including the final dividend to be brought before theAnnual General Meeting of Shareholders for approval,

amounts to a total of 1 euro per share, divided into an interimdividend payment of 0.42 euros, paid out on October 25, 2004,and a final dividend payment of 0.58 euros. This totaldividend proposal represents a payout ratio of 41% ofconsolidated income (versus 42% in 2003) and compared tothe average price in 2004, means a yield of 3.52%.

Total shareholder return, calculated as the sum ofdividends actually paid out in 2004 together with the changerecorded in the share price between the opening and closingdate of the year, came to 3.15 euros, equivalent to a return of11.45%.

The P/E (Price/Earnings) and P/CF (Price/Cash Flow) ratios,on a consolidated basis and using the year’s average shareprice, came to 11.7 and 7.1, respectively. These ratios continueto compare favorably with average ratios recorded for thelarge-cap company shares making up the “IBEX 35” (Spain’sblue-chip index).

CEPSA’s Annual General Meeting of Shareholders held onMay 31, 2001, authorized and empowered the Board ofDirectors, subject to legal provisions, to increase, all at once orover a period of time, within a five-year limit, the sharecapital of the Company up to a maximum of 133.8 millioneuros, by new cash contributions, through the issue of votingor non-voting shares with or without a share premium. Thisauthorization was not exercised at December 31, 2004.

The Annual General Meeting held on May 28, 2004,authorized and empowered the Board of Directors so that,subject to legally applicable provisions, and after obtainingthe necessary authorizations, it may issue, within themaximum period of five (5) years allowed by law, starting


CEPSA and the Stock Market


from the date of this authorization, non-convertible debt, bymeans of debentures, bonds or other fixed-yield securities,simple or mortgage, subordinated or not, and documented bymeans of certificates or book entries, up to a maximum limitof 300 million euros. The Board of Directors had not used thisauthorization at December 31, 2004. Likewise, CEPSA did nothave any outstanding bond issues at this date.


32

2004 2003 2002 2001 2000

Share Price (euros per share)High 30.90 28.68 19.14 14.58 10.42Low 25.50 17.10 12.43 9.06 8.68Average 28.37 25.67 16.58 11.80 9.37Year-end 29.70 27.50 17.39 12.49 9.20

Trading Number of shares (millions) 8.8 91.3 (*) 53.2 42.1 34.5Market value (millions of euros) 249.4 2.349.5 (*) 883.7 497.0 365.1

Stock Market RatiosDividend Yield (%) 3.52 3.70 4.16 5.09 3.49Price/Earnings (P/E) Ratio 11.68 11.22 9.63 7.28 7.04Price/Cash Flow (P/CF) per share 7.12 6.48 5.71 3.71 5.56

(*) Includes the effect of the partial takeover bid launched by Banco Santander Central Hispano on September 26, 2003 for a cash purchase offer of 28 euros pershare. According to the notification issued by the Spanish Securities & Exchange Commission (“CNMV”), a total of 32,461,948 shares were tendered in this bid,representing 12.13% of CEPSA’s share capital.

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Table of Contents

01 Letter from the Chairman04 Key Figures of the CEPSA Group 06 Board of Directors 07 Executive Management Committee

SUMMARY OF CEPSA GROUP ACTIVITIES


CEPSA GROUP LEGAL DOCUMENTS

34 Report from Independent Auditors36 Consolidated Financial Statements

36 Balance Sheets38 Statements of Income40 Notes to the Financial Statements

84 Management Discussion & Analysis

90 Information to the Annual General Meeting of Shareholders91 Notes from the Board of Directors 92 CEPSA Group Financial Information

101 CEPSA Group Addresses

For any inquiries about the 2004 Financial Statements orManagement’s Discussion & Analysis, or any other

document mentioned in this Annual Report,please contact our Institutional Relations Division,

at the head offices of the Company located at Avenida del Partenón 12,

“Campo de las Naciones”, 28042 Madrid,or our Office of Shareholder Services at the toll-free

number: 900 101282 or e-mail address:“[email protected]”.

CoordinationOffice of the Secretary of the Board of Directors

Design and RealizationIMAGIA

© March 2005, CEPSA

Printed by:Gráficas Enar

Printed on chlorine-free paper


from the date of this authorization, non-convertible debt, bymeans of debentures, bonds or other fixed-yield securities,simple or mortgage, subordinated or not, and documented bymeans of certificates or book entries, up to a maximum limitof 300 million euros. The Board of Directors had not used thisauthorization at December 31, 2004. Likewise, CEPSA did nothave any outstanding bond issues at this date.


32

2004 2003 2002 2001 2000

Share Price (euros per share)High 30.90 28.68 19.14 14.58 10.42Low 25.50 17.10 12.43 9.06 8.68Average 28.37 25.67 16.58 11.80 9.37Year-end 29.70 27.50 17.39 12.49 9.20

Trading Number of shares (millions) 8.8 91.3 (*) 53.2 42.1 34.5Market value (millions of euros) 249.4 2.349.5 (*) 883.7 497.0 365.1

Stock Market RatiosDividend Yield (%) 3.52 3.70 4.16 5.09 3.49Price/Earnings (P/E) Ratio 11.68 11.22 9.63 7.28 7.04Price/Cash Flow (P/CF) per share 7.12 6.48 5.71 3.71 5.56

(*) Includes the effect of the partial takeover bid launched by Banco Santander Central Hispano on September 26, 2003 for a cash purchase offer of 28 euros pershare. According to the notification issued by the Spanish Securities & Exchange Commission (“CNMV”), a total of 32,461,948 shares were tendered in this bid,representing 12.13% of CEPSA’s share capital.

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CEPSA GroupLegal Documents

34 Report from Independent Auditors 36 Financial Statements



INGLES-02 CEPSA 04 (56 pág Cuen 22/6/05 12:06 Página 33

Report from Independent AuditorsCompañía Española de Petróleos, S.A. and Subsidiaries (CEPSA Group)

34


CEPSA Group 35


Consolidated Balance Sheets as of December 31, 2004 and 2003 (Notes 1, 2 and 3)Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)

36

Thousands of euros

ASSETS 2004 2003

Fixed and other noncurrent assetsStart-up expenses (Note 4) 866 334 Intangible assets (Note 5)

Intangible assets and rigths 1,625,486 1,456,853 Provisions and accumulated amortization (644,775) (554,776)Total intangible assets 980,711 902,077

Tangible fixed assets (Note 6) Land and structures 301,107 285,082 Technical instalations and machinery 4,420,290 3,974,599 Other tangible fixed assets 332,686 316,725 Advances and construction in progress 196,115 217,342 Provisions and accumulated amortization (2,598,634) (2,388,534)Total tangible fixed assets 2,651,564 2,405,214

Long-term financial investment (Note 7) Holdings in companies carried by the equity method 118,336 142,840 Loans to companies carried by the equity method 34,776 16,569 Long-term investment securities 25,241 33,307 Other loans 183,049 207,151 Provisions (38,709) (48,414)Total long-term financial investment 322,693 351,453

Total fixed and other noncurrent assets 3,955,834 3,659,078

Goodwill in consolidation (Note 8) Co. consolidated by the global or proportional integration method 86,264 84,959 Companies carried by the equity method 3,400 14,363

Total goodwill in consolidation 89,664 99,322

Deferred charges (Note 10) 63,119 56,503

Current assets Inventories (Note 11) 736,356 736,334 Accounts receivable (Note 2,d) 1,795,267 1,418,241 Sort-term financial investments (Note 7) 176,689 182,483 Cash 49,497 40,655 Prepaid expenses 41,443 23,837

Total current assets 2,799,252 2,401,550

TOTAL ASSETS 6,907,869 6,216,453

(The accompanying notes 1 to 26 are an integral part of these Consolidated Balance Sheets)

Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally acceptedaccounting principles in Spain (see Note 26). In the event of a discrepancy, the Spanish-language version prevails.


CEPSA Group 37

Thousands of euros

SHAREHOLDERS’ EQUITY AND LIABILITIES 2004 2003

Shareholders’ equity (Note 12) Subscribed capital stock 267,575 267,575 Paid-in surplus 338,728 338,728 Revaluation reserve 90,936 90,936 Other reserves of the controlling company:

Unrestricted reserves 1,255,734 1,012,551 Restricted reserves 54,056 54,056 Prior years’ earnings - -

Reserves at companies consolidated by the global or proportional integration method 831,921 725,804 Reserves at companies carried by the equity method (44,994) (51,639)Translations differences:

Companies consolidated by the global or proportional integration method (38,918) (39,244)Companies carried by the equity method (502) (262)

Income allocable to the contoling company 649,787 612,301 Interim dividend paid in the year (112,381) (112,381)Total shareholders’ equity 3,291,942 2,898,425

Minority interest (Note 13) Shareholders’ equity atributed to minority interests 32,697 30,303 Income attributed to minority interests 7,472 7,803 Total minority interest 40,169 38,106

Negative difference in consolidation (Note 9) Co. consolidated by the global or proportional integration method 1,158 2,317 Total negative difference in consolidation 1,158 2,317

Deferred revenues (Note 14) Capital subsidies 72,514 79,656 Other deferred revenues 266,766 283,163 Total deferred revenues 339,280 362,819

Provisions for contingencies and expenses (Note 15) 271,115 302,738

Long-term debt (Note 16) Payable to credit entities 736,195 835,217 Payable to companies carried by the equity method 53 420 Other accounts payable 165,854 118,407 Total long-term debt 902,102 954,044

Current liabilities Payable to credit entities (Note 16) 306,603 262,389 Payable to companies carried by the equity method (Note 16) 246,739 235,096 Trade accounts payable 1,034,600 743,303 Other nontrade payables (Notes 2.d and 16) 465,501 407,979 Accrued expenses 8,660 9,237 Total current liabilities 2,062,103 1,658,004

TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 6,907,869 6,216,453


38

Consolidated Statements of Income for the years ended December 31, 2004 and 2003 (Notes 1, 2 and 3)Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group)

Thousands of euros

DEBIT 2004 2003

Expenses:Procurements (Note 20) 9,301,985 7,990,941 Decrease in finished product and products-in-process inventories 15,634 21,451 Personnel expenses (Note 2.d) 420,129 401,839 Period depreciation and amortization 367,126 377,981 Variation in operating provisions 1,592 (5,476)Other operating expenses:

Excise tax on oil and gas (Note 3.o) 2,168,642 2,142,893 Other expenses (Note 2.d) 1,552,957 1,420,770

13,828,065 12,350,399 Operating income 951,169 936,320

Financial expenses 41,156 42,689 Variation in financial investment provisions 1,838 (11,273)Tranlation losses (Note 3.a) 2,667 5,812

45,661 37,228

Financial income 46,066 -

Amortization of goodwill in consolidation (Note 8) 13,302 9,910 Income from ordinary activities 1,005,721 939,365

Losses on fixed assets (Note 20) 10,498 11,658 Variation in intangible assets, tangible fixed assets and control portofolio provisions (Note 20) (25,157) (8,698)Extraordinary expenses (Note 20) 52,765 64,100 Prior years’ expenses (Note 20) 632 837

38,738 67,897 Extraordinary income (Note 20) - 6,449

Consolidated income before taxes 997,545 945,814 Corporate income taxes (Note 17) 340,286 325,710

Consolidated income for the year 657,259 620,104 Income attributed to minority interests (Note 13) 7,472 7,803

INCOME ATTRIBUTED TO THE CONTROLLING COMPANY 649,787 612,301

(The accompanying notes 1 to 26 are an integral part of these Consolidated Statements of Income)



CEPSA Group 39

Thousands of euros

CREDIT 2004 2003

Revenues:Sales and services on ordinary activities 12,519,160 11,056,491 Excise tax on oil and charged on sales 2,168,393 2,142,794

Net sales (Notes 3.o and 20) 14,687,553 13,199,285 Capitalised expenses of group in-house work on fixed assest 28,035 33,420 Other operating revenues 63,646 54,014

14,779,234 13,286,719

Revenues from sahreholdings 558 296 Othe financial revenues 30,618 30,963 Gains on short-term financial investment 289 64 Excahnge gains-(losses) 60,262 (1,599)

91,727 29,724

Financial loss - 7,504

Share in income of companies carried by the equity method 20,629 19,049

Allocation of Negative difference in consolidation (Note 9) 1,159 1,410

Gains on fixed assets (Note 20) 1,826 43,525 Capital subsidies transferred to income for the year (Notes 3.h, 14 and 20) 9,553 9,355 Extraordinary revenues (Note 20) 17,970 21,189 Prior years’ revenues (Note 20) 1,213 277

30,562 74,346

EXTRAORDINARY LOSS (NOTE 20) 8,176 -


Notes to the Consolidated Financial StatementsNotes to consolidated financial statements for the years ended December 31, 2004 and 2003.Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group).

1. Description of the CEPSA Group

Compañía Española de Petróleos, S.A. (“CEPSA”), whose registered office is at Avenida del Partenón 12 (Campo de las Naciones),Madrid, was incorporated for an unlimited period of time on September 26, 1929, and is registered in the Madrid Mercantile Registerin Volume 206 of the Companies book, Folio 100, Sheet 6045. Its employer identification number is A-8003119.

Compañía Española de Petróleos, S.A. (“CEPSA”) and its investees (together “the CEPSA Group”) compose an integrated businessgroup which operates in the oil and gas industry in Spain and abroad and engages in business activities relating to the explorationfor and extraction of 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 consolidated financial statements, shows the directly or indirectly owned subsidiaries andmultigroup and associated companies which, together with CEPSA, compose the consolidated Group. The Table lists these companies’registered offices and lines of business, together with the most significant economic and financial information thereon for 2004.

2. Basis of presentation and consolidation principles

a) True and fair viewThe accompanying consolidated financial statements were prepared from the accounting records of the CEPSA Group companies inaccordance with the Spanish National Chart of Accounts and consolidation regulations and, accordingly, they give a true and fair viewof the Group’s net worth, financial position and results of operations.

These consolidated financial statements and the individual financial statements of the consolidated companies for 2004 will besubmitted for approval by the respective Shareholders' Meetings, and it is considered that they will be approved without any changes.The 2003 individual and consolidated financial statements of CEPSA and the CEPSA Group, respectively, were approved without anychanges by the Shareholders' Meeting held in Madrid on May 28, 2004.

b) Consolidation principlesThe companies at which a majority of the voting rights are owned or controlled and/or at which a majority of the members of the Boardof Directors can be appointed or removed were fully consolidated; the multigroup companies which are managed jointly with thirdparties were proportionally consolidated; and the associated companies over which there is significant influence but not effectivecontrol are accounted for by the equity method.

The positive differences between the acquisition cost of the consolidated subsidiaries and their underlying book value at theacquisition date, adjusted for the unrealized gains on their assets at that date and which still exist, are included under the “Goodwillin Consolidation” caption. Negative differences are recorded under the “Negative Consolidation Difference” caption in the consolidatedbalance sheet.

In the case of consolidable Group companies, these unrealized gains are allocated to the balance sheet captions relating to the assetson which they arose. Unrealized gains at companies accounted for by the equity method are treated as additions to the value of theholding therein, and are included under the "Investments in Companies Accounted for by the Equity Method" caption.

40



The consolidated reserves at the fully and proportionally consolidated companies are reflected as such in a specific caption under"Shareholders' Equity" in the consolidated balance sheet and were determined on the basis of the variation in the reserves of thesecompanies from when each of them was first included in the consolidable Group, net of the portion corresponding to minority interests,which is included under the "Minority Interests" caption.

Similarly, the reserves at the companies accounted for by the equity method from when they were first consolidated are reflected, inthe amount proportional to the consolidable Group's percentage of ownership in them, under the "Shareholders' Equity - Reserves atCompanies Accounted for by the Equity Method" caption in the consolidated balance sheet.

The equity of minority shareholders in the net worth and income of the CEPSA Group’s consolidated subsidiaries is recorded underthe "Minority Interests" caption in the consolidated balance sheets and the "Income Attributed to Minority Interests" caption in theconsolidated statements of income, respectively.

All material balances, transactions and results between the fully consolidated companies were eliminated in consolidation. Based onthe percentage of ownership, the balances, revenues, expenses and results from transactions with proportionally consolidatedcompanies were also eliminated. In addition, the accounting principles and procedures used by the Group companies were unified withthose applied by the Parent Company and all accounting principles and valuation methods with a material effect on the consolidatedfinancial statements were applied.

c) Comparative informationIn accordance with the Spanish National Chart of Accounts approved by Royal Decree 1643/1990, the consolidated financialstatements present, together with the figures for 2004, the corresponding amounts for 2003.

The variations in the scope of consolidation in 2004 were as follows:

Global/Proportional Equity Company Integration method Method

Asturiana de Gasóleos, S.A. — ECepsa Operaciones Marina-Aviación, S.A. I —Cepsa Ventas Directas - Distribución, S.A. E —Comercio y Distribución, S.A. (CODISA) — EGeneración Electrica Peninsular, S.A. I —Gutierrez Peinado Hermanos, S.L. — IMotel Estación Malgrat, S.A. (MEMSA) — ENueva Generadora del Sur, S.A. I E9095-5311 Quebec INC. I —

I= Included; E= Excluded

The variations in the scope of consolidation in the year include most notably the retirements due to mergers by absorption.

The detail of the net worth effect of the change in consolidation method and of the changes in the consolidated companies can be seen in the“Other Variations” column in the respective tables disclosing the variations in each caption in 2004.

CEPSA Group 41


d) Grouping of itemsThe balances of the "Accounts Receivable" and "Other Non-trade Payables" captions in the accompanying consolidated balance sheetsas of December 31, 2004 and 2003, consist of the items detailed below:

Thousands of euros

Current assets (accounts receivable) 2004 2003

Trade receivables for sales and services 1,596,667 1,252,385 Receivable from companies accounted for by the equity method 205,344 162,167 Sundry accounts receivable 2,573 3,029 Taxes receivable 79,763 92,205 Allowances (89,080) (91,545)

Total 1,795,267 1,418,241

Thousands of euros

Current liabilities (other nontrade payables) 2004 2003

Taxes payable 259,195 209,231Other payables 197,995 190,940Guarantees and deposits received 8,311 7,808

Total 465,501 407,979

Notes to the Consolidated Financial Statements

42


The amounts recorded under the "Personnel Expenses" and "Other Expenses" captions in the 2004 and 2003 consolidated statementsof income consist of the following items:

Thousands of euros

Personnel expenses 2004 2003

Wages, salaries and similar expenses 315,429 297,805 Contributions and provisions for pensions 11,344 2,275 Other employee welfare expenses 93,356 101,759

Total 420,129 401,839

Thousands of euros

Other expenses 2004 2003

Taxes other than income tax 36,562 27,365 Transport and freights 443,065 387,432 Outside work and services and utilities 1,053,325 978,093 Other current operating expenses 7,973 8,248 Environmental expenses (Note 22) 12,032 19,632

Total 1,552,957 1,420,770

CEPSA Group 43


3.Valuation standards

The main valuation methods applied in consolidation were as follows:

a) Translation of financial statements in foreign currenciesThe financial statements denominated in foreign currencies of the Group companies resident abroad were translated to euros asfollows: for the Group companies which engage in trading for the Group, the "monetary-non-monetary" method was used and thetranslation differences are included under the "Translation Gains/Losses" captions in the consolidated statements of income; for theremaining foreign companies, the "year-end exchange rate" method was used, consisting of the translation to euros of assets andliabilities at year-end exchange rates, of capital and reserves at historical exchange rates and of revenues and expenses at the averageexchange rates for the year. The resulting translation differences are recorded under the "Shareholders’ Equity - TranslationDifferences" caption in the accompanying consolidated balance sheets.

The effect of the changes in exchange rates can be seen in the respective tables disclosing the variations in each caption during theyear in the “Other Variations” column.

b) Start-up expensesThis caption comprises incorporation, preopening and capital increase expenses, valued at their effective cost, net of amortizationtaken by the straight-line method over five years.

c) Intangible assetsIntangible assets are valued at acquisition cost or at the direct and indirect cost incurred in producing or developing them, includingpersonnel, financial and other expenses relating to projects carried out (see Note 5).

Research and development expenses are amortized in full when the related project is completed, regardless of its outcome, unless thetechnology developed is patented, in which case they are amortized over 13 years.

Oil well drilling investments are recorded by the “successful efforts” method, and exploration costs are expensed as incurred. Drillingcosts are capitalized until it is determined whether exploitable reserves have been discovered. If so, they are amortized, together withthe field development expenses, on the basis of the reserves extracted as a percentage of the reserves proven to be recoverable; if thereserves detected are not exploitable, the drilling costs are charged to income as soon as this becomes known.

Manufacturing license rights are amortized at the same rates as those used to depreciate the manufacturing units to which theyrelate. Service station surface rights are amortized over an average of 20 years, based on the contracts for transactions of this type,and computer software is amortized over a maximum of three years.

The rights under financial lease contracts, when there is no reasonable doubt that the purchase option will be exercised, are recordedat the cost of the related assets, and the total debt for lease payments plus the amount of the purchase option are recorded as aliability. The difference between the two amounts, which represents the interest expenses on the transaction, is recorded as a deferredexpense. These rights are amortized at the same rate as the leased asset. When the purchase option is exercised, the value of the rightsrecorded and the related accumulated amortization are relieved from intangible assets and are recorded as part of the value of theacquired asset.

d) Differences in first-time consolidationGoodwill in consolidation and negative consolidation differences are recorded as the positive or negative difference, respectively,between the price paid to acquire the investees and their underlying book value at the acquisition date, net of the differences infirst-time consolidation attributed to asset items.

Goodwill is amortized on a straight-line basis over five years, except in the case of the goodwill relating to heating fuel marketingcompanies and to Deten Quimica, S.A, which is amortized over three and fifteen years, respectively, since these are the periods overwhich the decline in value will foreseeably occur.

Negative consolidation differences are allocated to income over five years as provided for in Article 25.3 of Royal Decree-Law1815/1991 approving the regulations for the preparation of consolidated financial statements.


44


e) Tangible fixed assetsTangible fixed assets are carried at cost, revalued pursuant to the applicable enabling legislation, which includes personnel expensesand other expenses directly and indirectly related to these assets incurred during the construction period only.

If necessary, in accordance with Spanish accounting regulations, the values of tangible fixed assets are adjusted by deducting fromtheir cost the amounts that it is not possible to recover through the generation of future revenues (see Note 6).

The costs of expansion, modernization or improvements leading to increased productivity, capacity or efficiency or to a lengthening ofthe useful lives of the tangible fixed assets are capitalized. Repair, upkeep and maintenance expenses are expensed currently.Retirements of assets and components are recorded by removing the asset and the related accumulated depreciation from theaccounts.

The Group depreciates its tangible fixed assets by the straight-line method at annual rates based on the following years of estimateduseful life:

Years of useful life

Depreciation of tangible fixed assets

Buildings and other structures 33 to 50Technical installations and machinery

Machinery, installations and tools 10 to 15Furniture and fixtures 10

Plants in serviceUnits 12 to 15Lines and network 15Tanks and spheres 20

Other tangible assets 4 to 10

f) Marketable securities and other similar financial investmentsExcept for the investments in associated companies that are accounted for by the equity method, marketable short- and long-term fixed-income and equity securities are recorded at the lower of cost or market. If cost is higher than market value, the required provisions fordiminution in value are recorded with a charge to income.The market value of investments in unlisted companies is taken to be the underlyingbook value per the latest balance sheet, including, where appropriate, the unrealized gains disclosed at the time of the acquisition and stillexisting at the date of subsequent valuation.

g) InventoriesCrude oil and oil derivatives are valued at the lower of “Dollar Value” LIFO cost or market value. Crude and oil derivatives in transit arevalued at the cost at source plus direct costs incurred through year-end. Replacement parts and supplies and other inventories are valued atthe lower of average acquisition or production cost or market (see Note 11).

In the case of refined products, the individual costs are allocated to the various products in proportion to the selling price thereof (isomarginmethod).

Production cost includes the acquisition cost of raw materials and other consumables required, determined in accordance with the valuationstandards of the Spanish Chart of Accounts, and the costs directly allocable to the product and the related costs and amortization expensecorresponding to production facilities which are indirectly allocable to the product in question, insofar as these costs relate to the production,manufacturing or construction period.

CEPSA Group 45


h) SubsidiesCapital subsidies are recorded at the amount granted. Nonrefundable capital subsidies are recorded under the “Deferred Revenues” captionin the consolidated balance sheet and are allocated to income over the useful life of the subsidized investments. Refundable capital subsidiesare recorded as long-term debt transformable into subsidies; operating subsidies are credited to income when earned.

i) Provisions for pensions and similar obligationsThe value of the commitments to employees covered by in-house allowances has been calculated by means of actuarial studies conducted bythe companies based on individual capitalization techniques using interest rates in line with the commitments (see Note 15).

The annual cost accrued for commitments to employees and for the financial effect related to pension funds’ revaluation is recorded under the“Personnel Expenses” and “Financial Expenses” captions.

As required by Transitional Provision Four of Royal Decree 1643/1990 and subsequent legislation, the difference as of December 31, 1989,between the value of the commitments and the allowances recorded for pension payments for retired and serving employees at that date, netof the related tax effect, was being amortized with a charge to reserves over 7 and 15 years, respectively. This difference had been fullyamortized as of December 31, 2004 (see Note 10).

As required by Royal Decree 1588/1999 approving the Regulations on the instrumentation of employers’ pension commitments to workers andbeneficiaries, the CEPSA Group externalized the capital relating to each participant at the date on which the pension plan was set up (i.e.past services). Additionally, the CEPSA Group externalized the commitments for death of spouse, death of parent, disability and retirementto its employees and their beneficiaries, in accordance with Additional Provision 25 of Law 14/2000 on Tax, Administrative, Labor and SocialSecurity Measures for 2001.

j) Other provisionsThe “Provisions for Contingencies and Expenses” caption includes provisions for major repairs to the production units, covering the estimatedexpenses of extraordinary overhauls based on the projected cost of the next overhaul and the period between two overhauls. It also includesprovisions for third-party liability, covering the probable or certain expenses arising from litigation in progress and obligations ofundetermined amount, and for risks relating to liabilities that may arise from contracts and transactions in progress.Additionally, the captionincludes other provisions for expenses expected to be incurred on the abandonment of crude oil production fields once all recoverable reserveshave been extracted.

k) Classification of debtIn the accompanying consolidated balance sheets, debts maturing at over 12 months from year-end were classified as long-term debt and theremainder as current liabilities.

l) Corporate income taxThe expense for corporate income tax for each year is calculated on the basis of book income before taxes, increased or decreased, asappropriate, by the permanent differences (individual and consolidated) from the income for tax purposes, net of the effect of tax relief and taxcredits taken, except those applicable to several years which are deferred so that the tax credit is proportional to the diminution in value ofthe asset giving rise to it.

In the case of the Group companies which file consolidated tax returns, the consolidated tax expense is allocated pursuant to an internalagreement which, as regards the recording and determination of individual tax charges, observes Rule Six of a Resolution dated October 9,1997, of the Spanish Accounting and Audit Institute, partially amended by the Resolution dated March 15, 2002 (see Note 17).

In accordance with Rule 9.3 of this Resolution, the “Corporate Income Tax Expense” account includes the difference between the estimated2003 and 2002 corporate income tax expense per the financial statements for these years and the definitive expenses determined when thetax was settled. The “Corporate Income Tax Expense” caption also includes the expenses arising from accepted and contested tax assessmentsand from supplementary tax returns (see Note 17).

m) Foreign currency transactions and balancesTransactions in foreign currencies are translated to euros at the exchange rates ruling at the transaction date and the exchange gains or lossesarising at the date of settlement of the transactions are credited or charged, as appropriate, to income.


46


Short-term receivables and payables denominated in foreign currencies are recorded in the consolidated balance sheet in euros aftertranslation at the year-end exchange rates or at the hedged exchange rates, if any. Exchange losses arising at year-end with respect to theexchange rates prevailing at the transaction date are recorded under the "Exchange Differences" caption with a charge to income. However,in accordance with the accounting principle of prudence, exchange gains are deferred to future years under the “Deferred Revenues” captionin the accompanying consolidated balance sheets.

Exchange differences arising on foreign currency loans to finance investments for which the functional currency is the same, and for whichthere are exchange rate hedges relating to the loans, are recorded with a balancing entry under the “Deferred Revenues” or “Deferred Charges”caption, and are allocated to income as the foreign currency financing from which they derive is repaid or when the risk ceases to be hedged(see Note 14).

n) Severance costsUnder current labor legislation, companies are required to pay severance to employees terminated without just cause. Although there are nolabor force reduction plans in place, several Group companies, in accordance with the accounting principle of prudence, have recordedprovisions to cover any risks that might arise in this connection.

o) Recognition of revenues and expensesRevenues and expenses are recognized on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless ofwhen the resulting monetary or financial flow arises. However, in accordance with the accounting principle of prudence, the Group companiesonly record realized income at year-end, whereas foreseeable contingencies and losses, including possible losses, are recorded as soon as theybecome known.

In accordance with the legislation applicable to companies operating in the oil and gas industry, the excise tax on oil and gas sales is recordedas part of the selling price and as an addition to cost under the “Net Sales” and “Other Operating Expenses” captions, respectively, in theconsolidated statements of income.

The “Net Sales” caption includes the value of exchanges of strategic stocks arranged with other operators.

p) Refurbishing of service stationsIn recent years certain service stations have been flagged. Investments made in installations and equipment owned by the Group companiesare recorded as tangible fixed assets, whereas disbursements made to refurbish and improve flagged service stations are recorded as deferredcharges and are amortized on a straight-line basis over the term of the related flagging contract. The period amortization of these deferredcharges amounted to €9,912 thousand in 2004 and €9,553 thousand in 2003 (see Note 10).

q) Hedging transactionsThe CEPSA Group uses certain hedging instruments and derivatives, including most notably futures contracts with crude oil and productbrokers, to hedge the price risks arising from the monthly purchases and sales of oil-based products. The transaction limits and the hedginginstruments have been approved by Group management and the monitoring process respects the separation of the performance and controlfunctions. Any negative differences between the market price at year-end and the agreed price of open transactions at year-end are chargedto income (see Note 19).

For currency and interest rate risks, the transaction limits and hedging instruments (basically forward currency transactions and interest rateswaps) have also been approved by Group management and the monitoring process respects the separation of the performance and controlfunctions. Any negative differences between the market price at year-end and the deal price for open transactions at year-end are charged toincome (see Note 19).

The income or loss resulting from hedging transactions is taken to the statement of income symmetrically to the revenue from or cost of thehedged item. Its effect is not material with respect to the Group’s income.

r) Environmental mattersPer the Resolution of March 25, 2002, of the Spanish Accounting and Audit Institute, investments of an environmental nature are defined asinvestments included in the Company’s assets for use in its business on a lasting basis which are mainly for the purpose of minimizing theimpact on the environment and protecting and improving the environment, including the reduction or elimination of pollution in the futurecaused by the operations performed by the companies in the Group.

CEPSA Group 47


Likewise, expenses of an environmental nature 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 contingencies and obligations, the Group recorded provisions for environmental actions to remedythe gradual pollution of soil, with a charge to “Extraordinary Loss” in the statements of income. These provisions were quantified on the basisof the estimates and in-house technical studies. Also, the Group has taken out insurance policies which cover such other environmentaldamage as might arise, including any third-party liability that might arise therefrom (see Note 22).

4. Start-up expenses

The breakdown of the balances of this caption and of the variations therein in 2003 and 2004 is as follows:

Thousands of euros

Balance at Other Amortizations Balance at2003 01.01.03 Additions Variations and write-downs 12.31.03

Incorporation expenses 66 - 16 (38) 44 Preopening expenses 3,918 101 151 (4,069) 101 Capital increase expenses 113 101 (15) (10) 189

Total 4,097 202 152 (4,117) 334

Thousands of euros

Balance at Other Amortizations Balance at2004 01.01.04 Additions Variations and write-downs 12.31.04

Incorporation expenses 44 1 2 (23) 24Preopening expenses 101 - (97) - 4Capital increase expenses 189 424 322 (97) 838

Total 334 425 227 (120) 866


48


5. Intangible assets

The gross investments and accumulated amortization and allowances in intangible asset accounts, and the variations therein in 2003and 2004 are as follows:

Thousands of euros

Balance at Additions or Other Retirements Balance at2003 01.01.03 Provisions Transfers variations or Reductions 12.31.03

Assets

Research and development expenses 5,371 5,137 (6,020) 104 - 4,592 Oil well drilling expenses 939,201 67,141 113 (1) (4,143) 1,002,311 Concessions, patents and licenses 48,903 2,281 4,937 291 - 56,412 Goodwill 11,479 1,531 120 (602) (3,116) 9,412 Computer software 78,304 10,162 204 33 (59) 88,644 Other intangible assets 283,661 17,220 (3,145) (17) (2,237) 295,482 Total 1,366,919 103,472 (3,791) (192) (9,555) 1,456,853

Accumulated amortization and allowances

Research and development expenses (2,456) (216) 787 (33) - (1,918)Oil well drilling expenses (299,552) (133,167) (77) - 32,639 (400,157)Concessions, patents and licenses (40,445) (5,722) (15) (21) - (46,203)Goodwill (4,310) (930) (70) - 1,499 (3,811)Computer software (61,141) (6,827) (6) (13) 41 (67,946)Other intangible assets (25,902) (10,405) (17) 59 1,524 (34,741)Total (433,806) (157,267) 602 (8) 35,703 (554,776)

Net intangible assets 933,113 (53,795) (3,189) (200) 26,148 902,077

CEPSA Group 49



50

Thousands of euros


Assets

Research and development expenses 4,592 6,531 (5,107) 23 - 6,039 Oil well drilling expenses 1,002,311 56,643 (47) 37 (4,958) 1,053,986 Concessions, patents and licenses 56,412 14,797 4,407 (797) - 74,819 Goodwill 9,412 109 - - - 9,521 Computer software 88,644 12,026 27 85 (353) 100,429 Other intangible assets 295,482 88,166 62 21 (3,039) 380,692 Total 1,456,853 178,272 (658) (631) (8,350) 1,625,486

Accumulated amortization and allowances

Research and development expenses (1,918) (206) (23) (13) - (2,160)Oil well drilling expenses (400,157) (99,744) - (47) 33,709 (466,239)Concessions, patents and licenses (46,203) (5,379) (167) 16 - (51,733)Goodwill (3,811) (791) 8 - - (4,594)Computer software (67,946) (7,354) 190 (22) 353 (74,779)Other intangible assets (34,741) (13,292) (63) 66 2,760 (45,270)Total (554,776) (126,766) (55) - 36,822 (644,775)

Net intangible assets 902,077 51,506 (713) (631) 28,472 980,711

The “Oil Well Drilling Expenses” caption includes exploration and development investments at production fields, the detail being asfollows:

Thousands of euros

Investments Depreciation

2004 2003 2004 2003

Operating assets 40,031 58,377 82,620 115,278Exploration costs 16,612 8,764 17,124 17,889

Total 56,643 67,141 99,744 133,167

The “Additions” column includes €11,853 thousand in 2003 and €14,540 thousand in 2004 of personnel, financial and other expensesrelating to these projects, which were capitalized to intangible asset accounts with a credit to the “Capitalized Expenses of Group Workon Fixed Assets” caption in the accompanying consolidated statements of income.

The investment recorded by the Group companies under the “Computer Software” caption relates mainly to acquisitions made in orderto update computer software to the most recent market versions.


CEPSA Group 51

The main investments in the “Other Intangible Assets” caption were the acquisition on a lease basis by Cepsa Elf Gas of butanedistribution cylinders, and the acquisition on a lease basis of a double-hull crude oil tanker.

The main information relating to the lease agreements in force at 2004 and 2003 year-ends is as follows:

Thousands of euros

2004 2003

Original cost (excluding purchase option) 316,958 231,569Purchase option 10,842 5,682Principal repaid 151,973 102,475Exchanges differences (22,003) (25,028)Interperiod allocation of deferred interest expenses 150 156Outstanding financial expenses 11,640 9,547Lease payments paid 159,235 117,008Lease payments payable 165,614 119,451

6.Tangible fixed assets

The gross investments and accumulated depreciation in tangible fixed asset accounts, and the variations therein in 2003 and 2004are as follows:

Thousands of euros


Assets

Land and structures 277,236 8,191 6,757 1,967 (9,069) 285,082 Plant and machinery 3,407,227 44,134 598,324 2,566 (77,652) 3,974,599 Other fixtures, tools and furniture 88,669 3,339 (4,390) 427 (3,867) 84,178 Advances and construction in progress 583,782 276,870 (645,941) 3,727 (1,096) 217,342 Other tangible fixed assets 180,121 7,116 47,632 2,924 (5,246) 232,547 Total 4,537,035 339,650 2,382 11,611 (96,930) 4,793,748

Accumulated depreciationStructures (47,069) (8,102) 2,604 (168) 645 (52,090)Plant and machinery (2,022,219) (178,422) (11,916) (2,039) 18,608 (2,195,988)Other fixtures, tools and furniture (45,531) (9,042) 7,357 (149) 3,289 (44,076)Other tangible fixed assets (61,029) (12,314) 42 (835) 4,108 (70,028)Total (2,175,848) (207,880) (1,913) (3,191) 26,650 (2,362,182)

Allowances (48,026) (43,114) - (671) 65,459 (26,352)

Net tangible fixed assets 2,313,161 88,656 469 7,749 (4,821) 2,405,214


Thousands of euros


Assets

Land and structures 285,082 10,513 13,684 (1,618) (6,554) 301,107 Plant and machinery 3,974,599 58,570 411,984 (4,193) (20,670) 4,420,290 Other fixtures, tools and furniture 84,178 3,525 4,662 213 (1,594) 90,984 Advances and construction in progress 217,342 274,988 (439,022) 143,534 (727) 196,115 Other tangible fixed assets 232,547 4,697 9,551 671 (5,764) 241,702 Total 4,793,748 352,293 859 138,607 (35,309) 5,250,198

Accumulated depreciationStructures (52,090) (6,160) - 2,310 2,406 (53,534)Plant and machinery (2,195,988) (201,314) (201) 2,287 14,022 (2,381,194)Other fixtures, tools and furniture (44,076) (9,453) (23) 172 1,215 (52,165)Other tangible fixed assets (70,028) (13,602) 80 134 5,041 (78,375)Total (2,362,182) (230,529) (144) 4,903 22,684 (2,565,268)

Allowances (26,352) (8,720) - (3,663) 5,369 (33,366)

Net tangible fixed assets 2,405,214 113,044 715 139,847 (7,256) 2,651,564

Tangible fixed asset additions in 2003 and 2004, amounting to €339,650 thousand and €352,293 thousand, respectively, relatedparticularly to investments in refining units aimed at improving and flexibilizing production processes; to comply with the legalrequirements scheduled to come into force in 2005 with respect to gas oil and petrol specifications; to the consolidation of the DirectSales organization; to improving the presence and efficiency of the service station network in Spain and Portugal; to the developmentof LPG commercial network; to the completion of the construction of a new plant by INTERQUISA in San Roque in order to doublethe production capacity of PTA, and the completion of another new plant by INTERQUISA CANADA and in general, to improvementsin industrial facilities to minimize the impact on the environment and enhance safety in the Group’s activities and also.

In 2003 and 2004, €21,567 thousand and €13,495 thousand, respectively, of personnel and other expenses relating to the constructionperiod of various tangible fixed assets were credited as an investment to the “Capitalized Expenses of Group In-House Work FixedAssets” caption in the accompanying consolidated statements of income.

The amounts recorded in the “Other Variations” column relate basically to variations in the scope of consolidation and to the effect ofvariations in the exchange rates with the euro at certain foreign subsidiaries.

The “Retirements or Disposals” column for 2003 includes in the case of “Land and Structures” the sale of various land lots; in the“Technical Installations” caption the most significant event was the reduction of the net value of certain refining facilities, since it wasconsidered that, based on the recoverability of the investment per the estimated future revenues, the factors for recoverability aredefinitive, as well as the sale of service stations. This column for 2004 includes the retirement of assets from the service stationnetwork and of those of Plastificantes de Lutxana, S.A.


52


CEPSA Group 53

At 2003 and 2004 year-ends, certain CEPSA Group companies recorded €13,364 thousand and €3,752 thousand, respectively, underthe “Provisions” caption arising from reasonable adjustment of asset values based on the expected recovery of the net investmentthrough the generation of future income.

1992 saw the foreclosure of a mortgage for €8,915 thousand taken out on the land on which the La Rábida refinery is located in Palosde la Frontera (Huelva), which Ertoil, S.A. (now merged into CEPSA) had used as security for the mortgage bond issue made in 1976by Unión Explosivos Rio Tinto, S.A., later Ercros, S.A. This sum, deposited by CEPSA at Court No. 1 of Moguer (Huelva), was initiallyretained and the principal amount thereof (€7,690 thousand) was delivered to the foreclosing debentureholders’ syndicate in 1999. At2004 year-end, the amount of the interest, costs and expenses had yet to be settled, and this will depend on the decision to be handeddown by the First Chamber of the Spanish Supreme Court in respect of a request by CEPSA that the mortgage be declared null andvoid. In any case, CEPSA has recorded the provisions considered necessary to meet any financial liability that may arise from thislitigation (see Note 15).

Also, the Spanish Supreme Court will hand down a decision on other proceedings brought by CEPSA against Ercros, S.A. to obtainreimbursement from the latter of the €8,915 thousand deposited at the Moguer Court and compensation for damages caused by theaforementioned mortgage foreclosure.

In 1996 certain consolidable Group companies revalued their tangible fixed assets pursuant to Royal Decree-Law 7/1996, increasingthe book value of these assets by €117,350 thousand. This increase in value is being depreciated (the depreciation charge is a tax-deductible expense) with a charge to income in 1997 and subsequent years based on the years of residual useful life of the revaluedassets. In 2004 and 2003 the additional tangible fixed asset depreciation charges resulting from the aforementioned revaluation were€6,256 thousand and €7,014 thousand, respectively, at the consolidable Group companies. At 2004 and 2003 year-ends theundepreciated increases in book value amounted to €21,148 thousand and €27,432 thousand, respectively.

Certain CEPSA Group companies have been granted administrative concessions by the Spanish State to use mooring facilities andaccess and adjacent areas at the ports of Santa Cruz de Tenerife, Algeciras-La Línea and Palos de la Frontera, which will revert tothe State in 2061, 2065 and 2005 and 2022, respectively. Management of the CEPSA Group expects that these concessions will berenewed when they fall due and considers that no provision to a reversion reserve is necessary since the facility maintenanceprograms ensure that they are in good working order and the related cost will have been depreciated in full for accounting purposesbefore the end of the concession period.


7. Marketable securities and other similar financial investments

The breakdown of the financial investments and the related provisions and of the variations therein in 2003 and 2004 is as follows:

Thousands of euros


Assets

Investments in companies accounted for by the equity method 134,300 21,919 - (821) (12,558) 142,840 Loans to companies accounted for by the equity method 88,004 - (60,646) - (10,789) 16,569 Long-term investment securities 23,923 11,318 - (1,323) (611) 33,307 Other loans 220,095 43,394 (2,313) 2,214 (76,116) 187,274 Long-term deposit and guarantees 20,594 7,448 (1) (891) (7,273) 19,877 Total 486,916 84,079 (62,960) (821) (107,347) 399,867

Allowances

Investments in companies accounted for by the equity method (33,537) - - - 5,426 (28,111)Other long-term financial investments (25,118) (10,138) - 770 14,183 (20,303)Total (58,655) (10,138) - 770 19,609 (48,414)

Net long-term financial investments 428,261 73,941 (62,960) (51) (87,738) 351,453

Thousands of euros


Assets

Investments in companies accounted for by the equity method 142,840 6,297 - (30,801) - 118,336 Loans to companies accounted for by the equity method 16,569 18,278 - - (71) 34,776 Long-term investment securities 33,307 2,420 225 (45) (10,666) 25,241 Other loans 187,274 42,667 (19,238) (229) (40,482) 169,992 Long-term deposit and guarantees 19,877 2,680 - 76 (9,576) 13,057 Total 399,867 72,342 (19,013) (30,999) (60,795) 361,402

Allowances

Investments in companies accounted for by the equity method (28,111) - - - - (28,111)Other long-term financial investments (20,303) (584) - - 10,289 (10,598)Total (48,414) (584) - - 10,289 (38,709)

Net long-term financial investments 351,453 71,758 (19,013) (30,999) (50,506) 322,693


54


CEPSA Group 55

The “Holdings in Companies Accounted for by the equity method” caption as of December 31, 2004 and 2003, relates mainly to CLHand ASESA, the detail being as follows:

Thousands of euros

Company 2004 2003

ASESA 8,461 8,568CLH (Including first-time consolidation difference) 65,598 63,483Nueva Generadora del Sur, S.A. - 31,462Others companies 44,277 39,327

Total investments in companies accounted for by the equity method 118,336 142,840

The variations in the aforementioned caption in 2004 and 2003 are as follows:

Thousands of euros

2004 2003

Beginning balance 142,840 134,300

Income after tax for the year 20,629 19,049Dividend distributed in the year (16,530) (13,496)Inclusion of companies carried by the equity method 2,198 16,366Retirement of companies due to:

Disposals - (12,558)Mergers (30,405) (277)

Other variations (396) (544)

Ending balance 118,336 142,840

In 2003 the “Inclusion of Companies Accounted for by the Equity Method” caption included basically the 25% increase in theinvestment in Nueva Generadora del Sur, S.A. for €15,747 thousand.

In 2004 the “Absorptions and Change in Consolidation Method” caption related to the change in the method of consolidating NuevaGeneradora del Sur, S.A (see Note 2-c). In 2003 this caption related to CEPSA’s sale of 1,912,345 shares of Compañía Logística deHidrocarburos CLH, S.A. pursuant to Royal Decree Law 6/2000 on Urgent Measures to Raise Competition in the Goods and ServicesMarket. As of December 31, 2004, CEPSA owned 14.145% of the capital stock of Compañía Logística de Hidrocarburos.



56

The detail of the variations in the "Short-Term Financial Investments" caption in 2003 and 2004 and of the balances thereof as ofDecember 31, 2003 and 2004, is as follows:

Thousands of euros

* *Balance at Additions or Other Retirements Balance at

2003 01.01.03 Provisions Transfers variations or Reductions 12.31.03

Assets

Loans to companies accounted for by equity method 16,988 29,005 60,646 - (13,794) 92,845 Short-term investment securities 889 335 - - (888) 336 Other loans 57,922 4,411,627 2,314 2,386 (4,391,789) 82,460 Short-term deposits and guarantees 829 1,247 - 5,845 (1,016) 6,905 Total 76,628 4,442,214 62,960 8,231 (4,407,487) 182,546

Allowances (950) - - - 887 (63)

Ner short-term investments 75,678 4,442,214 62,960 8,231 (4,406,600) 182,483

Thousands of euros

* *Balance at Additions or Other Retirements Balance at

2004 01.01.04 Provisions Transfers variations or Reductions 12.31.04

Assets

Loans to companies accounted for by equity method 92,845 8,448 - (143) (19,987) 81,163 Short-term investment securities 336 222,545 - - (221,711) 1,170 Other loans 82,460 3,115,284 19,193 1,662 (3,127,732) 90,867 Short-term deposits and guarantees 6,905 981 (180) (35) (1,784) 5,887 Total 182,546 3,347,258 19,013 1,484 (3,371,214) 179,087

Allowances (63) (2,314) - (21) - (2,398)

Ner short-term investments 182,483 3,344,944 19,013 1,463 (3,371,214) 176,689

(*) Renewals are shown separately in the “Additions or Provisions” and “Retirements or Reductions” columns.


The detail, by maturity, of the short- and long-term loans granted by the consolidated Group is as follows:

Thousands of euros

Maturity Subsequent2003 2004 2005 2006 2007 2008 Years Total

Loans to companies carried by the equity method 92,845 - - - - 16,569 109,414

Other loans 82,460 58,740 42,334 13,293 11,694 61,213 269,734

Total 175,305 58,740 42,334 13,293 11,694 77,782 379,148

Thousands of euros


Loans to companies carried by the equity method 81,163 23,543 - 2,840 5,250 3,143 115,939

Other loans 90,867 45,543 30,466 13,666 12,984 67,333 260,859

Total 172,030 69,086 30,466 16,506 18,234 70,476 376,798

The “Other Loans” caption as of December 31, 2003 and 2004 in the foregoing tables includes long-term deferred tax assets amountingto €120,758 thousand and €103,680 thousand, respectively, and receivables for fixed asset sales amounting to €39,942 thousand and€29,138 thousand, respectively.

CEPSA Group 57


8. Consolidation goodwill

The detail, by company, of the “Consolidation Goodwill” caption in 2003 and 2004 is as follows:

Thousands of euros

2003 2004

Net value Retirements/other Net value Retirements/other Net valueat 01.01.03 Additions variations Amortization at 12.31.03 Additions variations Amortization at 12.31.04

Fully or proportionallyconsolidated companies:Cepsa Estaciones de Servicio, S.A. 3,633 - 1,925 (2,043) 3,515 - (2,044) 1,471 Deten Química, S.A. 88,715 - - (7,393) 81,322 - (7,392) 73,930 Generación Mazagón, S.A. 182 - - (60) 122 - (63) 59 Nueva Generadora del Sur - - - - - - 13,504 (2,700) 10,804

Total fully or proportionallyconsolidated companies 92,530 - 1,925 (9,496) 84,959 - 13,504 (12,199) 86,264

Companies accountedfor by the equity method:Direct sales companies - 1,161 - (302) 859 52 - (386) 525 Nueva Generadora del Sur - 13,504 - - 13,504 - (13,504) - - Distribution Network companies 2,037 - (1,925) (112) - 3,592 - (717) 2,875

Total companies accountedfor by the equity method 2,037 14,665 (1,925) (414) 14,363 3,644 (13,504) (1,103) 3,400

Total 94,567 14,665 - (9,910) 99,322 3,644 - (13,302) 89,664

9. Negative consolidation difference

The breakdown, by company, of the negative consolidation differences and of the variations therein in 2003 and 2004 is as follows:

Thousands of euros

2003 2004

Net value Net value Net valueat 01.01.03 Additions Amortization a 12.31.03 Additions Amortization at 12.31.04

Company

Generación de Energías del Guadarranque, S.A. 250 - (250) - - - -

Cogeneración Tenerife, S.A. 1,863 - (621) 1,242 - (621) 621

GETESA, Generadora de Energía Termoeléctrica, S.A. 1,614 - (539) 1,075 - (538) 537

Total 3,727 - (1,410) 2,317 - (1,159) 1,158


58


10. Deferred charges

The detail of the balances of the "Deferred Charges" caption as of December 31, 2003 and 2004, and of the related variations andamortization in 2003 and 2004 is as follows:

Thousands of euros

Balance at Expenses Other Retirements Balance at2003 01.01.03 incurred Transfers variations or Reductions Amortization 12.31.03

Personnel expenses 6,425 - - (1) (3,213) (1) 3,210 Deferred interest expenses 14,316 327 - 88 (1,617) (2,772) 10,342 Distribution network expenses 27,451 8,789 2,753 (35) (256) (9,553) 29,149 Other deferred charges 10,260 2,250 (33) 4,491 (271) (2,895) 13,802

Total 58,452 11,366 2,720 4,543 (5,357) (15,221) 56,503

Thousands of euros

Balance at Expenses Other Retirements Balance at2004 01.01.04 incurred Transfers variations or Reductions Amortization 12.31.04

Personnel expenses 3,210 - - 3 (3,213) - - Deferred interest expenses 10,342 6,458 - (194) (208) (4,758) 11,640 Distribution network expenses 29,149 16,507 (2) - (133) (9,912) 35,609 Other deferred charges 13,802 4,591 - (9) (92) (2,422) 15,870

Total 56,503 27,556 (2) (200) (3,646) (17,092) 63,119

€3,213 thousand in 2003 and €3,213 thousand in 2004 of amortization of commitments to retired and serving employees wererecorded pursuant to Transitional Provision Four of Royal Decree-Law 1643/1990 and other legislation with a charge to reserves andprepaid taxes. These commitments were fully amortized as of December 31, 2004 (see Note 3-i).

The “Deferred Interest Expenses” caption included mainly the interest relating to leasing agreements entered into (see Note 5). Theamounts arising from adjustment of deferred interest payable, taking into account the interest rates in force at year-end, wererecorded in the “Retirements or Reductions” column.

The “Distribution Network Expenses” account includes the investment of €8,789 thousand and €16,507 thousand in 2003 and 2004,respectively, relating to the promotion of the CEPSA image at flagged service stations owned by third parties. €9,553 thousand and€9,912 thousand of amortization of investments of this kind were recorded in 2003 and 2004, respectively.

The “Other Deferred Charges” caption includes different items, the most noteworthy of which in 2003 were royalty expenses (therelated licenses are amortized over several years) and in 2004 were long-term advance volume discount agreements.

CEPSA Group 59


11. Inventories

The detail of the balance of the "Inventories" caption as of December 31, 2004 and 2003, is as follows:

Thousands of euros

Balance at Balance at12.31.04 12.31.03

Crude oil 266,671 248,205 Finished goods 323,679 346,497 Other raw materials 17,744 19,535 Lubricants and basestocks 12,799 14,801 Supplies and other inventories 111,693 102,602 Advances to suppliers 6,597 7,294 Allowances (2,827) (2,600)

Total 736,356 736,334

Pursuant to Royal Decree-Law 1716/2004, CEPSA and other Group companies which act as operators are required to maintainminimum crude oil and product safety stocks and Corporación de Reservas Estratégicas de Productos Petrolíferos (CORES) inspectsand controls the fulfillment of this obligation. CEPSA management considers that the consolidated Group has been meeting thisobligation.

As indicated in Note 3-g, CEPSA uses the “Dollar Value” LIFO valuation method to value its raw material and commercial goodsinventories.

Pursuant to the ICAC Resolution dated May 9, 2000, establishing the methods for determining production cost, it is hereby statedthat the value using the weighted average price or weighted average cost method at 2004 year-end was €258,158 thousand higherthan the value obtained using the “Dollar Value” LIFO valuation method.


60


12. Shareholders’ equity

The detail of the balances of equity accounts as of December 31, 2002, of the variations therein in 2003 and 2004, and of the 2003 and2004 year-end balances is as follows:

Thousands of euros

Capital Paid-in Revaluation Restricted Other Consolidated Retained Translation Income for Interim stock surplus reserves reserves reserves reserves earnings differences the year dividend

Balance at 12.31.02 267,575 338,728 90,936 54,056 841,822 570,559 263 (44,822) 460,857 (61,542)Distribution of income:

Gross dividend - - - - - - - - (184,627) 61,542 Reserves - - - - 172,685 103,808 - - (276,493) - Unallocated - - - - - - (263) - 263 -

Other variations:Provision to in-housepension allowance (Note 3.i.) - - - - (1,956) (202) - - - - Other variations - - - - - - - 5,316 - -

2003 income - - - - - - - - 612,301 - 2003 interim dividend - - - - - - - - - (112,381)

Balance at 12.31.03 267,575 338,728 90,936 54,056 1,012,551 674,165 0 (39,506) 612,301 (112,381)Distribution of income:

Gross dividend - - - - - - - - (254,196) 112,381 Reserves - - - - 245,139 112,965 - - (358,105) - Unallocated - - - - - - - - - -

Other variations:Provision to in-housepension allowance (Note 3.i.) - - - - (1,956) (203) - - -Other variations - - - - - - - 86 - -

2004 income - - - - - - - - 649,787 - 2004 interim dividend - - - - - - - - - (112,381)

Balance at 12.31.04 267,575 338,728 90,936 54,056 1,255,734 786,927 0 (39,420) 649,787 (112,381)

a) Capital stockCapital stock stood at €267,574,941, and consisted of 267,574,941 shares of €1 par value each.

Per the information provided by the members of the Board of Directors who are shareholders, as registered at the Spanish NationalSecurities Market Commission (CNMV), as of December 31, 2004, Total, S.A., Banco Santander Central Hispano, S.A., InternationalPetroleum Investment Company (IPIC) and Unión Fenosa, S.A. directly and indirectly owned 45.28%, 32.27%, 9.54% and 4.99%,respectively, of the capital stock of CEPSA.

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

CEPSA Group 61


b) Revaluation reserveIn 1996 CEPSA and several consolidated Group companies revalued their tangible fixed assets pursuant to Royal Decree-Law 7/1996by €58,438 thousand and €58,438 thousand, respectively. In the consolidation process, this latter figure was recorded under the“Consolidated Reserves” caption.

The revaluation reserve also includes €32,498 thousand relating to the revaluations made in 1979 and 1981 pursuant to State BudgetLaw 1/1979 and State Budget Law 74/1980. The resulting revaluation surpluses can now be assigned to unrestricted voluntaryreserves. The balance of the “Revaluation Reserve, Royal Decree-Law 7/1996” account can be used, free of tax, to eliminate recordedlosses and to increase capital. From January 1, 2007 (i.e. ten years after the date of the balance sheet reflecting the revaluationtransactions) the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realized.The surplus will be deemed to have been realized in respect of the portion on which depreciation has been taken for accountingpurposes or when the revalued assets have been transferred or retired from the accounting records.

If this balance were used in a manner other than that provided for in Royal Decree-Law 7/1996, it would be subject to tax.

c) Reserves at consolidated companiesThe detail, by company, of the balances of this caption as of December 31, 2004 and 2003, is as follows:

Thousands of euros

Company 2004 2003

Fully or proportionally consolidated companiesCepsa Estaciones de Servicio, S.A. 177,915 156,882 Cepsa Lubricantes, S. A 19,589 17,874 Cepsa Portuguesa, S.A. 18,590 22,581 Intercontinental Química, S.A. 150,598 130,556 Ertisa, S.A. 95,313 86,460 Petroquímica Española, S.A. 206,397 194,322 Proas, S.A. 6,555 6,480 Other companies 156,964 110,649 Total 831,921 725,804 Companies accounted for by the equity method:Compañía Logística de Hidrocarburos CLH, S.A. (42,483) (42,892)Other companies (2,511) (8,747)Total (44,994) (51,639)

Total 786,927 674,165


62


d) Translation differencesThe detail of the translation differences as of December 31, 2004 and 2003, is as follows:

Thousands of euros

Company 2004 2003

Deten Quimica, S.A. (26,744) (27,506)Interquisa Canadá, L.P. (11,971) (11,649)Petresa Canadá Inc. (514) (477)Other companies (191) 126

Total translation differences (39,420) (39,506)

e) DividendsThe “Interim Dividend” account includes the dividend paid with a charge to CEPSA’s income in 2003 and 2004.

13. Minority interests

The detail of this caption as of December 31, 2004 and 2003, is as follows:

Thousands of euros

2004 2003

Shareholders’ Shareholders’Minority interests equity Income equity Income

CompanyC.M.D. Aeropuertos Canarios, S.L. 13,063 2,694 12,031 2,483Deten Química, S.A. 14,604 2,760 13,354 3,770Lubricantes del Sur, S.A. 5,046 2,014 4,936 1,548Others (16) 4 (18) 2

Total 32,697 7,472 30,303 7,803

CEPSA Group 63


14. Deferred revenues

The detail of the variations in 2003 and 2004 in this caption and of the balances thereof as of December 31, 2003 and 2004, is asfollows:

Thousands of euros

Balance at Other Transfer Balance at2003 01.01.03 Additions variations Retirements to income 12.31.03

Capital subsidies 64,469 24,383 159 - (9,355) 79,656 Other deferred revenues 174,229 116,845 31 (123) (7,819) 283,163

Total 238,698 141,228 190 (123) (17,174) 362,819

Thousands of euros

Balance at Other Transfer Balance at2004 01.01.04 Addiction variations Retirements to income 12.31.04

Capital subsidies 79,656 2,433 (22) - (9,553) 72,514 Other deferred revenues 283,163 52,985 (2,342) (651) (66,389) 266,766

Total 362,819 55,418 (2,364) (651) (75,942) 339,280

The breakdown, by granting entity, of the additions to the “Capital Subsidies” caption in 2004 and 2003 is as follows:

Thousands of euros

Subsidies received 2004 2003

From the European Union 171 - From the Central Government 2,262 20,650 From autonomous community governments - 3,733

Total 2,433 24,383


64


The subsidies received in 2004 relate to those granted to CEPSA and those received in 2003 were granted to INTERQUISA for thenew PTA plant (see Note 6).

The additions to the “Other Deferred Revenues” caption included in 2004 tax credits and in 2003 and 2004 exchange gains relatingto valuation adjustments arising from hedging transactions, corresponding to the foreign currency financing for certain of the Group’sinvestments (see Note 3-m). The “Transfer to income” caption includes the realization of exchange gains as a result of the partialrepayment of the loans financing the aforementioned investments.

15. Provisions for contingencies and expenses

a) Provisions for pensions and similar obligationsThe Group’s commitments to its employees in this connection as of December 31, 2003 and 2004, are fully covered, either by externalfunds or through in-house provisions based on actuarial individual capitalization techniques, calculated at 4% (see Note 3-i).

The detail of the variations in 2003 and 2004 in this account and of the balances thereof as of December 31, 2004 and 2003, is asfollows:

Thousands of euros

2004 2003

Beginning balance 32,167 35,955 Inclusions and exclusions of companies and other variations - (136)Provisions

Financial expenses 1,246 1,366 Personnel expenses:

Ordinary contributions to pension funds 1,288 2,733 Discount of vested rights of retired employees 729 342

Amount used in the yearOther amouns used (5,752) (8,093)

Ending balance 29,678 32,167

The “Other Releases” caption in 2004 and 2003 included €4,745 thousand and €6,878 thousand, respectively, relating to pensionpayment commitments covered by in-house allowances and €1,007 thousand and €1,215 thousand relating to payments of othercommitments to employees who retired in 2002 and in prior years (see Note 3-i).

The balance as of December 31, 2004, relates to the actuarial estimate of the commitments whose externalization was not compulsorypursuant to Law 14/2000.

CEPSA Group 65


b) Other provisions for contingencies and expensesThe detail of the variations in 2003 and 2004 in this caption and of the balances thereof as of December 31, 2003 and 2004, is asfollows:

Thousands of euros

Balance at Other Balance at2003 01.01.03 Provisions Transfers variations Applications 12.31.03

Provisions for third-party liability 155,706 50,788 9 (326) (48,348) 157,829 Provision for major repairs 31,814 21,729 - - (5,465) 48,078 Other provisions 78,056 20,106 (12,096) 531 (21,933) 64,664

Total 265,576 92,623 (12,087) 205 (75,746) 270,571

Thousands of euros

Balance at Other Balance at2004 01.01.04 Provisions Transfers variations Applications 12.31.04

Provisions for third-party liability 157,829 43,463 - 80 (51,060) 150,312 Provision for major repairs 48,078 14,947 - - (32,033) 30,992 Other provisions 64,664 11,703 - 974 (17,208) 60,133

Total 270,571 70,113 - 1,054 (100,301) 241,437

The "Provision for Third-Party Liability" covers the contingencies arising from the Group companies’ ordinary operations, which,based on the principle of prudence, might give rise to actual liabilities in their dealings with third parties and with their personnel.As of December 31, 2004, the main items were contingencies with third parties relating to contractual undertakings, exceptionalemployee welfare coverage, the contingencies relating to lawsuits in progress.

The "Provision for Major Repairs" covers the expenses of periodic general overhauls at the CEPSA Group’s refineries and industrialplants.

The “Other Provisions” caption includes provisions to cover possible tax contingencies and environmental contingencies and liabilities.


66


16. Nontrade payables

The detail, by maturity, of the "Nontrade Payables" as of December 31, 2003 and 2004, is as follows:

Thousands of euros


Payables to companies accounted for by the equity method 235,096 - - - - 420 235,516Payable to credit institutions 262,389 163,805 172,713 213,206 54,249 231,244 1,097,606Other nontrade payables 407,979 9,302 3,518 6,998 8,680 89,909 526,386

Total 905,464 173,107 176,231 220,204 62,929 321,573 1,859,508

Thousands of euros


Payables to companies accounted for by the equity method 246,739 - - - - 53 246,792 Payable to credit institutions 306,603 183,658 183,986 69,815 64,832 233,904 1,042,798 Other nontrade payables 465,501 9,929 6,278 9,111 9,521 131,015 631,355

Total 1,018,843 193,587 190,264 78,926 74,353 364,972 1,920,945

The short-term debt to companies accounted for by the equity method relates basically to the outstanding excise tax on oil and gascollected by the Spanish Treasury through Compañía Logística de Hidrocarburos, CLH, S.A.

The “Payable to Credit Institutions” caption as of December 31, 2003 and 2004, includes lease contracts for €119,451 and €165,614,respectively (see Note 5).

The breakdown, by maturity, of the “Payable to Credit Institutions” caption as of December 31, 2004 and 2003, is as follows:

Thousands of euros

2004 2003

Due at Due atShort-term Long-term Total Short-term Long-term Total

In euros 174,773 461,513 636,286 140,566 435,537 576,103 In foreing currencies 129,861 274,682 404,543 119,884 399,680 519,564 Unmatured interest payable 1,969 - 1,969 1,939 - 1,939

Total payable to credit entities 306,603 736,195 1,042,798 262,389 835,217 1,097,606

CEPSA Group 67


The average annual nominal interest rate on the loans in euros was 2.47% in 2003 and 2.13% in 2004, and that on the foreign currencyloans was 1.84% in 2003 and 1.90% in 2004. The weighted average cost of bank financing was 2.13% in 2003 and 2.01% in 2004.

The interest rates shown above include the net effect of interest rate swaps and forward foreign currency sales of $US, arranged bythe Group. As of December 31, 2003 and 2004, the interest rate swaps outstanding covered financial debts of €138,724 thousand and€125,211 thousand, respectively. Forward foreign currency sales exchange debts nominated in euros to foreign currency of €147,294thousand and €224,123 thousand, respectively.

As of December 31, 2003, the CEPSA Group companies had unused credit facilities amounting to €623,080 thousand. The unusedbalance does not bear any interest.

The “Other Nontrade Payables” caption comprises deferred taxes amounting to €50,531 thousand and €51,672 thousand in 2003 and2004, respectively, and commercial and corporate taxes payable and debts for fixed asset additions.

17.Tax matters

CEPSA and certain Group companies have filed consolidated corporate income tax returns since 1989. Table I contains a list of themain companies in the tax Group in 2004.

The reconciliation of the consolidated income per books to the taxable income for corporate income tax purposes in 2004 and 2003 isas follows:

Thousands of euros

2004 2003

Increase Decrease Amount Increase Decrease Amount

Income per books (before taxes) 997,545 945,814 Individual permanent defferences 33,821 42,060 (8,239) 60,398 103,057 (42,659)Permanent differences in consolidation 32,413 15,176 17,237 33,272 28,585 4,687 Adjusted income per books 1,006,543 907,842 Individual timing differences:

Arising in the yeard 56,889 32,875 24,014 104,022 32,471 71,551 Arising in prior years 12,489 145,823 (133,334) 8,480 169,123 (160,643)

Taxable income 897,223 818,750

The timing differences were basically due to the period provisions for contingencies and expenses (mainly pensions, liabilities and employeewelfare commitments, amortization and other expense items not yet deductible), and the permanent differences were due to the periodamortization of financial goodwill, exemptions arising from revenues which have already been taxed abroad, gains of certain asset transfersand nondeductible expenses and differences in consolidation.

As of December 31, 2004 and 2003, the balance of the “Prepaid Income Tax and Tax Loss Carryforwards” account totaled €114,885 thousandand €147,113 thousand, respectively, and that of the “Deferred Income Tax” account amounted to €51,672 thousand and €50,531 thousand,respectively.

CEPSA is taxed in Algeria on the income obtained from the prospection for and production of crude oil from the “Berkine” Block 406 A oilfield,in the central eastern region of the Algerian Sahara, which is attributed to its permanent establishment.


68


The tax on remuneration for production activities in force in Algeria is deemed to be of the same nature as the Spanish corporate income tax.The current tax rate is 38% on the gross annual remuneration in barrels of Saharan Blend crude oil, withheld and settled through the Algerianstate-owned company Sonatrach, in the name and on behalf of CEPSA. The tax payable in 2004 amounts to €127,001 thousand.

The corporate income tax expense is obtained from the taxable income as follows:

Thousands of euros

2004 2003

Taxable income 897,223 818,750 Gross tax payable 347,334 306,241 Tax credits and relief taken (44,138) (29,992)Nex tax payable 303,196 276,249 Net generation of prepaid taxes 31,127 22,785 Net generation of deferred taxes 7,135 8,397 Ned amound of investment tax credits taken to income 3,862 488 Corporate income tax for the year 345,320 307,919 Corporate income tax adjustment (5,034) 17,791

Total corporate income tax expense 340,286 325,710

In calculating the corporate income tax expense for each year, CEPSA took into account the applicable tax credits for dividend doubletaxation and certain activities and other tax incentives.

As of December 31, 2004 and 2003, the CEPSA Group did not have any material unused tax credits.

In 2004 and 2003 the income qualifying for the reinvestment tax credit amounted to €1,006 thousand and €5,773 thousand,respectively. This income was reinvested in 2004 and 2003.

As permitted by Article 35 of the Corporate Income Tax Law, the CEPSA Group took the following tax credits for investment inmeasures to reduce environmental impact in 2004 and 2003:

Thousands of euros

General tax regime Canary Islands tax regime

2004 2003 2004 2003

Enviromental investments 47,268 3,363 14,870 1,576Tax credit 4,727 336 4,461 473

The “Tax Adjustment” amounts of €(5,034) thousand in 2004 and €17,791 thousand in 2003 include the difference between thecorporate income tax expense recorded as of December 31, 2003 and 2002, and the corporate income tax expense per the final taxreturns for those years and other items such as the effect of applying timing adjustment reversibility criteria for corporate income taxpurposes and the effect of the assessments issued by the tax inspection authorities and other supplementary assessments issued forvarious Group companies.

CEPSA Group 69


As of December 31, 2004 and 2003, certain companies in the consolidated tax Group had €15,789 thousand and €18,598 thousand,respectively, of tax losses qualifying for carryforward and the related tax assets were recorded only in those cases in which it wasreasonably estimated that their future recovery is assured.

Assessments have been contested for various taxes, including the excise tax on oil and gas. The CEPSA Group has filed appealsagainst such assessments with the appropriate courts and has recorded a provision for the full amount thereof, together with therelated late payment interest accrued through 2004 year-end.

In 2003 the Spanish tax inspection authorities concluded the inspection of tax years 1996 to 1999, and issued assessments involvinga tax expense of €4,153 thousand with respect to the assessments accepted by the Company and of €3,539 thousand for theassessments challenged by the Company, included under the “Corporate Income Tax Adjustment” caption. The assessments beingchallenged were fully provisioned (see Note 15).

The years open for review by the tax inspection authorities in connection with the taxes applicable to the Group vary for the differentconsolidated companies, although they are generally the years since 2000.

CEPSA management does not expect any additional material liabilities for which provisions have not been recorded to arise for theParent Company or for the other consolidated Group companies as a result of the appeals filed or of inspection of the open years.

18. Directors’ compensation and other benefits

The compensation (salaries, attendance fees and other compensation) earned by CEPSA’s Board members in 2004 and 2003 amountedto €4,973 thousand and €4,603 thousand, respectively, at consolidated Group level. The Group companies had not granted anyadvances or loans to the members of the Board of Directors of CEPSA as of these dates.

Pursuant to Article 127 ter. of the Spanish Corporations Law, introduced by Law 26/2003, which amends Securities Market Law24/1988, and the revised Spanish Corporations Law, in order to reinforce the transparency of listed corporations, the Company’sdirectors have made the disclosures to which the aforementioned Article refers.

Following is a detail of the companies engaging in an activity that is identical, similar or complementary to the activity thatconstitutes the corporate purpose of Compañía Española de Petróleos S.A. in which the members of the Board of Directors own equityinterests, and of the functions, if any, that they discharge thereat:

Owner Investee Company Activity % of Ownership Functions

Mr. Demetrio Carceller Arce DISA Corporación Logistic services and 0.040% Chairman of the Petrolífera, S.A. distribution of oil products Board of Directors

Mr. Antonio Basagoiti García-Tuñón Unión Fenosa, S.A. Energy 0.002% Chairman of the Board of Directors

Mr. Ernesto Mata López Unión Fenosa, S.A. Energy 0.011% Member of the Board of Directors


70


Also, pursuant to the aforementioned law, we set forth below the activities carried on by the members of the Board of Directors thatare identical, similar or complementary to the activity that constitutes the corporate purpose of Compañía Española de Petróleos S.A.,except for the duties they discharge at the Parent Company, Compañía Española de Petróleos, S.A., or at other CEPSA Groupcompanies:

Company Through Positions Held orActivity Type of Status Wich Activity Functions Carried

Name Carried on Arrengement is Carried out On in the Company

Mr. Mohamed Nasser Al Khaily Integrated Employee IPIC OMV Aktiengesellschaft. (Austria).Oil Company Managing Director, 1st Deputy Chairman

Mr. Mohamed Nasser Al Khaily Petrochemical Employee IPIC Borealis (Denmark).Company Member of the Board of Directors

Mr. Mohamed Nasser Al Khaily Refining and Employee IPIC PARCO Pak-Arab Refinery Ltd.Marketing (Pakistan).

Vice Chairman of the Board of Directors

Mr. Mohamed Nasser Al Khaily Refining and Employee IPIC Hyundai Oilbank Co Ltd. (Korea).Marketing Chairman of the Board

Mr. Jean Paul Vettier Integrated Employee TOTAL, S.A. TOTAL, S.A.Oil Company Executive Committee member & Senior

Vice President Refining & Marketing

Mr. Vincent Méary Integrated Employee TOTAL, S.A. TOTAL, S.A.Oil Company Vice-President - Refining, Marketing &

Trading Finance. Finance Division

Mr. Jean Privey Integrated Employee TOTAL, S.A. TOTAL, S.A.Oil Company Senior Vice President Africa, Exploration

& Production Division

Mr. Pierre Klein Integrated Employee TOTAL, S.A. TOTAL, S.A.Oil Company Senior Vice President Administration

Refining & Marketing. Corporate Secretary

Mr. Menno Grouvel Integrated Employee TOTAL, S.A. TOTAL, S.A.Oil Company Senior Vice President Continental

Europe & Central Asia Exploration & Production

Mr. Jacques Porez Oil Company Employee TOTAL, S.A. TOTAL FRANCE FRANCE Senior Vice President South

and West Europe Division Refining & Marketing

Ms. Bernadette Spinoy Petrochemical Employee Petrofina, S.A. TOTAL PETROCHEMICALSCompany Petrofina, S.A.

Base Chemicals Vice-President Marketing & Sales

CEPSA Group 71


19. Guarantee commitments to third parties and other contingent liabilities

As of December 31, 2004 and 2003, certain Group companies had provided guarantees, mainly for bank transactions and supplycontracts, the breakdown being as follows:

Thousands of euros

2004 2003

Guarantees to Public entities 180,385 159,602 Guarantees to suppliers/creditors and others 635,015 593,135

Total 815,400 752,737

The guarantees to “Suppliers/ Creditors and Other” relate mainly to those provided by CEPSA to financial institutions for drawdownsagainst credit facilities granted to Group companies, amounting to €536,317 thousand and €431,827 thousand in 2004 and 2003,respectively. These amounts were recorded, according to maturity, under the “Payable to Credit Institutions” caption on the liabilityside of the consolidated balance sheets.

As of December 31, 2004, the CEPSA Group had arranged the following hedging transactions: short-term crude oil future saletransactions for a net volume of 741,000 barrels and a value of US$ 29,980,860; short-term purchases of futures on oil products for anet volume of 52,710 barrels and a value of US$ 2,544,050; swaps to hedge sales of products amounting to US$ 1,301,251 andpurchases of electricity for €9,569,395; interest rate swaps for financial debt of €125,211 thousand and short-term forward foreigncurrency purchases of US$ 46,200,000 and £2,300,000 and sales of US$ 300,611,218 and £6,813,850. The Group had arranged no otherderivatives, hedging or speculative transactions as of that date. (see Note 3.q).

20. Revenues and expenses

The breakdown, by market, of the CEPSA Group’s net sales is as follows:

Thousands of euros

2004 2003

Product Services Product Servicessales rendered Total sales rendered Total

Spain 11,291,304 114,959 11,406,263 11,226,185 121,107 11,347,292 Other EU. member states 2,072,410 5,735 2,078,145 1,102,029 6,538 1,108,567 Rest of the world 1,051,844 151,301 1,203,145 574,875 168,551 743,426

Total 14,415,558 271,995 14,687,553 12,903,089 296,196 13,199,285


72


The detail of the “Procurements” caption in 2004 and 2003 is as follows:

Thousands of euros

2004 2003

Purchases 9,322,338 8,067,719 Inventory variations (20,353) (76,778)

Total 9,301,985 7,990,941

The fees for financial audit services provided to the various companies composing the CEPSA Group and subsidiaries by the principalauditor and by other entities related to the auditor during 2004 amounted to €927 thousand. The audit fees charged by other auditorsparticipating in the audit of the various Group companies totaled €246 thousand.

Additionally, the fees for other professional services provided to the various Group companies by the principal auditor and by otherentities related to the auditor during 2004 amounted to €163 thousand, whereas the fees charged by other auditors participating inthe audit of the various Group companies totaled €37 thousand.

In 2003 and 2004 the CEPSA Group made the following foreign currency transactions in the course of its ordinary commercial andfinancial operations:

Equivalent value in Thousands of euros

Other 2003 USD currencies Total

Sales 3,006,248 189,068 3,195,316 Purchases 5,514,083 105,951 5,620,034 Services provided 210,364 1,541 211,905 Services received 320,756 31,140 351,896 Financial revenues 24,392 10,737 35,129 Financial expenses 26,008 11,857 37,865

Equivalent value in Thousands of euros

Other 2004 USD currencies Total

Sales 3,367,716 172,949 3,540,665Purchases 6,597,448 112,252 6,709,700Services provided 182,177 3,907 186,084Services received 347,161 19,772 366,933Financial revenues 81,870 3,754 85,624Financial expenses 29,624 4,559 34,183

CEPSA Group 73


The contributions to the income for the year attributed to the Parent Company in 2004 and 2003, by line of business, were as follows:

Thousands of euros

2004 2003

Exploration & Production 156,019 252,341Refining & Distribution 421,070 302,992Petrochemicals 59,651 41,346Gas & Power 13,047 15,622

Total 649,787 612,301

The breakdown of the "Extraordinary Income" caption in the 2004 and 2003 consolidated statements of income, respectively, is asfollows:

Thousands of euros

2004 2003

Extraordinary Extraordinary Extraordinary Extraordinaryexpenses revenues expenses revenues

Gain on disposal of intangible assets,tangible fixed assets and control portfolio(Notes 5, 6 and 7) 10,498 1,826 11,658 43,525

Indemnity payments and expenses for claims and contractual obligations 9,732 873 6,137 1,797

Period provisions/Provisions released/used 40,183 4,308 47,837 7,846

Capital subsidies transferred to income for the year (Note 14) - 9,553 - 9,355

Variation in intangible asset, tangible fixed asset and investment valuation allowances (25,157) - (8,698) -

Prior years’ expenses/revenues 632 1,213 837 277

Other items 2,850 12,789 10,126 11,546

Total 38,738 30,562 67,897 74,346


74


The “Gains on the Disposal of Intangible Assets, Tangible Fixed Assets and Control Portfolio” caption includes mainly the gainsarising from the sale and disposal of fixed assets, the most noteworthy of which are, in 2004, the gains arising from the disposal ofthe assets of the service station network and the assets of Plastificantes de Lutxana, S.A., and in 2003 the gains arising from thesale of CEPSA’s shares in Compañía Logística de Hidrocarburos CLH, S.A. amounting to €28,004 thousand.

In accordance with the accounting principle of prudence, the Group recorded, in 2004 and 2003, under the “PeriodProvisions/Provisions Used” caption the extraordinary additions to and reductions of provisions recorded to adjust the coverage ofthe possible risks to which the Group might be subject as a result of its dealings with third parties and with its employees (see Note15).

The “Variation in Provisions for Intangible Assets, Tangible Fixed Assets and Control Portfolio” caption includes the net valuationadjustments made at year-end to these accounts (see Notes 5, 6 and 7).

The “Other Items” caption groups together certain revenue and expense items of diverse nature which were recorded asextraordinary items in 2003 and 2004. Noteworthy in 2003 was the effect of the assessments issued by the tax inspection authoritiesfor 1996 to 1999, and in 2003 and 2004 the revenue recorded as a result of the agreement with a fixed asset supplier. Noteworthyin 2004 was the income from the termination of two long-term time charter contracts for vessels.

21. Employees

The average number of employees at the CEPSA Group in 2004 and 2003, by category, was as follows:

Average number of employees

Profesional category 2004 2003

Managers 112 121 Departament heads 587 580 Other line personnel 2,979 2,905 Specialists/assistants/clerical staff 6,962 6,917

Total 10,640 10,523

CEPSA Group 75


22. Environmental matters

The environmental information relating to 2003 and 2004 is as follows:

Thousands of euros

Balance at Additions or Retirements Other Balance at2003 01.01.03 provisions Amounts used variations 12.31.03

Environmental investmentEnvironmental assets 157,832 21,468 (3,720) 5,931 181,511 Accumulated depreciation of environmental assets (67,569) (19,960) 638 (1,421) (88,312)Provision for decline in value of environmental assets - - - - -

Total 90,263 1,508 (3,082) 4,510 93,199

Thousands of euros

Balance at Additions or Retirements Other Balance at2004 01.01.04 provisions Amounts used variations 12.31.04

Environmental investmentEnvironmental assets 181,511 23,491 (816) 812 204,998 Accumulated depreciation of environmental assets (88,312) (11,346) 429 136 (99,093)Provision for decline in value of environmental assets - - - - -

Total 93,199 12,145 (387) 948 105,905

On January 1, 2002, the environment-related investments were defined in accordance with the definition contained in the SpanishAccounting and Audit Institute (ICAC) Resolution of March 25, 2002, approving the rules for the recognition, valuation and disclosureof environmental matters in financial statements.

CEPSA considers that the objective of certain investments as those made in the hydrodesulfurization units is to adapt the gasolineand diesel specifications to market demand, for that reason in these consolidated financial statements these units have not beenrecorded as environmental facilities although their aim is to reduce sulfur in these products in order to comply with Europeanenvironmental legislation.


76


Thousands of euros

Balance at Additions or Retirements Balance at2003 01.01.03 provisions Amounts used 12.31.03

Environmental provisionsProvision for environmental activities 16,482 5,003 (6,264) 15,221Provision for environmental contingencies and obligations 7,265 950 (652) 7,563

Total 23,747 5,953 (6,916) 22,784

Thousands of euros

Balance at Additions or Retirements Balance at2004 01.01.04 provisions Amounts used 12.31.04

Environmental provisionsProvision for environmental activities 15,221 2,396 (6,592) 11,025Provision for environmental contingencies and obligations 7,563 843 (2,252) 6,154

Total 22,784 3,239 (8,844) 17,179

The “Provision for Environmental Activities” caption includes CEPSA Group’s contractual or legal obligations and commitments toprevent, reduce or repair damage to the environment with a charge to professional services, upkeep or maintenance expenses.

The CEPSA Group recorded provisions under the “Provisions for Environmental Contingencies and Expenses” caption forenvironmental action relating to gradual soil pollution, the only risk not covered by the insurance policies taken out by the Group.The amounts used in the year were mainly to offset extraordinary expenses arising from the treatment of polluted land.

Thousands of euros

Environmental expenses 2004 2003

Rent and royalties 29 11Repair and upkeep expenses 1,221 915Transport expenses 82 72Other services 8,304 13,631Period provision for environmental activities 2,396 5,003Total outside services 12,032 19,632Extraordinary expenses 1,334 1,518

Total 13,366 21,150

The “Other Services” caption includes mainly the expenses relating to the inerting of waste at CEPSA’S facilities amounting to €4,595thousand and €3,864 thousand in 2003 and 2004 respectively. The “Extraordinary Expenses” caption includes the expenses relatingto the increase of the values recorded, which are included in the provisions column of the “Provisions for Environmental Contingenciesand Expenses” caption in the environmental provisions table above.

CEPSA Group 77


23.Transition to international financial reporting standards (IFRS)

Pursuant to Regulation (EC) no. 1606/2002 of the European Parliament and of the Council dated July 19, 2002, all companiesgoverned by the laws of a European Union Member State and whose securities are listed on a regulated market of any EU MemberState must present their consolidated financial statements for the years beginning on or after January 1, 2005, in accordance withthe International Financial Reporting Standards (IFRS) ratified by the European Union. Consequently, the CEPSA Group will haveto present its consolidated financial statements for 2005 in accordance with mentioned above regulation.

Although the first consolidated financial statements prepared in accordance with the IFRSs will be, in the Group’s case, those for theyear ended December 31, 2005, it will be necessary to include, for comparative purposes the figures relating to the previous year(2004), prepared in accordance with the same bases used to determine the 2005 figures. This will require the preparation of an initialor opening balance sheet as of the date of transition to IFRS accounting procedures, January 1, 2004, in the Group’s case, prepared inaccordance with IFRSs in force as of December 31, 2005.

To meet the objective exposed, the Group has established a plan for the transition to IFRS that includes, inter alia, the following steps:

1. Analysis of the differences between the methods provided for in the National Chart of Accounts in force in Spain and IFRSs, andof the effects that such differences might have on the calculation of the estimates required to prepare the financial statements.

2. Selection of the methods to be used in cases or areas in which IFRSs permit alternative accounting treatments to be applied.

3. Assessment and determination of the appropriate changes to or adaptations of the operating procedures and systems used forcompiling and providing the information required in order to prepare the financial statements.

4. Assessment and determination of the changes that have to be made in the planning and organization of the process involved in thecompilation of information and the conversion and consolidation of the information of Group and associated companies.

5. Preparation of the opening consolidated financial statements, as of the transition date, and consolidated financial statement for2004, in accordance with IFRSs.

The plan is currently being executed and will be concluded in 2005, although as of the date of preparation of these consolidatedfinancial statements it is not yet possible to estimate the potential impacts of the transition.

24. Events subsequent to year-end

In order to comply with the commitments under the Kyoto Protocol undertaken by the European Union in May 2002 to reducegreenhouse gas emissions, several EU and Spanish regulations have been issued culminating in 2005 in the approval, contained inRoyal Decree 60/2005, of the National Emission Rights Plan, which will be in force for the three-year period 2005-2007.

On February 3, 2005, the Ministry of the Environment notified Cepsa and other companies in its Group of the assignment of 4.5million emission rights per annum at no charge, for the aforementioned period.

The emission rights trading system comes into force on January 1, 2005, and, accordingly, neither Cepsa nor the other Groupcompanies will have to record any accruals in this connection in 2004. Although the system will be applicable in 2005, it is consideredthat it will not have a material effect on 2005 income.


78


CEPSA Group 79

25. Statements of changes in financial position

The 2004 and 2003 statements of changes in financial position are as follows:

Thousands of euros

Source of funds 2004 2003

Funds obtained from operationsA) Allocated to the controlling company 1,067,313 1,020,094B) Allocated to minority interests 7,472 7,803

1,074,785 1,027,897Capital subsidies and other deferred revenues 21,212 24,383

Long-term debtA) Associated companies - -B) Other debt 35,379 42,143

35,379 42,143

Fixed asset disposalsA) Intangible assets 304 1,208B) Tangible fixed assets 3,952 40,858C) Long-term investments 1,887 36,684

6,143 78,750

Early amortization or transfer to short-term of long-term investmentsA) Other financial investments 35,608 102,780

35,608 102,780

Funds obtained from holding in subsidiaries procurements - -

Total funds obtained 1,173,127 1,275,953

Funds applied in excess of funds obtained (decrease in working capital) - -

Thousands of euros

Application of funds 2004 2003

Start-up and debt arrangements expenses 21,523 11,241Fixed asset additions

A) Intangible assets 178,272 103,472B) Tangible fixed assets 352,293 339,650C) Financial investments

1 Associated companies 5,842 31,0312 Other investments securities 2,420 11,3183 Other financial investments 47,175 21,087

586,002 506,558

Dividends 259,910 243,329

Repayment or transfer to short-term of long-term debtA) Debt securities and other similar liabilities - -B) Associated companies 367 14,631C) Other debt 221,282 144,392

221,649 159,023

Provisions for contingencies and expenses

Funds applied to the acquisition of consolidated holdings 67,618 43,786

Total funds applied 1,156,702 963,937

Funds obtained in excess of funds applied (increase in working capital) 16,425 312,016


Thousands of euros

Funds obtained from operations 2004 2003

Net income for the year 657,259 620,104Period depreciation and amortization and fixed asset provisions 353,636 366,510Net provisions for contingencies and expenses 34,941 57,011Amortization deferred charges 7,180 5,668Capital subsidies transferred to income (9,553) (9,355)Other deferred revenues transferred to income (5,985) (7,820)Effect of translation of foreing currency financial statements 2,667 5,812Long-term exchange differences (778) (1,061)Deferred corporate income tax (92) 4,916Prepaid corporate income tax 31,225 23,596Results of companies carried by the equity method (4,098) (5,553)

Cash-Flow after corporate taxes 1,066,402 1,059,828Loss on disposal of fixed assets 10,498 11,658Gain on disposal of fixed assets (2,115) (43,589)

Total 1,074,785 1,027,897

Thousands of euros

2004 2003

Variation in working capital Increase Decrease Increase Decrease

1. Inventories 22 - 61,847 -2. Accounts receivable 382,457 - 52,532 -3. Accounts payable - 386,364 87,288 -4. Short-term financial investments - 6,010 106,662 -5. Cash 8,835 - 4,404 -6. Accrual accounts 17,485 - - 717Total 408,799 392,374 312,713 717

Variation in working capital 16,425 - 312,016 -

Thousands of euros

2004 2003

Change in consolidation method Debit Credit Debit Credit

1. Net fixed assets 112,725 60 - -2. Long-term liabilities - 100,302 - -3. Working capital 8,726 21,089 - -4. Minority interests - - - -5. Consolidation reserves - - - -6. Goodwill in consolidation - - - -7. Negative difference in consolidation - - - -

Totales 121,451 121,451 - -

26. Explanation added for translation to English

These consolidated financial statements are presented on the basis of accounting principles generally accepted in Spain. Certainaccounting practices applied by the Group that conform with generally accepted accounting principles in Spain may not conform withgenerally accepted accounting principles in other countries.


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Table I

Detail of the main companies composing the CEPSA Group

as of December 31, 2004

Thousands of euros

Shareholders' Equity

(%) Holding Capital stock Reserves Net Cost + of holding Consolidation Tax

Name Registered offices Line of business Direct Indirect Subscr. Paid Net income per books Method (*) Group

ARAGÓN OIL, S.A. C/ Sanclemente, 15, 1º Oil trading 100% 300 300 1,163 820 E YesOficina 1ª Dcha. 50001 Zaragoza. Spain

ASFALTOS C/ Juan Bravo, 3, Refining for 50% 8,529 8,529 8,393 8,675 E NoESPAÑOLES, S.A. Planta Baja. 28006 Madrid. Asphalt(ASESA) Spain products

ATLAS, S.A. C/ Playa Benitez, s/n. Oil trading 100% 3,930 3,930 9,301 4,077 G YesCOMBUSTIBLES Y 51004 Ceuta. SpainLUBRIFICANTES

C.M.D. Polígono Industrial Valle de Jet fuel 60% 21,576 21,576 17,817 12,946 G NoAEROPUERTOS Güimar, Manzana XIV, distributionCANARIOS, S.L. parcelas 17 y 18. 38509 Güimar

Santa Cruz de Tenerife. Spain

CEDIPSA, CIA. Avda. del Partenón, 12 Service station 100% 8,114 8,114 10,472 10,059 G YesESPAÑOLA 28042 Madrid. Spain operationDISTRIBUIDORA DEPETRÓLEOS, S.A.

CEPSA Camino de San Lázaro, s/n, Oil distribution 100% 954 954 15,341 956 G YesAVIACIÓN, S.A. Zona ind. Aeropuerto Tenerife

Norte Los Rodeos. 38206San Cristobal de la LagunaSanta Cruz de Tenerife. Spain

CEPSA CARD, S.A. Avda. del Partenón, 12, 3ºC Management of 100% 60 60 204 60 G Yes28042 Madrid. Spain Group cards

CEPSA Avda. Ribera del Loira, 50. Oil exploration 100% 12,175 12,175 (21,424) 5,815 G YesCOLOMBIA, S.A. 28042 Madrid. Spain

CEPSA COMERCIAL C/ Embajadores Final, s/n. Oil trading 100% 1,169 1,169 1,322 2,519 G YesMADRID, S.A. Apartadero Santa Catalina.(CECOMASA) 28018 Madrid. Spain

CEPSA E. P., S.A. Avda. Ribera del Loira, 50. Oil exploration 100% 3,438 3,438 21,768 16,136 G No1ª planta. 28042 Madrid. Spain

CEPSA ELF Avda. Ribera del Loira, 50, Gas sale and 100% 36,752 36,752 28,498 42,012 G YesGAS, S.A. 1ª planta. 28042 distribution

Madrid. Spain

CEPSA ESTACIONES Avda. Partenón, 12. Service station 100% 82,043 82,043 242,848 120,017 G YesDE SERVICIO, S.A. 28042 Madrid. Spain operation(CEPSA EE.SS.)

CEPSA Suite C, Second Floor, Regal Oil trading 50% 71 71 4,948 53 E NoGIBRALTAR, LTD. House, Queensway. Gibraltar

CEPSA Steegoversloot 64. 3311 Oil trading 100% 4,060 4,060 30,566 15,210 G NoINTERNATIONAL B.V. PR Dordrecht. The Netherlands

CEPSA ITALIA, S.p.A. Viale Milanofiori Palazzo A/6. Petrochemicals 100% 6,000 6,000 7,145 6,934 G No20090 Assago - Milan. Italy trading

CEPSA Group 81

(*) G = Global integration; P = Proportional integration; E = Equity


Thousands of euros




CEPSA Avda. Ribera del Loira 50, Lubricants 100% 15,000 15,000 24,858 15,025 G YesLUBRICANTES, S.A. 3ª planta. 28042 Madrid. trading(C.L.S.A.) Spain

CEPSA Avda. de Anaga, 21. Corporate 100% 60 60 3,148 60 G YesOPERACIONES 38001 Santa Cruz de Tenerife services forMARINA- (Tenerife). Spain Bunker-AviationAVIACIÓN, S.A. & oil distribution

CEPSA PANAMA. S.A. C/ 50 Edificio Banco Alemán, Bunkering 67% 1,138 1,138 4,790 1,122 E No6º Piso. Panama city. servicesRepublic of Panama

CEPSA Avda. Columbano Bordalo Oil trading 96% 4% 27,500 27,500 30,176 38,338 G NoPORTUGUESA Pinheiro, 108 3º. 1070-067PETROLEOS, S.A. Lisboa. Portugal

CEPSA UK, LTD. International Press Centre 76 Petrochemicals 100% 142 142 7,337 154 G NoShoe Lane. EC4A 3JB London. tradingUK

CEPSA, S.A. Avda. del Partenón, 12. Corporate 100% 61 61 44 61 G Yes28042 Madrid. Spain services

COGENERACIÓN C/ Álvaro Rodríguez López. s/n. Cogeneration 100% 6,000 6,000 6,515 4,988 G YesDE TENERIFE, S.A. Refinería Tenerife(COTESA) 38005 Santa Cruz de Tenerife

(Tenerife). Spain

COMPAÑÍA Avda. Ribera del Loira, 50. Lubricants 100% 1,932 1,932 (1,903) (231) G YesESPAÑOLA 3ª planta. 28042 tradingDE PETRÓLEOS Madrid. SpainATLÁNTICO, S.A.(ATLÁNTICO)

COMPAÑÍA C/ Méndez Álvaro, 44 Oil product 14,15% 84,070 84,070 180,946 36,982 E NoLOGÍSTICA DE Edificio 9, planta baja. distributionHIDROCARBUROS 28045 Madrid. SpainCLH, S.A.

CONVENIENCIA, S.A. Avda. del Partenón, 12 Marketing 100% 1,228 1,228 2,293 1,743 E Yes28042 Madrid. Spain and network

distribution

DERIVADOS Avda. Partenón, 12, 1ª Sector A. Power 100% 12,330 12,330 10,908 12,328 G YesENERGÉTICOS PARA 28042 Madrid. Spain commercialization EL TRANSPORTE Y and cogenerationLA INDUSTRIA, S.A. (DETISA)

DETEN Rua Hidrogenio 1744. Complejo Manufacture and 71,44% 44,355 44,355 16,370 116,853 G NoQUÍMICA, S.A. Petroquímico de Camaçari. sale of

Salvador de Bahía. Brazil petrochemicals

ENERGÉTICOS DE Ctra. N-430. Km. 313. Oil trading 100% 768 768 171 906 E YesLA MANCHA, S.A. 13170 Miguelturra(ENERMAN) (Ciudad Real). Spain

ERTISA, S.A. Avda. del Partenón, 12, 2º D Manufacture and 100% 11,550 11,550 125,183 17,173 G Yes28042 Madrid. Spain sale of

petrochemicals

GEMASA, Pol. Ind. Nuevo Puerto, Cogeneration 100% 2,328 2,328 3,233 3,450 G YesGENERACIÓN Parc. 43-45. 21810 Palos de la MAZAGÓN, S.A. Frontera (Huelva). Spain


82



Thousands of euros




GENERACIÓN DE Puente Mayorga, s/n Cogeneration 100% 1,803 1,803 16,835 2,389 G YesENERGÍAS DEL 11360 San RoqueGUADARRANQUE, (Cadiz). SpainS.A. (GEGSA)

GENERACIÓN Avda. del Partenón, 12 Cogeneration 100% 32,000 32,000 3,093 32,000 G YesELÉCTRICA 28042 Madrid. SpainPENINSULAR, S.A

GETESA, Pol. Ind. de Guadarranque Cogeneration 100% 6,010 6,010 2,005 2,945 G YesGENERADORA 11360 San RoqueDE ENERGÍA (Cadiz). SpainTERMOELÉCTRICA, S.A.

INTERCONTINENTAL Avda. Partenón, 12, 5ª Sector C. Manufacture and 100% 25,865 25,865 178,623 50,111 G YesQUIMICA, S.A. 28042 Madrid. Spain sale of(INTERQUISA) petrochemicals

INTERQUISA 10200 East Sherbrooke Street. Manufacture and 51% 178,023 178,023 (47,198) 90,792 P NoCANADÁ, L.P. H1B 1B4 Montreal sale of

Quebec. Canada petrochemicals

LUBRICANTES DEL Avda. Ribera del Loira, 50 2ª Lubricants 65% 6,102 6,102 14,207 13,086 G NoSUR, S.A. (LUBRISUR) 28042 Madrid. Spain trading

NUEVA C/ Mesena, 144, Edif. C, Power 50% 96,000 96,000 26,913 70,779 P NoGENERADORA 4ª Planta cogenerationDEL SUR, S.A. 28033 Madrid. Spain

PETRESA 5250 Boulevard Manufacture and 51% 48,889 48,889 (15,816) 16,803 P NoCANADÁ, INC Becancour GOX 1BO sale of

Becancour Québec. Canada petrochemicals

PETROQUÍMICA Avda. Partenón, 12, 5ª Manufacture and 100% 3,750 3,750 196,557 12,847 G YesESPAÑOLA, S.A. Sector A. sale of(PETRESA) 28042 Madrid. Spain petrochemicals

PETRÓLEOS DE Avda. de las Petrolíferas. Bunkering 100% 120 120 20,206 121 G YesCANARIAS, S.A. 35008 Las Palmas services (PETROCAN) de Gran Canaria.

(Gran Canaria). Spain

PLASTIFICANTES DE La Florida, s/n. 48930 Manufacture and 100% 3,023 3,023 2,661 6,258 G YesLUTXANA, S.A. (P.D.L.) Lutxana-Baracaldo (Vizcaya). sale of

Spain petrochemicals

PRODUCTOS Avda. Ribera del Loira, 50. Asphalt 100% 3,150 3,150 9,005 5,313 G YesASFÁLTICOS, S.A. 28042 Madrid. Spain sales(PROAS)

PROMOTORA DE Avda. del Partenón, 12, 2º C Retailing at 100% 753 753 7,891 1,989 G YesMINIMERCADOS, S.A. 28042 Madrid. Spain service stations(PROMIMER)

PROPEL-PRODUTOS Avda. Columbano Bordalo Service station 93% 7% 224 224 342 484 G NoDE PETROLEO, L.D.A. Pinheiro, 108-3º. 1070-067 operation

Lisboa. Portugal

RED ESPAÑOLA DE Pseo de la Castellana, 176 Management of 55% 250 250 16,829 9,519 E NoSERVICIOS, S.A. 28046 Madrid. Spain Group cards(RESSA)

SOCIETAT CATALANA Avda. Diagonal, 605, 4T 6A Oil product 45% 60 60 107 4,237 E NoDE PETROLIS, S.A. 08028 Barcelona. Spain import and(PETROCAT) distribution

CEPSA Group 83



Management Discussion & Analysis of 2004 for Compañía Española de Petróleos, S.A. and Subsidiary Companies (CEPSA Group)

84


Operating Environment The global economic environment, as was the case in 2003, was marked by sharp growth in two key areas: the United States, whereGDP rose 4.4%, underpinned mainly by strong consumer spending albeit with burgeoning fiscal and trade deficits; and the sustainedpace of expansion in Asia’s emerging economies, particularly China. Noteworthy also was the economic upturn that gathered steamin Latin America. In contrast, however, a sluggish economic recovery in Germany hindered overall growth in the European Union,although, on the positive side, inflationary pressures remained in check.

Looking at Spain’s economy in the year, its growth continued to surpass the average in the rest of Western Europe. In 2004, GDP wasestimated to have risen 2.7%, three tenths of a point higher than the year before and one point over the average growth rate in theEurozone, supported primarily by firm domestic demand and despite an unfavorable trade balance. The unemployment rate continuedto fall, and inflation, although remaining steady at nearly 3%, still substantially exceeded the EU average, a circumstance that isadversely affecting the Spanish economy’s ability to maintain its relative competitiveness.

With regard to foreign exchange markets, the European currency posted new highs against the US dollar, with the average exchangerate in 2004 coming to $1.24/euro, 10% higher than the average of $1.13/euro in 2003 and considerably up from 2002’s average of$0.95/euro. Short-term interest rates on the euro were more or less stable throughout the year and stood below 2.1%, whereas theinterest rate on the US dollar jumped from 1.1% at the beginning of the year to 2.4% at the end.

As for the petroleum sector, global crude oil prices were on a continual upswing since May of 2003, when benchmark Brent soaredfrom $24 per barrel to an all-time record high of $52 per barrel in mid-October and thereafter slid once again to close the year at $40.5per barrel. Robust demand, coupled with global economic growth, as well as production constraints from high refining capacityutilization and geopolitical tensions and civil unrest in various oil producing countries were the main factors behind this trend.

As a result, Brent’s average price for the year, over $38 per barrel, was nearly 10 dollars, or 32%, higher than the median price for theyear before. Nonetheless, this increase was somewhat less accentuated in the Eurozone, since when converting oil prices from dollarsto euros, the year-on-year rise was only 21%.

Demand for oil products remained firm in 2004, basically due to brisk global economic growth and rising energy needs. Compoundingthese factors were limited supplies and nearly full capacity utilization of productive units. Consequently, manufacturing margins formotors fuels and other oil products, and especially basic chemical products, witnessed a surge, particularly in the last quarter of theyear. Taking the refining indictor as a reference, which measures theoretical yields of a set of standard refineries, the improvementvis-à-vis the year before was 24%, although the effect of this increase was somewhat dampened when reflected in the financialstatements of European companies, due to the appreciation of the euro.

CEPSA Group 85


ActivityIn the upstream segment, production activity intensified in the Algerian RKF and Ourhoud fields, the latter having come on streamcommercially in January 2003 and being the largest and most important asset in CEPSA’s E&P portfolio. Looking at 2004’s figures,total output from both fields, up 41% from the year before, came to 52 million barrels of crude oil, with CEPSA’s net entitlement fromcontractual terms amounting to 11.4 million barrels.

Favorable production levels, in addition to high oil prices throughout the year, led to a pre-tax income figure of 294 million euros forthis business.

This highly-favorable earnings performance comes up somewhat short in comparison to the previous year on account of a number offactors, chief among which was the appreciation of the euro against the dollar, and of notable importance, the one-time sale in 2003of 5.7 million barrels produced in prior years and which the Algerian national oil company Sonatrach, for contractual reasons, did notallow CEPSA to sell until that year. Without considering the impact of this non-recurring sale, income before taxes would have been37% higher than in 2003, much more than the increase in international prices when converted into euros.

Capital and exploratory expenditures in this segment were targeted at continuing with the scheduled development of fields thatare currently in production and undertaking new gas and crude oil exploration projects in Colombia and Northern Africancountries.

In the downstream segment, installed refining capacity utilization was consistent with the high levels achieved in previous years, withthroughput at 20.9 million tons. Improved refining margins per unit, as well as the benefits harnessed from productivity enhancementprograms put into practice in the company’s refining facilities, which in 2004 generated savings of 21 million euros, propelled earningsin this segment.

Oil product sales came to 25.2 million tons, 4% more than 2003’s figure of 24.8 million, in addition to 1.5 million tons of basic chemicalproduct sales. Greater commercial activity and the rebound in basic chemical margins were positive factors that managed to offsetthe 14% fall, vis-à-vis 2003, in unit margins on oil products, especially dragged down by the weak US dollar and the difficulties inpassing along the rise in raw material prices to end consumers.

Pre-tax earnings from refining, marketing and basic chemicals came to roughly 600 million euros, climbing 27% from the year before.This increase would have in fact been 35% if we factored out the gains in 2003 from the partial divestment of CEPSA’s shareholdingin CLH, in compliance with applicable legislation at that time.

In implementing the Group’s investment strategy, capital spending in this segment was primarily assigned towards completing newfacilities aimed at complying with EU-mandated product specifications on sulfur limits to achieve cleaner-burning fuels. Accordingly,a considerable portion of capital expenditures in this areas, which totaled 416 million euros, 110 million more than the year before,were earmarked towards the construction of two new hydrodesulfurization plants to treat gas oils and naphtha and the remodelingand capacity expansion of another four existing units. Additionally, a new-double hulled tanker was acquired to transport crude andinvestments continued to be pursued in an effort to bolster and optimize the company’s service station network and steadily developits commercial network to meet growing demand for LPG’s, bottled butane and piped gas.

With regard to the Petrochemicals segment, a persistently-challenging operating environment exacerbated by high feedstockprices, to a certain extent indexed to crude oil price movements, and the lagging dollar, hampered margins from these activities.The start-up in the second half of 2003 of new manufacturing units in Spain and Canada, and increases in sales volumes,nonetheless helped sustain pre-tax earnings at favorable levels, coming to 86 million euros in 2004, compared to 60 million in 2003.

After having completed hefty investments in recent years to create world-class and competitive facilities for supplying the differentglobal markets where CEPSA operates, the volume of capital expenditures in the petrochemical derivative business fell to 29 millioneuros in the year.

Finally, in the Gas & Power segment, core investments were allocated towards construction of a 740 MW combined cycle plant, withtwo power generating sets, in San Roque, Cádiz, with CEPSA having a 50% interest in this joint venture. Commercial operationsbegan in July 2004.

86

Management Discussion & Analysis


ResultsIn 2004, the CEPSA Group’s consolidated net sales and operating revenues, including the excise tax on oil and gas, came to 14,688million euros, while EBITDA stood at 1,306 million euros and pre-tax earnings at 998 million euros. In both cases, the figures rosemore 1% and 5% respectively from 2003’s levels.

Nonetheless, in order to meaningfully assess the company’s performance, earnings should be placed on a comparable basis with lastyear’s, taking into account the effect of the two non-recurring items in both upstream and downstream operations in 2003. Excludingthese items, EBITDA would have been 21% higher and pre-tax earnings would have risen 35% year-on-year.

The key factors driving this increase, whether related to the global economic environment, the oil sector or company-specific measures,are explained in detail in foregoing paragraphs.

After deducting expense items such as income taxes and minority interests, the CEPSA Group’s net income stood at 650 million euros,6% higher than the 612 million euros posted the previous year. Taking into account the effect of non-recurring items in 2003 –the saleof Algerian crude oil produced in prior years and the partial divestment of the company’s shareholding in CLH– net income wouldhave risen 34% from a year earlier.

Return on average capital employed (ROACE) came to 15.1%, slightly above last year’s ratio but sharply higher than returns inprevious years. As evidence of the level and quality of earnings, average net liabilities in the year for the first time stood below cashflow generated in the period. In 2004, this ratio was down to 0.9, in contrast to 2003, when it was 1.1 and 2002, at 1.8.

Based on CEPSA’s 2004 earnings figure, the Board of Directors will submit a proposal to the Annual General Meeting of Shareholdersto approve a dividend distribution of 1 euro per share, up 5.3% from the dividend paid out in 2003. The proposed dividend, involvinga total payment of 268 million euros, is equivalent to a pay-out ratio of approximately 41.2% of consolidated net income. Of theaforementioned dividend, an interim distribution was made coming to 0.42 euros per share.

Financial and Equity PositionAt the close of 2004, the CEPSA Group’s consolidated assets totaled 6,908 million euros, 11% higher than the 2003 year-end figure.

The net value of tangible fixed and intangible assets stood at 3,633 million euros, 326 million more than the figure at the end of theyear before. Intangible fixed assets mainly include investments in exploration & production and assets financed by leasingarrangements. The most significant asset additions stem from the implementation of the company’s capital spending plan, as detailedabove, which overall totaled 539 million euros.

Shareholders’ equity at December 31, 2004, before the final dividend distribution for the year, amounted to 3,292 million, 14% morethan the previous year. Thus, the debt-to-equity ratio stood at 30%, versus 37% in 2003.

Research & Development ActivitiesThe technology area’s key focus is supporting CEPSA’s technical and operational excellence to keep the company ahead of itscompetitors. In order to achieve this goal, the Research Center continued to work towards enhancing the company’s reservoir ofscientific and technical know-how and expertise to further its productive processes while initiating new activities, such as those inconnection with the E&P area. This Center is also actively involved in a number of significant projects both at home and in theEuropean Union, not to mention the technical assistance and support it lends to CEPSA’s industrial and commercial areas, havingachieved the most rigorous certifications that attest to the quality of the work methods it uses in upholding the company’s industrialand technological performance.

Trends in the Group’s WorkforceAt December 31, 2004, employees of CEPSA and its subsidiaries numbered 10,534 people, 235 more than at the end of the previousyear, due to the expansion of activities in exploration & production and the coverage of workforce requirements in new manufacturingand marketing units. In order to foster the professional growth and development of personnel working in the company’s different areasand businesses, CEPSA paid special attention to training plans and programs and considerably raised its efforts to ensure thatemployees’ skills and knowledge are tailored to the Group’s current and potential needs, investing in training initiatives that providedover 463,000 instructional hours in the year.

CEPSA Group 87


Treasury StockNeither CEPSA nor any of the companies making up the CEPSA Group directly or indirectly acquired shares of the CompañíaEspañola de Petróleos, S.A. in 2004, nor did they own such securities at year-end.

Subsequent EventsIn order to fulfill commitments to reduce greenhouse gas emissions as envisaged in the Kyoto Protocol, ratified by the European Unionmember states in May 2002, Royal Decree 60/2005 of January 21st was enacted, which approved the National Plan to assign emissiontrading rights. Spain’s Ministry of Environmental Affairs notified CEPSA and other companies of the Group that it would be freelyassigned 4.5 million emission rights for each of the years spanning 2005-2007.

OutlookThe strategy defined by the CEPSA Group in recent years and a disciplined investment approach that seeks to adequately controlrisks has enabled the company to achieve sustainable and solid earnings and cash flow performance. Accordingly, the attainment ofa more equitable balance in contributions from the different segments in which the company operates and the ability to profitablygrow its core businesses continue to be key strategic targets.

In the upstream area, plans are to consolidate the level of proprietary reserves over the long run, as well as to expand natural gas-related activities. To accomplish this goal, a wide variety of projects are due to be undertaken in 2005 and beyond, ranging from workin already-developed fields to new exploration ventures in various regions of Northern Africa and Colombia, in partnership withdifferent companies.

In manufacturing, whether of oil products, basic chemicals or petrochemical derivatives, a myriad of industrial projects were startedin the year that will serve to expand the production capacity of various product families, having greater added value than currentoutput, and will enable the company to strike a better balance in its refineries’ feedstock. At the same time, and representing acornerstone of CEPSA’s philosophy, the company will continue to make a steadfast commitment to ensuring safety in all its facets andto furthering the goals of environmental protection. As regards its commercial area, CEPSA will carry on consolidating its presencein the different markets where it operates, while paying special attention to its niche markets and finding ways to develop businesseswith strong future potential.

As a result of these actions and measures, CEPSA seeks to deliver profitable business performance and prosperity in the years tocome, minimizing the impact of any adverse operating environments that may lie ahead, while drawing on the company’s strengthsand capitalizing on business opportunities wherever they may arise.

Management Discussion & Analysis

88


CEPSA Group 89


CEPSA Group 89

INGLES-03 CEPSA 04 (16 pág ulti 22/6/05 12:07 Página 89

Information to the Annual GeneralMeeting of ShareholdersSummary of Proposals to be Submitted by the Board of Directors for Approval of the 2005 Annual General Meeting ofShareholders of Compañía Española de Petróleos, S.A. (CEPSA).

1. To study and approve, where applicable, the Financial Statements and Management Discussion & Analysis for Compañía Españolade Petróleos, S.A. and its Consolidated Group, as well as the Proposal for Profit Distribution and management of CompañíaEspañola de Petróleos, S.A., all pertaining to fiscal year 2004.

2. To ratify and re-elect Board Directors.

3. To re-elect Deloitte, S.L. (formerly called Deloitte & Touche España, S.L.) for a one-year period, as the independent auditors toexamine and review the 2005 Financial Statements of Compañía Española de Petróleos, S.A. and the companies pertaining to itsConsolidated Group.

4. To delegate powers to the Board of Directors or the person or persons from the Board designated for such purposes, in order toconvert the resolutions passed at the Annual Meeting of Shareholders into public deed, as required, as well as to execute or filethem, as needed, with the Public Registers.

Proposed Distribution of 2004 Profit of Compañía Española de Petróleos, S.A. (CEPSA)

Euros

Basis of Distribution:2004 Income 575,873,274.14Retained earnings from prior years -

Total 575,873,274.14

Distribution to:Dividends 267,574,941.00Voluntary Reserves 308,298,333.14

Total 575,873,274.14

At its meeting of September 28, 2004, the Board of Directors declared an interim dividend on the year’s profits of 0.42 euros per share,payable October 25, 2004.

If the proposed profit distribution is approved by the Annual General Meeting of Shareholders, a final dividend of 0.58 euros per sharewill be distributed, with total dividend per share coming to 1 euro, meaning an increase of 0.05 euros, or 5.3%, from the amount paidout on 2003’s earnings.

90


Notes from the Board of DirectorsThe Annual General Meeting of Shareholders, held on May 28, 2004, resolved to re-elect the incumbent Directors Mr. Ernesto GerardoMata López and Mr. Juan Rodríguez Inciarte for another five-year term of office, pursuant to the provisions of Article 34 of theCompany Bylaws.

At the same Annual Meeting, a resolution was passed to renew the authorization granted to CEPSA’s Board of Directors to issuenon-convertible fixed-yield securities, up to a maximum limit of three hundred million euros (€300,000,000), under the terms andconditions established for these purposes in legislation in force.

Likewise, the AGM approved the amendment of Articles 25, 27 and 30 of the Company Bylaws, regarding proxy authorizations andvoting by means of remote communication, in order to adapt them to provisions under Act 26/2003 of July 17th on the Transparencyof Listed Corporations.

The AGM also approved the Rules and Regulations of CEPSA’s Shareholders Meetings, and was duly informed of the Rules andRegulations of the Board of Directors of the Company, prepared in fulfillment of provisions of the aforementioned Act 26/2003.

In compliance with the ruling handed down by the Antitrust Court, File C86/04 Disa/Shell, in connection with the transaction notifiedto this Court by Disa Corporación Petrolífera, S.A. to acquire the entire share capital of Shell Peninsular, S.L. and Shell Atlántica,S.L., and likewise by virtue of the Resolution of the Council of Ministers of January 25, 2005, Mr. Demetrio Carceller Arce tenderedhis resignation as a CEPSA Board Director at the Board meeting held on February 4, 2005. The Board accepted this resignation andlikewise commended Mr. Carceller for his distinguished services and outstanding contributions to the Company throughout histenure.

The Board of Directors meeting on March 29, 2005, formulated and approved the 2004 Financial Statements (Balance Sheets,Statements of Income, and Notes to the Financial Statements) and the Management Discussion & Analysis, for CEPSA and itsConsolidated Group, all documents signed, as proof of consent, by each of the Board members, having likewise approved in the samemeeting, the Proposal for 2004 Profit Distribution for Compañía Española de Petróleos, S.A., pursuant to what is set forth in Article171-2 of the Companies Act in force and other applicable laws.

This same Board meeting also approved the Company’s Corporate Governance Report for 2004.

Likewise at this meeting, the shareholder Mr. José Manuel Otero Novas was co-opted onto the Board of Directors, in replacement ofMr. Demetrio Carceller. His appointment will be submitted for ratification, where appropriate, at the next Annual General Meetingof Shareholders.

The Board of Directors would like to extend their deepest gratitude and appreciation to all of the employees of the CEPSA Group, ineach and every one of its centers, for their untiring service and dedication throughout the year.

CEPSA Group 91


CEPSA Group Financial Information

92


CEPSA Group 93

Statements of Income for the years ended December 31

Millions of euros

2004 2003 2002 2001 2000

Net sales 14,688 13,199 11,459 11,664 12,174 Other income 76 67 153 117 153 Total sales & operating revenues(*) 14,764 13,266 11,612 11,781 12,328 Purchased crude oil and products (9,302) (7,991) (7,175) (7,324) (8,030)Personnel expenses (420) (402) (380) (365) (353)Other expenses (3,722) (3,564) (3,299) (3,216) (3,066)Gross profit 1,320 1,309 758 875 879 Depreciation and amortization (367) (378) (261) (243) (239)Variation in operating provisions (2) 5 (8) (12) (25)Operating profit 951 936 489 621 615 Net financial income/(expense) 46 (8) (22) (51) (56)Share in net income from equity affiliates 21 19 18 45 35 Amortization of goodwill & negative differences in consolidation (12) (8) (10) (9) (14)Income from ordinary activities 1,006 939 475 605 581 Other net income and expenses (8) 7 100 (21) (91)Income before taxes 998 946 575 584 490 Corporate income taxes (341) (326) (97) (132) (125)Income attributed to minority interests (7) (8) (17) (18) (9)Net income attributed to the controlling company 650 612 461 435 356

(*) Total sales & operating revenues fully includes the item of "Changes in finished product and work-in-process inventories"

Millions of euros

2004 2003 2002 2001 2000

Income before taxes 998 946 575 584 490 Operating financial income/(expense):

Total net financial income/(expense) 46 (8) (22) (51) (56)Non-operating financial income/(expense) 20 8 16 26 27

Total operating financial income/(expense) 66 - (6) (25) (29)

Variation in long-term provisions and other net incomeVariation in long-term provisions 15 (25) (40) (26) (145)Other net income (6) 225 137 11 50

Total variation in long-term provisions and other net income 9 200 97 (15) (94)

Operating income (excluding non-recurring items) 923 746 484 625 613 Non-recurring items - (179) - - -

Operating income 923 925 484 625 613 Amortization/depreciation of fixed assets (367) (378) (262) (243) (240)Amortization of goodwill (12) (8) (11) (9) (19)Variation in working capital provisions (4) 19 (7) (16) (35)

Earnings before interest, taxes,depreciation and amortization (EBITDA) (*) 1,306 1,292 764 892 907

(*) EBITDA includes share in income from logistical companies carried by the equity method


Breakdown by Business Segments

Results

Millions of euros

2004 2003 2002 2001 2000

Earnings before interest, taxes,depreciation and amortization (EBITDA)

Exploration & Production 344 527 58 68 82 Refining, Marketing & Basic Chemicals 748 607 468 604 627 Petrochemicals 177 131 214 222 200 Gas & Power 37 27 24 (2) (2)

Earnings before interest, taxes,depreciation and amortization (EBITDA) 1,306 1,292 764 892 907

Operating incomeExploration & Production 244 394 21 35 44 Refining, Marketing & Basic Chemicals 576 458 286 434 423 Petrochemicals 83 56 162 166 159 Gas & Power 20 17 15 (10) (13)

Operating income 923 925 484 625 613

Tangible Fixed Assets, Intangible Assets and Long-term Financial Investments in Associated Companies (Investments by Business Segments)

Millions of euros

2004 2003 2002 2001 2000

Exploration & Production 58 67 236 266 80Refining, Marketing & Transportation 402 306 242 312 338Petrochemicals 29 71 219 315 61Technology, Gas & Cogeneration 40 33 3 24 40Corporate Area 10 8 9 15 6

Total 539 485 709 932 525


94


Statement of Changes in Financial Position for the years ended December 31

Millions of euros

Source of funds 2004 2003 2002 2001 2000

Funds from operations 1,075 1,028 660 851 760 Capital subsidies and other deferred revenues 21 24 14 66 9 Fixed asset disposals 6 79 159 31 73 Variation in net financial liabilities (195) (215) 286 58 225 Other sources under long-term captions 41 (99) 21 (4) (7)Variation in working capital (48) (115) (73) 169 (167)

Total source of funds 900 702 1,067 1,170 892

Application of fundsStart-up and debt arrangement expenses 22 11 10 18 13 Fixed asset acquisitions 539 485 709 910 525 Other financial investments 11 (81) 85 28 56 Dividends 260 243 181 144 110 Provisions for contingencies and expenses 68 44 82 49 185 Applications for changes in consolidated Group - - - 22 4

Total application of funds 900 702 1,067 1,170 892

Funds from Operations for the years ended December 31

Millions of euros

2004 2003 2002 2001 2000

Consolidation income for the year (incluiding minority interests) 657 620 478 453 365 Amortization & depreciation of: 386 392 281 262 255

Fixed assets 357 369 251 233 225 Deferred charges 10 9 10 10 14 Goodwill in consolidation and other amortizations 19 14 20 19 16

Net provisions 10 38 48 55 191 Other Cash-Flow 13 10 (30) 90 (21)Cash-Flow 1,066 1,060 777 860 789 Gain/(loss) from fixed assets 9 (32) (117) (9) (29)Total funds from operations 1,075 1,028 660 851 760

CEPSA Group 95


Balance Sheet (before profit distribution) at December 31

Millions of euros

ASSETS 2004 2003 2002 2001 2000

A. Due from shareholders for uncalled capital - - - - -

B. Fixed assets: 3,956 3,659 3,679 3,243 2,608 I. Start-up expenses 1 - 5 3 3 II. Intangible assets 981 902 933 720 399 III. Tangible fixed assets 2,651 2,405 2,313 2,128 1,761 IV. Long-term financial investments 323 352 428 393 446

C. Goodwill in consolidation 90 99 95 105 110

D. Deferred charges 63 57 58 84 87

E. Current assets: 2,799 2,401 2,179 2,072 2,312 I. Due from shareholders for called capital - - - - - II. Inventories 736 736 674 623 611 III. Accounts receivable 1,795 1,418 1,364 1,253 1,591 IV. Short-term financial investments 177 182 76 130 57 V. Cash & cash equivalents 50 41 36 43 33 VI. Prepaid expenses 41 24 29 22 20

TOTAL ASSETS 6,908 6,216 6,011 5,505 5,117


96


Millions of euros

SHAREHOLDERS' EQUITY AND LIABILITIES 2004 2003 2002 2001 2000

A. Shareholders' Equity: 3,292 2,899 2,518 2,263 1,968 I. Subscribed capital stock 268 268 268 268 268 II. Paid-in surplus 339 339 339 339 339 III. Revaluation reserve 91 91 91 91 91 IV. Other reserves of the controlling company 1,310 1,067 896 720 467 V. Reserves at companies consolidated by the global

or proportional integration method 831 726 625 535 475 VI. Reserves at companies carried by the equity method (45) (52) (55) (60) 22 VII. Translation differences (40) (40) (45) (2) 3 VIII.Income attributable to the controlling company 650 612 461 435 356 IX. Interim dividend paid in the year (112) (112) (62) (61) (52)

B. Minority interests 40 38 36 46 40

C. Negative difference in consolidation 1 2 4 5 1

D. Deferred revenues 339 363 239 154 98

E. Provisions for contingencies and expenses 271 303 302 342 348

F. Long-term debt: 902 954 1,148 1,045 800 I. Debentures and other marketable debt securities outstanding - - - - - II. Payable to credit entities 736 836 997 931 522 III. Other creditors:

Financial interest-bearing loans 71 39 57 32 201 Other passive financial loans 95 79 80 69 74

IV. Payable to companies carried by the equity method - - 14 13 3

G. Current liabilities: 2,063 1,657 1,764 1,649 1,862 I. Debentures and other marketable debt securities outstanding - - - - - II. Payable to:

Credit entities 305 260 242 232 482 Other financial interest-bearing loans 67 57 234 223 34

III. Payable to companies carried by the equity method 247 235 208 195 200 IV. Trade accounts payable 1,035 743 735 660 873 V. Other nontrade payables 400 353 339 333 263 VI. Accrued expenses 9 9 6 7 10

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,908 6,216 6,011 5,505 5,117

CEPSA Group 97



98

Tangible Fixed and Intangible Assets at December 31

Millions of euros

2004 2003 2002 2001 2000

Gross tangible fixed assets: 5,250 4,794 4,537 4,241 3,700 Land and structures 301 285 277 263 240 Technical installations and machinery 4,420 3,975 3,407 3,263 3,082 Other installations, tools and furniture 91 84 89 92 83 Advances and construction in progress 196 217 584 480 178 Other fixed assets 242 233 180 142 117

Depreciation and provisions of tangible fixed assets: 2,599 2,389 2,224 2,113 1,940 Land and structures 54 52 47 44 38 Technical installations and machinery 2,415 2,223 2,070 1,964 1,797 Other installations, tools and furniture 52 44 46 48 44 Other fixed assets 78 70 61 57 61

Net tangible fixed assets: 2,651 2,405 2,313 2,128 1,761 Land and structures 247 233 230 220 202 Technical installations and machinery 2,005 1,752 1,337 1,299 1,285 Other installations, tools and furniture 39 40 43 44 39 Other fixed assets 164 163 119 86 56 Advances and construction in progress 196 217 584 480 178

Gross intangible assets: 1,626 1,457 1,367 1,094 721 Research & Development expenses and oil well drilling expenses 1,060 1,007 945 710 445 Licenses, patents, concessions, etc. 75 56 49 47 43 Goodwill 10 10 11 11 7 EDP computer software 100 89 78 67 53 Other intangible assets 381 295 284 260 173

Amortization and provisions of intangible assets: 645 555 434 374 322 Research & Development expenses and oil well drilling expenses 468 402 302 266 232 Licenses, patents, concessions, etc. 52 46 40 37 32 Goodwill 5 4 4 4 3 EDP computer software 75 68 61 51 42 Other intangible assets 45 35 26 17 13

Net intangible assets: 981 902 933 720 399 Research & Development expenses and oil well drilling expenses 592 605 643 444 213 Licenses, patents, concessions, etc. 23 10 8 10 11 Goodwill 5 6 7 7 4 EDP computer software 25 21 17 16 11 Other intangible assets 336 260 258 243 161


CEPSA Group 99

Statement of Financial Balance (before profit distribution) at December 31

Millions of euros

2004 2003 2002 2001 2000

Capital employed1. Net fixed assets: 4,074 3,805 3,757 3,432 2,805

1.1. Tangible fixed assets 2,651 2,405 2,313 2,128 1,761 1.2. Long-term financial investments 300 352 367 393 446 1.3. Intangible assets 981 902 933 720 399 1.4. Other net fixed assets 142 146 144 192 200

2. Working Capital 931 907 797 734 893 2.1. Inventories 736 736 674 623 611 2.2. Trade and other accounts receivable 1,795 1,418 1,364 1,253 1,591 2.3. Short-term passive financial investments 50 69 20 30 17 2.4. Suppliers and other trade debts (1,282) (978) (944) (854) (1,074)2.5. Prepaid accrued expenses and other accounts payable (368) (338) (317) (318) (253)

Net assets 5,005 4,712 4,554 4,167 3,698 3. Long-term operating liabilities (495) (506) (505) (511) (457)

3.1. Deferred revenues (159) (156) (146) (154) (98)3.2. Provisions for contingencies and expenses

(excluding internal allowances) (241) (271) (265) (275) (282)3.3. Deferred taxes and long-term passive debts (95) (79) (94) (82) (77)

Capital employed 4,510 4,206 4,049 3,655 3,241

Capital used4. Permanent resources: 4,315 4,043 3,666 3,344 2,798

4.1. Shareholders' equity 3,292 2,899 2,518 2,263 1,968 4.2. Minority interests 40 38 36 46 40 4.3. Negative difference in consolidation 1 2 4 5 1 4.4. Internal allowances 30 32 36 67 66 4.5. Unrealized foreign currency exchange gains 180 207 93 6 5 4.6. Long-term interest-bearing loans 772 865 979 957 718

5. Net short-term financing: 195 163 383 311 442 5.1. Short-term financing 372 317 475 454 515 5.2. Short-term interest-bearing investments (127) (113) (56) (100) (40)5.3. Cash and cash equivalents (50) (41) (36) (43) (33)

Capital used 4,510 4,206 4,049 3,655 3,241

Supplementary information:

Working capital (2.)-(5.) 736 744 414 423 450


Structure of Statement of Financial Balance (before profit distribution) at December 31

2004 2003 2002 2001 2000

Capital Employed1. Net fixed assets 90.34% 90.46% 92.79% 93.90% 86.56%2. Working capital 20.64% 21.56% 19.70% 20.09% 27.55%3. Long-term operating liabilities (10.98)% (12.03)% (12.48)% (13.99)% (14.11)%

Capital employed = Capital used 100.00% 100.00% 100.00% 100.00% 100.00%4. Permanent resources 95.68% 96.12% 90.54% 92.53% 88.04%5. Net short-term financing 4.32% 3.88% 9.46% 7.47% 11.96%

Supplementary information:Working capital [(2.)-(4.)/capital employed] 16.32% 17.69% 10.24% 11.58% 13.89%

Profitability and Equity Ratios at December 31

Profitability Ratios 2004 2003 2002 2001 2000

Net sales / Average total assets 2.2 2.2 2.0 2.2 2.6 Return on Average Capital Employed (ROACE) (1) 15.13% 15.11% 12.86% 13.52% 12.87%Return on Average Equity (ROAE) (2) 21.00% 22.60% 19.28% 20.55% 19.29%Net Income attributed to the controlling company/Average number of shares 2.4 2.3 1.7 1.6 1.3Net Income attributed to the controlling company/Net sales revenues 4.43% 4.64% 4.02% 3.73% 2.93%Average long-term debt / Cash-flow 0.9 1.1 1.8 1.4 1.3

(1) Income before interest, deducting operating taxes/Average capital employed(2) Net income attributed to the controlling company/ Average shareholders' equity

Equity ratios 2004 2003 2002 2001 2000

Permanent resources / Total net assets 96.10% 96.54% 91.59% 92.53% 88.04%Permanent resources / Net fixed assets 118.06% 119.55% 111.03% 112.33% 116.05%Current assets / Short-term debt 135.68% 144.90% 123.49% 125.66% 124.18%Liquid assets / Short-term debt 100.00% 100.48% 85.27% 87.85% 91.34%Working capital / Short-term financing 250.27% 286.12% 167.80% 161.59% 173.25%Net interest-bearing debt / Shareholders' equity 29.38% 35.46% 57.76% 56.28% 59.18%Net interest-bearing debt (includes Internal Allowances)/Shareholders' equity 30.29% 36.56% 59.19% 59.25% 62.56%Net interest-bearing debt (includes Internal Allowances)/Total net liabilities 19.92% 22.50% 32.73% 32.18% 33.30%


100


CEPSA Group 101

CEPSA Group Addresses

Compañía Española de Petróleos, S.A.

Center Address Telephone Fax

Head offices Avda. del Partenón, 12 91 337 60 00 91 725 41 1628042 Madrid

Tenerife Refinery Alvaro Rodríguez López, s/n 922 60 26 00 922 21 88 0338005 Sta. Cruz de Tenerife (Tenerife)

“Gibraltar” Refinery Puente Mayorga, s/n 956 69 80 60 956 10 34 7711360 San Roque (Cádiz)

“La Rábida” Refinery Polígono Nuevo Puerto Apdo. 289 959 53 00 35 959 35 01 1921080 Palos de la Frontera (Huelva)

OIL AREA: Domestic Subsidiaries

Company Address Telephone Fax

Cepsa Aviación, S.A. Camino de San Lázaro, s/n 922 31 44 64 922 25 09 4038206 La Laguna - Tenerife

Cepsa Card, S.A. Avda. del Partenón, 12 - 3ª Sector C 900 200 100 91 337 76 6628042 Madrid

Cepsa E.P., S.A. Avda. Ribera del Loira, 50 91 337 72 10 91 337 72 1528042 Madrid

Cepsa Gas Licuado, S.A. Avda. Ribera del Loira, 50 - 1ª Sector A 91 337 96 35 91 337 96 4828042 Madrid 902 155 156

Cepsa Estaciones de Servicio, S.A. Avda. del Partenón, 12 - Sector B 91 337 63 98 91 337 75 6928042 Madrid

Cepsa Lubricantes, S.A. (C.L.S.A.) Avda. Ribera del Loira, 50 - 3ª 91 337 95 73 91 337 96 6228042 Madrid

Cepsa Operaciones Marina-Aviación, S.A. Avda. de Anaga, 21 922 28 30 02 922 27 30 0938001 Santa Cruz de Tenerife

CMD Aeropuertos Canarios, S.L. Pol. Ind. Valle de Güimar 922 50 53 40 922 50 53 80Manzana XIV, Parcelas 17 y 1838008 Güimar (Santa Cruz de Tenerife)

Compañía de Investigación y Avda. Ribera del Loira, 50 91 337 72 10 91 337 72 15Explotaciones Petrolíferas, S.A. (CIEPSA) 28042 MadridLubricantes del Sur, S.A. (LUBRISUR) Avda. Ribera del Loira, 50 - 2ª Plta. 91 337 75 80 91 337 75 89

28042 MadridProductos Asfálticos, S.A. (PROAS) Avda. Ribera del Loira, 50 91 337 71 27/25 91 337 71 33

28042 MadridPromotora de Minimercados, S.A. Avda. del Partenón, 12 - 2º C 91 337 59 90 91 337 73 20(PROMIMER) 28042 Madrid


CEPSA Group Addresses

102

Domestic Associates


Asfaltos Españoles, S.A. (ASESA) C/Juan Bravo, 3 - Planta Baja 91 576 82 18 977 54 06 0628006 Madrid

Cía. Logística de Hidrocarburos Méndez Álvaro, 44 Edificio 9 - Planta baja 91 774 60 00 91 774 60 01C.L.H., S.A. 28045 MadridSocietat Catalana de Petrólis, S.A. Avda. Diagonal, 605, 4º - 2ª 93 400 50 70 93 405 14 06(PETROCAT) 08028 Barcelona

Foreign Associates


Cepsa Gibraltar, LTD. Europort Building, 7 - 2nd Floor 956 77 61 70 956 77 61 95P.O. Box 51 Gibraltar

Cepsa Maghreb, S.A. Dêpôt Petro Sud Ancien Port Pétrolier 00 212 48 87 52 28 00 212 48 82 57 32Agadir 80000 (Maroc)

Foreign Subsidiaries


Cepsa International B.V. Steegoversloot 64. 3311 PR Dordrecht 00 3120 64 46 125 00 3120 64 23 185The Netherlands

Cepsa Panamá. S.A. 50 Edificio Banco Alemán, 6º 00 507 214 77 09 00 507 214 83 00Ciudad de Panamá

Cepsa Portuguesa de Petróleos Avda. Columbano Bordalo Pinheiro 108, 3ª 00 35121 721 76 00 00 35121 727 52 691070-067 Lisboa (Portugal)

PETROCHEMICALS AREA: Domestic Subsidiaries


ERTISA, S.A Avda. del Partenón, 12, 2º Sector D 91 337 66 83 91 337 66 9128042 Madrid

Intercontinental Química, S.A. Avda. del Partenón, 12, 5ª Sector C 91 337 74 74 91 337 74 70(INTERQUISA) 28042 MadridPetroquímica Española, S.A. (PETRESA) Avda. del Partenón, 12, 5ª Sector A 91 337 97 77 91 337 97 66

28042 Madrid


CEPSA Group 103

Foreign Subsidiaries


Cepsa Italia SPA. Viale Milanofiori Palazzo A/6 00 3902 824 21 86 00 3902 824 21 8020090 Assago Milan (Italy)

Cepsa U.K. LTD. Audrey House 16-20 Ely Place 00 44 207 831 27 88 00 44 207 831 27 97London EC1N 6SN(United Kingdom)

Deten Química, S.A. Rue Hidrogênio, 1744 00 55 71 832 21 25 00 55 71 834 51 56Complejo Petroquímico de CamaçariSalvador de Bahía (Brazil)

Ertisa Great Britain, Limited 2, Sekforte Court 217/219 John Street 00 44 207 253 64 40 00 44 207 253 63 44London EC1 V4LY (United Kingdom)

ERTISA Netherland B.V. Wieldrechtseweg, 50 P.O. Box 8101 00 31 78 652 62 00 00 31 78 618 34 453301 - CC Dordrech (Netherlands)

INTERQUISA Canadá, L.P. 600 Rue de La Gauchetière Ouest, 00 1 514 645 78 87 00 1 514 645 91 15Bureau 1700. H3B 4L8 MontrealQuébec (Canada)

PETRESA Canadá INC. 5250, Boulevard Bécancour 00 1 819 294 14 14 00 1 819 294 26 26Bécancour (Quebec) GOX 1B0 (Canada)

PETRESA Internacional N.V. Boulevard de Waterloo, 39 00 322 548 97 20 00 322 514 27 55Hilton Tower Bruselas B-1000 (Belgium)

GAS & POWER


Cepsa Gas Comercializadora, S.A. Avda. Partenón, 12 91 374 90 70 91 374 90 5428042 Madrid

Derivados Energéticos para el Avda. Partenón, 12 - 1ª - Sector A 91 337 60 00/9561 91 337 95 33Transporte y la Industria, S.A. (DETISA) 28042 MadridGas Directo, S.A. Vía de los Poblados, 1 91 207 97 97 91 207 98 29

Parque Empresarial Alvento - Edificio D28033 Madrid

Generación Eléctrica Peninsular, S.A. Avda. del Partenón, 12 91 337 60 00/9561 91 337 95 33(GEPESA) 28042 MadridNueva Generadora del Sur, S.A. C/ Mesena, 144 - Edificio C, 4ª planta 91 567 60 26 91 567 66 54

28033 Madrid


Table of Contents

01 Letter from the Chairman04 Key Figures of the CEPSA Group 06 Board of Directors 07 Executive Management Committee

SUMMARY OF CEPSA GROUP ACTIVITIES


CEPSA GROUP LEGAL DOCUMENTS

34 Report from Independent Auditors36 Consolidated Financial Statements



90 Information to the Annual General Meeting of Shareholders91 Notes from the Board of Directors 92 CEPSA Group Financial Information

101 CEPSA Group Addresses

For any inquiries about the 2004 Financial Statements orManagement’s Discussion & Analysis, or any other

document mentioned in this Annual Report,please contact our Institutional Relations Division,

at the head offices of the Company located at Avenida del Partenón 12,

“Campo de las Naciones”, 28042 Madrid,or our Office of Shareholder Services at the toll-free

number: 900 101282 or e-mail address:“[email protected]”.

CoordinationOffice of the Secretary of the Board of Directors

Design and RealizationIMAGIA

© March 2005, CEPSA

Printed by:Gráficas Enar

Printed on chlorine-free paper



AVENIDA DEL PARTENÓN, 12CAMPO DE LAS NACIONES, 28042 MADRID

PHONE +34 913 376 000

WWW.CEPSA.COM


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