CONSOLIDATED MANAGEMENT REPORT For the financial year 2015 REPSOL S.A. and Investees comprising the Repsol Group Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish language version prevails. APPENDIX 1. MAIN EVENTS DURING THE PERIOD....................................................................................................... 3 2. OUR COMPANY............................................................................................................................................... 8 2.1. BUSINESS MODEL ................................................................................................................................. 8 2.2. CORPORATE GOVERNANCE ............................................................................................................. 13 2.3. STRATEGIC PLAN 2016-2020 ............................................................................................................. 16 3. MACROECONOMIC ENVIRONMENT ..................................................................................................... 20 4. RESULTS, FINANCIAL OVERVIEW, AND SHAREHOLDER REMUNERATION ............................. 24 4.1 RESULTS ............................................................................................................................................... 24 4.2. FINANCIAL OVERVIEW ..................................................................................................................... 30 4.3. SHAREHOLDER REMUNERATION ................................................................................................... 32 5. PERFORMANCE BY BUSINESS AREAS ................................................................................................... 36 5.1. UPSTREAM ........................................................................................................................................... 36 5.2. DOWNSTREAM .................................................................................................................................... 54 6. OTHER WAYS OF CREATING VALUE .................................................................................................... 66 6.1. PEOPLE .................................................................................................................................................. 66 6.2. SAFETY AND ENVIRONMENT .......................................................................................................... 76 6.3. TAXATION ............................................................................................................................................ 83 6.4. RESEARCH, DEVELOPMENT, AND INNOVATION (R+D+i) ......................................................... 88 6.5. EMERGING BUSINESSES ................................................................................................................... 90 6.6. SOCIETY ................................................................................................................................................ 91 7. OUTLOOK AND PROSPECTS ..................................................................................................................... 95 8. RISKS ............................................................................................................................................................... 99 APPENDIX I: INDICATORS, ALTERNATIVE MAGNITUDES AND RECONCILIATION WITH IFRS . 110 APPENDIX II: ANNUAL CORPORATE GOVERNANCE REPORT ............................................................... 116 1. MAIN EVENTS DURING THE PERIOD The year 2015 has signaled the beginning of the deep transformation process of Repsol1, driven by significant corporate events and taking place in an economic environment marked by volatile markets and the drop in crude oil and gas prices. Among the events transforming its corporate identity remark: the acquisition of the Canadian oil company Talisman Energy Inc.2, converting Repsol into one of the leading private oil and gas companies worldwide, the approval of a new organizational structure in which the Chief Executive Officer (CEO) has assumed all the executive functions and the announcement of its new Strategic Plan 2016-2020, whose key strategic lines are value-creation and resilience even in an environment of low oil and gas prices. Otherwise, results for the year reveal the advantages of Repsol’s integrated model as in a demanding environment in which Group activities have taken place. Thus, positive results obtained in the ordinary course of business (Adjusted Net Income €1,860 million), shows Downstream3 strength while the negative Net Income (€-1,227 million) is explained, mainly by impairments registered (€-2,957 million) as a consequence of the impact of current environment of low prices in Upstream4 assets appraisal. Hereafter, these events are developed: ACQUISITION OF TALISMAN ENERGY On May 8, 2015, Repsol completed the acquisition of Talisman. The investment amounted to €8,005 million, which was financed using Repsol’s liquidity, mainly arising from the collection of the compensation from the YPF expropriation and from the sale of the shares not expropriated. After the acquisition, which represented the inclusion of Talisman's debt (€3,994 million at the acquisition date), the Group’s credit rating remains unchanged (see section 4.2 Financial Overview). Talisman is a Canadian company based in Alberta (Canada), incorporated under the Canada Business Corporation Act, and whose shares were listed on the Toronto and New York Stock Exchanges. Its main business activities include the exploration, development, production, transportation and marketing of crude oil, natural gas and other natural gas liquids, focusing the most majority of its activity on two areas: North America (United States, Canada, and Colombia) and Asia-Pacific (Australia, Timor Leste, Indonesia, Malaysia, Papua New Guinea, and Vietnam). Additionally, Talisman has activity in the United Kingdom, Norway, Algeria, and Kurdistan. The acquisition of Talisman was a transformational transaction in terms of growth, (virtually doubles the Upstream segment in terms of production, operated assets, employees and capital employed), but also by the diversification contributed to the composition and the risk profile portfolio and for the incorporation of talent, knowledge and new skills (the complementary nature of Repsol’s technical capabilities and those of Talisman improve the potential of the whole company). 1 From hereon after, the names “Repsol,” “Repsol Group,” or “the Company” will be indistinctly used to refer to the group of companies comprising Repsol, S.A., and its subsidiaries, associates, and joint agreements (see Note 1 of the consolidated financial statements). 2 Hereinafter "Talisman", that on January 1, 2016 has changed its name to Repsol Oil & Gas Canada Inc, see Note 32 "Subsequent events" of the consolidated financial statements for the year 2015. 3 Downstream businesses include mainly the activities of Refining, Chemicals, Gas & Power, Trading, Marketing and LPG. See section 2.1 of "Business Model" of this report. 4 Upstream businesses include the activities of Exploration, Development and Production of hydrocarbons. See section 2.1 "Business model" in this report. 3 For further information regarding the impact of the inclusion of Talisman in the consolidated financial statements of the Group, see section 4.1) in consolidated financial statements at corresponding to year 2015 and the section 4.1 in this Management Report. NEW ORGANIZATIONAL STRUCTURE In May, the Company approved its new organizational structure in which the Chief Executive Officer (CEO), Josu Jon Imaz San Miguel, assumed all the executive functions, and he became president of three new top management bodies with full responsibility in their respective areas (Corporate Executive Committee, Exploration and Production Executive Committee and Downstream Executive Committee). The new structure is aligned with best international practices in corporate governance matters, and adapts to the Company’s new dimension as a result of the Talisman acquisition as well as the different characteristics of its businesses. This current demanding environment requires boosting our capacity for managing the business in order to increase its efficiency and value creation. For further information, see section 2.2 in this report. STRATEGIC PLAN 2016-2020 On October 15, 2015 Repsol publicly presented its strategic plan for the period 2016-2020 ("Strategic Plan"). Even in an environment of low prices in crude oil and gas, the Strategic Plan's main purpose is the value creation and increasing resilience, defined as the union of strength and the capacity for adapting to an increasingly changing and complex environment. Meeting these objectives shall be implemented through the efficiency and assets portfolio management. Key Strategic lines were summarised as follows: For more information, see section 2.3 of this report. 4 RESULTS FOR THE PERIOD € Million 2015 2014 Variation Upstream (909) 589 (1,498) Downstream 2,150 1,012 1,138 Gas Natural Fenosa 453 441 12 Corporation 166 (335) 501 Adjusted Net Income 1,860 1,707 153 Inventory effect1 (459) (606) 147 Non-recurring income (2,628) (86) (2,542) Income from discontinued operations - 597 (597) Net Income (1,227) 1,612 (2,839) Adjusted Net Income amounted to €1,860 million in 2015, 9% higher than in 2014. The notable increase in Downstream results, thanks to the strengths