APCO ARGENTINA INC/NEW - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from to
Commission file number 0-8933

APCO ARGENTINA INC.
(Exact name of registrant as specified in its charter)

Cayman Islands
(State or other jurisdiction of EIN 98-0199453
incorporation or organization)

One Williams Center, Mail Drop 26-4
Tulsa, Oklahoma 74172
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (918) 573-2164

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
None None

Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares $.01 Par Value (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). Yes [ ] No [x]

The aggregate market value of the voting stock of the registrant held by
non-affiliates on June 28, 2002, the last business day of the second quarter
2002, was $45,698,260. This value was calculated based upon the average bid and
asked prices of the registrant's stock of $20 as reported to the Company by the
National Association of Securities Dealers. Since the shares of the registrant's
stock trade sporadically in the over-the-counter market, the bid and asked
prices and the aggregate market value of stock held by non-affiliates based
thereon may not necessarily be representative of the actual market value. See
Item 5.

As of March 1, 2003 there were 7,360,311 shares of the registrants ordinary
shares outstanding.

Documents Incorporated By Reference

List hereunder the following documents if incorporated by reference and the part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated:

None

PART I

ITEM I. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

Apco Argentina Inc. ("the Company") is a Cayman Islands corporation which was
organized April 6, 1979 as a successor to Apco Argentina Inc., a Delaware
corporation organized July 1, 1970. The principal business of the Company is its
52.85 percent interest in a joint venture engaged in the exploration,
production, and development of oil and gas in the Entre Lomas concession located
in the provinces of Rio Negro and Neuquen in southwest Argentina. The Company
also owns a 1.5 percent interest in a joint venture engaged in oil and gas
exploration and development in the Acambuco concession located in the province
of Salta in northwest Argentina and a 81.82 percent interest in a third joint
venture engaged in oil exploration and development in the Canadon Ramirez
concession located in the province of Chubut in southern Argentina.

The Company had an active year increasing its ownership interests in its
existing properties. In October 2002, it completed the purchase of 27,700
additional shares of Petrolera Perez Companc S.A. ("Petrolera") from the Perez
Companc family ("PC Family") for a total consideration of $6.9 million.
Petrolera is the operator of the Entre Lomas concession and owns a 73.15 percent
interest therein. The shares acquired in this purchase represent 5.54 percent of
Petrolera's total shares outstanding and increased the Company's total ownership
in Petrolera from its former level of 33.684 to 39.224 percent.

Subsequently in December 2002, the Company entered into an agreement to purchase
all of the outstanding shares of Fimaipu S.A. for $1.8 million. Fimaipu is a
private Argentine holding company whose sole asset is 7,895 shares of Petrolera
representing 1.58 percent of Petrolera's total shares outstanding. The purchase
of Fimaipu further increased the Company's owernship in Petrolera to 40.8
percent. This transaction closed in January 2003.

Because Petrolera owns a 73.15 percent interest in Entre Lomas, the Company's
increased ownership in Petrolera as of January 2003 represents an indirect
interest of 29.85 percent in Entre Lomas that when combined with its 23 percent
direct participation gives the Company a combined direct and indirect
participation in the Entre Lomas concession of 52.85 percent.

Also, in January 2003, the Company purchased an additional 36.82 percent
interest in the Canadon Ramirez concession from Tyax S.A., a partner in the
concession, for a total consideration of $155 thousand. This purchase increased
the Company's interest in Canadon Ramirez to 81.82 percent.

During 2002, the company generated net income of $7.3 million compared with $8.5
million during the previous year.

In the fourth quarter of 2001, the economic crisis that had been evolving in
Argentina throughout that year culminated in December with the resignation of
then President De la Rua. The Argentine government subsequently declared default
on Argentina's $130 billion of debt and overturned the long standing
convertibility plan that had pegged the Argentine peso to the US dollar at an
exchange rate of 1:1 since April 1991. These events led to the devaluation of
the peso and the implementation of economic reforms during the first quarter of
2002 that have negatively impacted the Company. By December 31, 2002, the peso
to US dollar exchange rate was 3.37:1, representing a cumulative loss in the
value of the peso of more than 70 percent since the 1:1 peg was lifted. This
devaluation has resulted in the Company incurring significant foreign exchange
losses beginning with the fourth quarter 2001 and through much of 2002.

2

SEASONALITY

Of the products sold by the Company, only natural gas is subject to seasonal
demand. Demand for natural gas in Argentina is reduced during the warmer months
of October through April, with natural gas prices being generally lower during
this off-peak period. During 2002, natural gas sales represented 6 percent of
the Company's total operating revenues and approximately 14 percent during the
previous two years. Consequently, the fluctuation in natural gas sales between
summer and winter is not significant for the Company.

GOVERNMENT REGULATIONS

The Company's operations in Argentina are subject to various laws and
regulations governing the oil and gas industry, assessment and collection of
income taxes, value added taxes, and other taxes such as royalties and
severance, labor laws, and provincial environmental protection requirements. In
early January 2002, the Argentine government approved Emergency Law 25,561 that
included economic and monetary reforms and related executive decrees that have
impacted the Company. These reforms and their impact are described in the
sections "Liquidity and Capital Resources," on page 16 and in "Argentine
Economic and Political Environment," on page 24.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

None.

(c) NARRATIVE DESCRIPTION OF BUSINESS

ENTRE LOMAS

The Company participates in a joint venture with Petrolera and Pecom Energia
S.A. ("Pecom Energia"), formerly Perez Companc S.A. Both partners are Argentine
companies. The purpose of the joint venture is the exploration and development
of the Entre Lomas oil and gas concession in the provinces of Rio Negro and
Neuquen in southwest Argentina. The Company's interest in the joint venture
totals 52.85 percent, of which 23 percent is a direct participation and 29.85
percent is an indirect participation through the Company's 40.8 percent stock
ownership in Petrolera, the operator of the joint venture. Petrolera owns a
73.15 percent direct interest in the joint venture.

As described on page 2, in October 2002, the Company increased its stock
interest in Petrolera by purchasing 27,700 additional shares from the PC Family.
The Company made this purchase by exercising a right of first refusal. The
Company exercised its right of first refusal after the announcement by the PC
Family in July 2002 of a proposed sale of all of its shares in Petrolera to
Petroleo Brasileiro S.A. ("Petrobras"), the Brazilian national oil company.
Consequently, the Company purchased its 27,700 shares while Petrobras purchased
the balance of the PC Family's shares in Petrolera and the PC Family's shares in
Pecom Energia. Subsequent to the purchase, the principal shareholders of
Petrolera are now the Company, Petrobras and Pecom Energia, in which Petrobras
is the majority shareholder.

The Company's management and representatives of Petrobras have met and will
continue to meet in the future. As of this time, little to no changes are
expected in the manner and method in which operations in Entre Lomas and within
Petrolera are conducted.

YPF CONTRACTS

In 1967, Yacimientos Petroliferos Fiscales ("YPF"), then the national oil
company of Argentina, sought bids for the development of the Entre Lomas area.
Pecom Energia won the bid and entered

3

into contract 12,507, dated March 13, 1968, which permitted the Entre Lomas
joint venture to explore for, develop and produce oil in the area. Similar
contracts with YPF with respect to natural gas produced and liquids extracted
from natural gas were entered into on November 18, 1970, and February 10, 1977,
respectively. Originally, the joint venture's interests in the Entre Lomas area
were derived from such contracts and not from ownership of the mineral resources
produced. Under Argentine hydrocarbon law, the Argentine government retains
ownership of the minerals in place.

JOINT VENTURE AGREEMENTS

On April 1, 1968, Pecom Energia and Petrolera entered into a joint venture
agreement with Apco Oil Corporation pursuant to which Petrolera became operator
of the Entre Lomas area. On July 1, 1970, Apco Oil Corporation transferred its
interest in the Entre Lomas area to the Company. Similar joint venture
agreements among the Company, Pecom Energia and Petrolera for the development of
natural gas and extraction of propane and butane were entered into February 29,
1972, and March 23, 1977, respectively.

DEREGULATION

On November 8, 1989, the Argentine government issued decree 1212/89 describing
steps necessary to deregulate hydrocarbon production from existing production
and development contracts, including Entre Lomas. The decree directed YPF to
negotiate with producers the conversion of contracts to the concession or
association system described in the 1967 Hydrocarbon Law 17,319, and gave owners
of the converted contracts the right to freely dispose of hydrocarbons produced
at world prices.

Complete deregulation of the Entre Lomas area was implemented by an agreement
with the Argentine government that went into effect January 22, 1991 and amended
in February 1994. Pursuant to the agreement, Entre Lomas was converted to a
concession giving the joint venture partners ownership of produced hydrocarbons
at the wellhead. Under this agreement, the concession holders, or joint venture
partners, have the right to freely sell produced hydrocarbons in internal or
external markets, and have authority over operation of the concession including
future exploration and development plans. The partners, throughout the term of
the concession, are subject to provincial royalties (which are, in substance,
production taxes), turnover taxes, and federal income taxes. These rates of
royalties and taxes are fixed by law, are the same for all oil and gas
production concessions in Argentina, and are currently 12 percent, 2 percent,
and 35 percent, respectively. The Entre Lomas concession term currently runs
through the year 2016, with an option to extend the concession for an additional
ten-year period with the consent of the government.

SALE OF OIL

The Entre Lomas concession participates in several contracts negotiated by the
Pecom Energia group. This arrangement allows the joint venturers to pool Entre
Lomas oil with other concessions in the Medanito area providing greater
negotiation strength with Argentine refiners and export customers.

During 2002, the Company sold 52 percent of its oil domestically and 48 percent
was exported. Domestic sales were made under various short-term agreements with
EG3 S.A., Shell C.A.P.S.A., Refineria San Lorezo S.A. and Esso Petrolera
Argentina S.R.L., which are all Argentine refiners. Oil was exported to
Petrobras, ENAP, the Chilean National Oil Company, and Repsol YPF Trading y
Transporte S.A. In 2002, Petrobras was the largest export purchaser of the
Company's crude oil, accounting for 59 percent of all exports.

4

Medanito area crude oil is in demand because of its relative quality and favored
geographical location. While there is no guarantee, management believes that
upon expiration, these contracts will be extended or replaced.

The per barrel price for Argentine crude oil continues to be based on the spot
market price of West Texas Intermediate ("WTI") less a discount to provide for
differences in gravity and quality. The average weighted price discount for
contracts in effect during 2002 was $1.80, as compared with $1.44 for contracts
in effect in 2001, and $1.06 for contracts in effect during 2000. Since
deregulation of Argentina's energy industry in 1991, domestic market conditions
have evolved to the point that the discount for oil sold in country appears to
have stabilized in the $1.00 to $2.00 range depending on market conditions.
Discounts for exported oil are generally higher. Export oil is not subject to
domestic production tax.

As a consequence of the economic reforms implemented in Argentina since December
2001, oil sales prices have been negatively impacted depending on whether oil is
sold in internal markets or exported. Refer to the section "Liquidity and
Capital Resources" on page 16 for a description of the impact of these reforms
on Argentine oil prices.

The Company's oil sales have historically depended on a relatively small group
of customers. As described in Note 6, of Notes to Consolidated Financial
Statements, during 2002, Apco sold its oil to the following principal customers,
EG3 S.A., Petrobras S. A., and ENAP. Decisions to sell to these customers were
based on the advantages presented by the commercial terms negotiated with each
customer. The entire Argentine domestic refining market is small and consists of
seven refiners of which three constitute 95 percent of the market. The
concentration of Apco's sales to these principal customers is directly related
to the limited number of available buyers for crude oil produced in Argentina.

SALE OF GAS

In 2002, the Entre Lomas joint venture partners entered into a US Dollar
denominated gas sales contract with Genelba, an electric power generator owned
by Pecom Energia. The term of this contract was one year with a daily volume
commitment of 21 mmcf throughout the year. Entre Lomas gas sales volumes for
2002 averaged 27 mmcf per day or 13 mmcf per day net to the Company's interests.
Additional production above the Genelba volume commitment is sold in the spot
market to other gas distribution companies, traders and electric utilities. Gas
sales prices vary depending on seasonal demand. In December 2002, a new one year
peso denominated contract with Genelba replaced the prior contract with the same
daily volume commitment.

The Neuquen basin, wherein the Entre Lomas concession is located, is served by a
substantial gas pipeline network that delivers gas to the Buenos Aires
metropolitan and surrounding areas, the industrial regions of Bahia Blanca and
Rosario and by export pipelines to Chile. Entre Lomas is well situated in the
basin with two major pipelines in close proximity.

Since deregulation of Argentina's gas industry in 1994, the joint venture
partners have been able to find markets for Entre Lomas gas. There is no
guarantee that existing Entre Lomas gas sales contracts will be renewed or
replaced. The partners have actively sold gas in the spot market to supplement
contract sales volumes. The Company believes that failure to renew or replace
contracts could have a negative effect on the Company's cash flow and results of
operations.

Refer to the section "Liquidity and Capital Resources" on page 16 for a
description of the impact of economic reforms on Argentine natural gas prices.

5

TRANSPORTATION

Oil produced in the Entre Lomas concession is sold in Puerto Rosales, a major
industrial port in southern Buenos Aires Province, and is shipped there through
the Oleoductos del Valle S.A. ("Oldelval") pipeline system. The daily capacity
of this system ranges from 130,000 to 175,000 barrels. The current volume
allocation for the Entre Lomas concession in the Oldelval system is 11,600
barrels per day. The cost to transport oil through this system and use the
storage and handling facilities in Puerto Rosales averaged $.46 per barrel in
2002.

PETROLERA

Petrolera was established for the express purpose of carrying out production and
development operations in the Entre Lomas area. Investment decisions and
strategy for development of the concession are agreed upon by the joint venture
partners and implemented by Petrolera. Petrolera has a board of 11 directors, 5
of whom are nominees of the Company and 6 of whom are nominees of Petrobras and
its affiliates. Petrolera's operating and financial managers and field personnel
are employed exclusively by Petrolera. The Company understands that Petrolera's
sole business at present is its role as operator and owner of a 73.15 percent
interest in the Entre Lomas concession.

COMPANY BRANCH

The Company's branch office in Buenos Aires obtains operational and financial
data from Petrolera that is used to monitor joint venture operations. The branch
provides technical assistance to Petrolera and makes recommendations regarding
field development and reservoir management. Apco currently employs seven
full-time personnel in its branch office in Buenos Aires, Argentina. The
directors and executive officers of the Company are described in Part III, Item
10 on page 55. A Tulsa-based employee of The Williams Companies, Inc., the
indirect parent of Williams Global Energy (Cayman) Limited that owns 68.96
percent of the shares of the Company, serves as President and Chief Operating
Officer of the Company.

DESCRIPTION OF THE CONCESSION

The Entre Lomas concession is located about 950 miles southwest of the city of
Buenos Aires on the eastern slopes of the Andes Mountains. It straddles the
provinces of Rio Negro and Neuquen approximately 100 kilometers north of the
city of Neuquen. The concession produces oil and gas primarily from the Charco
Bayo/Piedras Blancas field complex ("CB/PB"). Two smaller fields, the Entre
Lomas/Lomas de Ocampo and El Caracol fields, located to the northwest of the
main field complex also produce oil and gas. A fourth field, Borde Mocho,
located southwest of CB/PB, was discovered in 1996 and also produces oil and
gas.

The most productive producing formation in the concession is the Tordillo. In
the CB/PB field the Tordillo has generated over 80 percent of all oil produced
in Entre Lomas. The Tordillo also produces associated gas that is both sold and
consumed for field operations. Propane and butane are extracted from this gas in
the joint venture's gas processing plant. The Tordillo is also the principal
producing formation in the Borde Mocho field. Other important formations are the
Quintuco, that produces gas from several wells in CB/PB and oil in the Entre
Lomas/Lomas de Ocampo, El Caracol, and Borde Mocho fields and the Petrolifera
formation that produces gas in the Entre Lomas gas field and some oil in CB/PB.
Since inception 502 wells have been drilled in the concession, of which at year
end, 295 are producing oil wells, 22 are producing gas wells, 124 are active
water injection wells, 11 are water producing wells, and 50 wells are inactive
or abandoned.

The CB/PB and El Caracol fields are secondary recovery projects. Water injection
has been introduced in CB/PB in phases since 1975. The El Caracol field has been
under injection since 1989. Secondary recovery operations commenced in the Entre
Lomas oil field in 1998 and extension of field wide secondary recovery is still
underway.

6

CHARCO BAYO/PIEDRAS BLANCAS FIELD

CB/PB produces principally from the Tordillo formation with some minor
production from the Petrolifera formation. Production in the CB/PB field
commenced in 1968, with the largest part of this complex developed before 1974.
Additional development drilling has continued through the present with two
significant drilling campaigns occurring during 1979-1981 and 1986-1988. These
two campaigns were the result of renegotiations of the original Entre Lomas
contract. Secondary recovery was introduced with a successful pilot in 1975 and
has slowly been expanded to include 85 injection wells. CB/PB is best described
as a mature oil field with considerable remaining development potential.
Development of this field has historically been gradual due to the sporadic
nature of past major investment programs which, until the Entre Lomas area was
converted to a concession, occurred as a result of major renegotiations of the
original contract.

The field's ultimate development is likely to result from a combination of
expansion of secondary recovery throughout the entire producing field, infill
drilling, continued step out drilling, and recompletion of existing wells with
behind pipe reserves. The results of these programs may be enhanced and higher
percentage recoveries achieved by improving the efficiency of the waterflood
through various means including modifying existing patterns of injection,
placing idle wells back on production, and the use of polymer injection. By the
end of 2000, all remaining wells using gas lift were converted to rod pump
thereby increasing lift capacity throughout this field.

Due to the gradual development of this field, recoveries normally attributed to
waterfloods after 20 to 30 years have not been attained and it is currently
estimated that this field has a remaining productive life in excess of twenty
years. The Company believes that the limits of this field have not yet been
defined in all directions. As a result, there remain undrilled step out
locations in the flanks of the structure and infill locations which should be
drilled in order to produce from areas of the field not currently drained by
existing wells. The level of development drilling activity in CB/PB will, of
course, be dependent on an oil price level that provides adequate returns for
the joint venture partners. During 2002, 10 additional wells were drilled and
completed as producers.

In the CB/PB field, the Quintuco formation is mainly gas productive and produces
from a few gas wells interspersed among the many Tordillo oil wells located on
this structure and from dual completion oil wells producing from both the
Quintuco and Tordillo formations. Quintuco gas reserves in this field are
believed to be fully developed.

In 1992, the Argentine Department of Energy issued Resolution 105 requiring
environmental control. As a result, in the last few years investments have been
made to change the system of produced water disposal in the Entre Lomas
concession. Until 1998, fresh water had been the sole source of injection in all
waterflood projects in the concession. Prior to 1996, produced water was
disposed of in evaporation and filtration pits, however, this practice was
suspended by the province in that year. Produced water has since been injected
into a shallower formation with high injectivity capacity. Commencing 1998,
produced water in CB/PB also began to be reinjected into the Tordillo formation.
Surface and down hole injection lines were replaced with those that withstand
the corrosive effects of reinjecting formation water. Formation water is now
being injected into both the producing and shallow formations.

EL CARACOL FIELD

The El Caracol field is located in the northwestern most part of the concession.
This field produces oil from the Quintuco formation. Thirty-five wells have been
drilled here to date. Additional development drilling potential may still exist.
Water injection began here in 1989 and response has been favorable. Potential
for further expansion of the waterflood may also exist. During 2002, two
development wells were drilled and completed as oil producers.

7

ENTRE LOMAS/LOMAS DE OCAMPO FIELDS

The Entre Lomas structure is located in the central part of the concession to
the northwest of CB/PB. This anticline is cut by a fault near its crest. An oil
field exists on the southwest or upthrown side of this fault and a gas field
exists on the northeast or downthrown side. In recent years, development of both
the oil and gas fields has continued to the north and northwest with the
drilling of deeper dual completion wells capable of producing oil from the
Quintuco formation and gas from the Petrolifera formation.

OIL RESERVOIRS

The oil field is productive from the Quintuco formation, with some minor
production from the Tordillo formation. It now includes 41 producing wells. As
described in the previous paragraph, the Quintuco formation continues to
demonstrate development potential toward the north and northwest.

This field, has shown signs of pressure depletion. Reservoir simulation studies
have predicted that the Entre Lomas oil field will have a favorable response to
secondary recovery similar to the response achieved in the El Caracol field.
Investments to implement waterflooding in this field commenced in 1997 and water
injection commenced in 1998. As of year-end, twenty wells had been converted to
injection. Further expansion of secondary recovery is anticipated.

GAS RESERVOIRS

Deregulation of Argentina's gas industry in 1994 fueled considerable interest in
gas development throughout the country. As a result, a well drilled in 1970 that
had discovered significant gas potential from several sections of the
Petrolifera formation, was placed on production. Since then, ten wells have been
drilled, of which nine are productive. Another well drilled in the early 1970's
was also put on production making a total of nine wells on production in the
main body of this field. Although the main body now appears to have been
defined, additional expansion possibilities exist to the northwest. Late in
1997, the Lomas De Ocampo 4 well, drilled to the northwest of the existing field
was found to be productive in both the Petrolifera and Quintuco formations. Six
additional dual completion wells have been drilled and are producing oil from
the Quintuco formation and gas from the Petrolifera formation. Additional
drilling in Lomas De Ocampo is planned for 2003. In 2002, the pesofication of
gas sales contracts and the resulting drop in natural gas prices have postponed
previous plans to achieve full development of the Petrolifera gas reservoir in
this gas field.

BORDE MOCHO

This is the smallest field in the concession. It is located southwest of CB/PB
near the concessions southern boundary. To date 8 wells have been drilled and
all are producing oil. The discovery well was drilled in 1996 and the seventh
and eighth wells in late 2002. All wells produce from the Tordillo, the main
producing formation, and 4 wells are also productive from the Quintuco
formation. Separation and storage facilities in CB/PB were built in 2000. Future
development of this field is planned.

EXPLORATION

In the Entre Lomas concession, there are approximately 142 thousand undeveloped
acres. Since inception, 502 wells have been drilled inside the concession of
which only a few have been drilled significant distances from the main producing
fields. Although the joint venture partners believe the major producing
structures have been identified and are being developed, large blocks of the
concession remain unexplored.

8

Since 1993, the Entre Lomas partners have conducted three seismic campaigns. The
most recent survey was completed in late 1998. As a result, the concession is
now covered by more than 500 square kilometers of 3 dimensional seismic ("3D
seismic") that image the principal producing fields and surrounding acreage
believed to be of most interest. These separate seismic programs were
successfully integrated into one continuous seismic block. The seismic has
multiple objectives the first of which is finding lower risk exploration
opportunities that target formations known to be productive from structural
closures and/or fault traps that exist away from the principal producing field
areas. Other important objectives are to evaluate for high risk deep exploration
potential in sedimentary sequences that exist between the base of the
Petrolifera formation and the basement floor, and utilize the 3D seismic in ways
that may help exploit the existing producing fields.

To date, seismic surveys have aided the efficient development of the Entre Lomas
gas field since 1994, the current northwest extension of both the Entre Lomas
and Lomas de Ocampo fields, and development of the Borde Mocho field.

In 2001, the joint venture partners drilled the El Caracol xp-33 well, a deep
exploration test in the area of the El Caracol oil field. The principal
objective of this well was to investigate the Precuyano formation in the
location of an interesting deep structure identified by 3D seismic. Secondary
objectives were all of the known producing formations in the concession;
Quintuco, Tordillo, and Petrolifera. The well was drilled to a total depth of
11,290 feet. Exploration of the Precuyano in the Neuquen basin has been quite
limited to date. The well found gas in the Precuyano formation, but poor
reservoir quality prevented production at commercial rates. As a result, the
well was completed in the Quintuco formation and is now on production as part of
the El Caracol field. Drilling deep wells to unexplored sedimentary horizons is
risky and has a low probability of success.

ACAMBUCO

The Company owns a 1.5 percent participation interest in the Acambuco joint
venture, an oil and gas exploration and development concession located in
Northwest Argentina, in the province of Salta, on the border with Bolivia. The
Acambuco concession covers an area of 294,000 acres.

DESCRIPTION OF THE CONCESSION

The Company has been a participant in the Acambuco area since 1981. The
principal objective in Acambuco is the Huamampampa formation, a deep fractured
quartzite that has sizable gas exploration and development potential. In
Acambuco, Huamampampa is found at depths in excess of 14,000 feet. The Ramos and
Aguarague concessions, immediately to the south and east of Acambuco, have major
gas fields with significant gas production and reserves from Huamampampa. In
1994, the joint venture partners discovered the San Pedrito gas field whose
principal reserves exist in the Huamampampa formation with additional reserves
in the Icla and Santa Rosa formations both of which underlie Huamampampa.

The Acambuco joint venture currently consists of Pan American Energy Investments
Ltd. ("PAE"), an affiliate of British Petroleum PLC that owns 52 percent, Shell
C.A.P.S.A. and YPF S. A. which each hold 22.5 percent interests, and Northwest
Argentina Corp., a subsidiary of the Williams Companies, Inc. and the Company
each with interests of 1.5 percent.

9

DRILLING AND DEVELOPMENT ACTIVITY

The San Pedrito field discovery well, the San Pedrito x-1 ("SPx1"), was drilled
to 14,500 feet and discovered gas in the Huamampampa formation. For this initial
well, the Company exercised its non-consent option. In May 1996, the joint
venture drilled a second exploration well, the San Antonio x-1, on a separate
structure. This well, drilled to a depth of 15,700 feet, was not productive in
the Huamampampa. Oil shows were found in a secondary target, the Tupambi
formation. The Company again exercised its non-consent option.

In September 1998, the Acambuco partners drilled the San Pedrito x-2 ("SPx2")
well at a location approximately 3 miles south of the SPx1 discovery well.
Although the well encountered Huamampampa in a structural position lower than
SPx1 well, in late February 2000, the well successfully tested daily volumes of
20 million cubic feet and 350 barrels of condensate with no water. The Company
participated in this confirmation well and has participated in all investments
thereafter.

In April 1999 a successful long-term production test was conducted in the SPx1.
The maximum daily volume achieved in this test was 32 million cubic feet and 470
barrels of condensate. This test indicated that the Huamampampa reservoir in the
San Pedrito structure is extensive. As described previously, the Company
exercised its non-consent option for this well and will share in its future
revenue stream after its partners reach a 300 percent payout limited to this
well.

Also, in 1999, the Acambuco partners drilled the Cerro Tuyunti x-1 ("CTx1") well
on the largest of the structures in the concession. The well reached a total
depth of 20,300 feet. In late January 2000, the well flowed non-commercial
volumes of gas. In 2000, the joint venture acquired and interpreted 3D seismic
over Cerro Tuyunti. The interpretation indicates that the structure should be
explored to the north of the CTx1.

The joint venture completed drilling the San Pedrito X-3 ("SPx3") in March 2001.
The well reached a total depth of 18,333 feet. It not only investigated the
Huamampampa formation that is productive in the SPx-1 and SPx-2 wells, but also
the Icla and Santa Rosa formations. The Santa Rosa formation flow tested a rate
of 28 million cubic feet per day of natural gas with a low condensate yield.

On the Macueta structure located just south of the Bolivian border and next to
the San Alberto field in Bolivia, in 2000, the joint venture drilled the Macueta
x-1001 (bis). This well reached a total depth of 17,500 feet, investigating both
the Huamampampa and Icla formations. In June 2001, due to lower than expected
production test results, the joint venture partners decided to drill a
horizontal extension in the Icla formation. After 1,380 feet of horizontal
drilling, the well tested 36 million cubic feet per day of natural gas and 730
barrels per day of condensate. Subsequently the joint venture shot 3D seismic
over the Macueta structure.

In January 2001, the joint venture re-entered the Macueta x-1002, drilled in the
early 1980's with the purpose of sidetracking this well to a more favorable
structural position in the Huamampampa formation. In spite of drilling more than
2,600 feet horizontally, the well, for mechanical reasons, was unable to reach
the intended target. Production test volumes from the horizontal extension were
disappointing. The Macueta structure in Acambuco is believed to be the southern
extension of the San Alberto structure where a significant gas field is
producing on the opposite side of the Bolivian border.

The San Pedrito x-4 was drilled in 2001. The well penetrated the Huamampampa
formation at a depth of 15,300 feet at which time a drill stem test was
conducted resulting in a test volume of 29 million cubic feet per day of natural
gas and 600 barrels per day of condensate. Ultimately, the well reached a total
depth of 18,660 and penetrated both the Icla and the Santa Rosa formations. This
well commenced production in April 2002.

10

In May 2002, capacity of production and gas treating facilities in Acambuco was
expanded to 176 million cubic feet ("mmcf") per day.

Acambuco is situated in an overthrust belt wherein drilling can be difficult and
costly not only because of the depths of the primary objectives, but also from
the risk of mechanical problems during drilling. The costs to drill and complete
a well drilled to the Huamampampa formation have ranged from $30 to $40 million.
The Company's future participation in Acambuco wells is subject to the risk of
unfavorable oil and gas prices that could adversely impact the Company's future
cash flow, and to other risks described under "Forward-Looking Statements" on
page 12.

SALES AND MARKETS

Construction of facilities in Acambuco that include gathering lines, a gas
pipeline, and a gas treatment plant were completed in 2001. Sales from the
Acambuco joint venture commenced in late March 2001. At this time, natural gas
and condensate are being produced from 4 San Pedrito wells. As described
previously, the Company did not participate in the SPx-1 well.

Acambuco gas is being sold under contracts negotiated by PAE primarily to
domestic distribution and industrial customers in the northern part of
Argentina.

Refer to the section "Liquidity and Capital Resources" on page 16 for a
description of the impact of economic reforms on Argentine gas prices. Gas
prices in Acambuco have decreased significantly and the joint venture does not
contemplate additional gas development investments until gas prices in Argentina
improve.

OIL FIELDS

In addition to natural gas production, Acambuco also produces oil from the
Tupanbi formation which has been productive from fields elsewhere in the region.
In Acambuco, there exists an old oil field discovered in the 1920's, the San
Pedro field, that produced more than 17 million barrels of oil from the Tupambi.
The field was abandoned in 1960. The joint venture partners performed studies of
the San Pedro field and defined prospects for reactivating wells to restart oil
production. During 2002, three wells were intervened and one is now on
production. Additional workovers are planned for 2003.

CANADON RAMIREZ

The Company owns 81.82 percent interest in the 92,000 acre Canadon Ramirez
concession, located in southern Argentina, in the Chubut province. This region
produces hydrocarbons from the Golfo San Jorge basin, the oldest oil-producing
province in the country.

As described on page 2, in January 2003, the Company acquired an additional
36.82 percent interest from Tyax. S.A. The Company obtained its original 45
percent interest in Canadon Ramirez from Pan Am Group S.A. (predecessor to
Tyax), owned by the Melhem family in Argentina. A third partner in the
concession is ROCH S.A. that held a 10 percent interest and exercised its right
of first refusal to participate with the Company in the purchase of the Tyax
participation. ROCH now owns the remaining 18.18 percent interest.

During 1997 and 1998, investments were made in Canadon Ramirez that included
well workovers, recompletions, extended production testing and reprocessing and
reinterpreting 2 dimensional seismic ("2D seismic"). All wells produced oil with
high water cuts and were eventually shut in. The Company feels that additional
studies including a new reinterpretation of existing seismic images are
warranted to determine the future potential in Canadon Ramirez.

11

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, excluding historical information,
include statements that discuss the Company's expected future results based on
current and pending business operations (also called forward looking
statements). The Company makes these forward-looking statements in reliance on
the safe harbor protections provided under the Private Securities Litigation
Reform Act of 1995.

Forward-looking statements can be identified by words such as "anticipates,"
"expects," "planned," "scheduled," or similar expressions. Although the Company
believes these forward-looking statements are based on reasonable assumptions,
statements made regarding future results are subject to numerous assumptions,
uncertainties, and risks that may cause future results to be materially
different from the results stated or implied in this document.

The following are important factors that could cause actual results to differ
materially from any results projected, forecasted, estimated, or budgeted:

o Changes in economic conditions in Argentina.

o Changes in Argentine laws and regulations to which the Company is
subject, including tax, environmental and employment laws, and
regulations.

o Political instability in Argentina.

o Conditions of the capital markets the Company utilizes to access
capital to finance operations.

o The availability and cost of capital.

o The effect of changes in accounting policies.

o The ability to manage rapid growth.

o The ability to control costs.

o Currency fluctuations and controls and changes in laws and regulations
affecting the currency of Argentina.

o Future unpredictability and volatility of product prices.

o The ability of the Company and its partners to find markets for
produced hydrocarbons.

o Changes in, and volatility of, supply and demand for crude oil,
natural gas and other hydrocarbons.

o The policies of the Organization of Petroleum Exporting Countries
("OPEC").

o The inherent imprecision of estimates of hydrocarbon reserves, rates
of future production and valuation of reserves.

o The competitiveness of alternative energy sources or product
substitutes.

o The actions of competitors and increased competition in markets in
which the Company sells its products.

o Uncertainties associated with petroleum exploration, future activities
and results of operations.

o The cost and effects of legal and administrative claims and
proceedings against the Company and its subsidiary.

It is also possible that certain aspects of the Company's business that are
currently unregulated may be subject to regulation in the future.

(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

The Company is a Cayman Islands corporation with executive offices located in
Tulsa, Oklahoma and a branch office located in Buenos Aires, Argentina. All of
the Company's operations are located in Argentina.

12

(i) The Company has no operating revenues in either the Cayman Islands or the
United States. Because all of the Company's operations are located in Argentina,
all of its products are sold either domestically in Argentina, or exported from
Argentina to either Brazil or Chile. The percentage of the Company's operating
revenues sold to customers in Brazil during the years 2002, 2001 and 2000 was 27
percent, 49 percent and 44 percent, respectively. The percentage sold to
customers in Chile during 2002 was 12 percent. There were no sales to customers
in Chile during 2001 and 2000.

(ii) With exception of cash and cash equivalents deposited in banks in the
Cayman Islands and the United States, almost all of which are located in the
Cayman Islands, and furniture and equipment in its executive offices, all of the
Company's assets are located in Argentina.

ITEM 2. PROPERTIES

See ITEM 1 (c) for a description of properties.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company is a party.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 2002.

13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On December 31, 2002, there were 980 record holders of the Company's ordinary
shares, $0.01 par value. The ordinary shares are traded sporadically in the
over-the-counter market. The Company understands that the trades that occur are
made both at the quoted market price or on a negotiated basis outside of the
quoted market. The high and low bid prices listed below were provided to the
Company by the National Association of Securities Dealers Automated Quotation
System (NASDAQ).

The Company has historically paid its shareholders a quarterly dividend of 16.25
cents per share. Future dividends are necessarily dependent upon numerous
factors, including, among others, earnings, levels of capital spending, changes
in governmental regulations and changes in crude oil and natural gas prices. The
Company reserves the right to change the level of dividend payments or to
discontinue or suspend such payments at the discretion of the Directors. Refer
to "Liquidity and Capital Resources" on page 16 for additional discussion of
future dividend payments.

The Company has been advised that: a Cayman Islands company may not pay
dividends to shareholders out of its share capital or share premium account;
there are no current applicable Cayman Islands laws, decrees or regulations
relating to restrictions on the import or export of capital or exchange controls
affecting remittances of dividends, interest and other payments to non-resident
holders of the Company's ordinary shares; there are no limitations either under
the laws of the Cayman Islands or under the Company's Memorandum or Articles of
Association restricting the right of foreigners to hold or vote the Company's
ordinary shares; there are no existing laws or regulations of the Cayman Islands
imposing taxes or containing withholding provisions to which United States
holders of the Company's ordinary shares are subject; and there are no
reciprocal tax treaties between the Cayman Islands and the United States.

14

ITEM 6. SELECTED FINANCIAL DATA

The following historical financial information presented below is derived from
the Company's audited financial statements and reflects certain
reclassifications of prior period information to be on a consistent basis.

Refer to the table "Volume, Price and Cost Statistics" on page 52 for variations
in prices that influence the Company's revenues and net income. In addition, the
Company's net income for 2002 and 2001 were impacted by economic conditions in
Argentina. Refer to "Argentine Economic and Political Environment" on page 24
for a discussion of events in Argentina during this period.

As explained in note 2 to the consolidated financial statements, effective
January 1, 2002, the Company adopted SFAS 143 "Accounting for Asset Retirement
Obligations." The impact of the implementation is reflected in the Consolidated
Statement of Operations on page 30.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPTIAL RESOURCES

CASH FLOW

Internally generated cash flow from the Company's interests in the Entre Lomas
concession is the Company's primary source of liquidity. In the past, both
during calm periods and turbulent periods in Argentina's economy, the Entre
Lomas operation has had the ability to finance development and exploration
expenditures with internally generated cash flow. The current economic crisis
tested both the profitability and cash generating ability of the Company's
Argentine operations. In retrospect, in spite of the crisis, the Entre Lomas
concession was able to generate excess cash flow such that during the year the
Company generated net cash provided by operating activities of $14 million that
included dividends received from Petrolera totaling $6.4 million. These amounts
compare with net cash provided by operating activities of $10.2 million and
$16.1 million and Petrolera dividends of $4.7 million and $5.3 million for the
years 2001 and 2000, respectively.

The year was defined by two major events that impacted the Company. The first
was Argentina's economic crisis and new laws and regulations that resulted from
the crisis that impacted the Company during 2002 and will continue to impact it
for the foreseeable future. The second was the purchase by the Company of 27,700
additional shares of Petrolera from the PC family for a total consideration of
$6.9 million.

Reference is made to the section "Argentine Economic and Political Environment"
for a description of the economic crisis. However, to summarize, the most
important outcome of the crisis that impacts the Company's results of operations
and cash flow was the passage by Argentina's legislature of economic reforms
included in Emergency Law 25,561, which among other things, overturned the long
standing convertibility plan, required the pesofication of Argentine contracts,
and implemented a new tax on export sales.

As described elsewhere in this report, the abandonment of the convertibility
plan and the decision to allow the actual peso to float in international
currency markets resulted in a "maxi-devaluation" of the peso. Since December
2001 through December 31, 2002, the peso to US dollar exchange rate has
increased from 1:1 to 3.37:1, representing a cumulative loss in value of the
Argentine peso of more than 70 percent. This devaluation has resulted in the
Company incurring foreign exchange losses of $1.7 million during 2002.

The pesofication of Argentine contracts had a negative impact on the Company's
revenue stream to the extent that domestic Argentine oil and natural gas sales
contracts previously priced in US dollars were converted to pesos by requiring
the settlement of those sales in Argentina at an exchange rate to be negotiated
between sellers and buyers. This had a downward impact on the Company's domestic
oil prices early in the year because the negotiated exchange rate was
significantly below the actual peso to US dollar exchange rate. However, the
situation for domestic oil sales gradually improved and in May 2002, Argentine
producers and refiners agreed that the negotiated exchange rate for settlement
of contracts would be increased to 90 percent of the actual exchange rate
effectively making domestic oil prices from that moment forward equivalent to 90
percent of the WTI price less the discount provided for in domestic oil sales
contracts. As a result, for the year, the Company's per barrel sales price for
oil sold to Argentine customers averaged $22.71, compared with $24.14 for
exported oil.

The effect on natural gas prices has been more severe. Since natural gas prices
in Argentina are not influenced by international reference prices, pesofication
has caused gas prices to fall in proportion

16

to the devaluation of the peso. As a result, for the year the Company's gas
sales price averaged $.42 per thousand cubic feet, compared with an average of
$1.28 during 2001.

Effective April 1, 2002, the Argentine government imposed a tax on hydrocarbon
exports equivalent to 16.67 percent of the value of oil export sales and 4.76
percent of the value of natural gas liquids export sales. During 2002, the
Company paid $938 thousand of export taxes.

The government also prohibited the payment abroad in US dollars of domestic
sales and established the requirement that oil and gas Companies repatriate 30
percent of export sales collected in foreign banks.

The effects of devaluation and the pesofication of Argentine contracts are not
all negative. Devaluation of the peso has had a positive impact on the Company's
peso denominated expenditures including capital expenditures, and expenses such
as operating, transportation and storage, and selling and administrative. These
expenditures have all decreased to varying degrees depending on the dollar and
peso make up of each category of expense. For example, expenditures that have a
large labor component, or that consist of a high proportion of domestically made
products and materials, have decreased significantly due to the decline in the
value of the peso. This benefit has resulted because the cumulative rate of
inflation in the Argentine economy has, up to now, lagged considerably behind
the cumulative rate of the peso's devaluation. The cumulative rates of inflation
in Argentina for 2002, published by the Argentine government, as measured by the
consumer price index and the wholesale price index have been 41 percent and 118
percent, respectively, as compared with the level of devaluation illustrated in
the exchange rate table that appears in the section "Argentine Economic and
Political Environment" on page 24. Because of these phenomena, the US dollar
cost of drilling wells in the Entre Lomas concession declined by approximately
30 percent, compared with a similar cost in 2001.

In summary, although Argentina experienced significant economic turmoil during
2002 that created business uncertainty, the environment for oil and gas
companies operating in the country stabilized somewhat as the value of the
Argentine peso firmed during the last half of the year. In spite of the
introduction of the new tax on exports and the sharp drop in natural gas prices
that has occurred during the year, the economics of drilling, development and
production operations in Argentina remain attractive today.

As the year has progressed, liquidity has become less of a concern for the
Company. As mentioned previously, the Company received $6.4 million in dividends
from Petrolera. In general, domestic oil and gas sales proceeds plus the 30
percent of repatriated export sales have been more than sufficient to fund
disbursements in Argentina.

The impact of Argentina's economic crisis on companies operating in the country
has been significant, especially those companies with international dollar
denominated debts. Fortunately, Apco is free from long-term debt and although it
has been adversely impacted to some extent by these developments, it has fared
better than many of its competitors with operations in the country.

There is no predicting the direction that Argentina's economy will take in 2003
or what the future impact of this economic crisis or any additional governmental
actions that may result in response to it may have on Argentina's oil and gas
industry and on the Company's results of operation and cash flow from operating
activities.

To illustrate this uncertainty, in January 2003, due to the rapid increase in
the price of WTI as a consequence of a possible conflict in the Middle East and
the Argentine government's desire to maintain stability in domestic fuel prices,
an agreement was reached between the government, oil producers and domestic
refiners that currently expires on March 31, 2003 that requires that domestic

17

sales prices be calculated on a WTI price not to exceed $28.50 per barrel. The
difference between the invoice price and the price that results when WTI exceeds
this temporary ceiling is being accumulated as an account receivable by oil
producers that accrues interest and will be paid by domestic refiners to oil
producers at such time as WTI falls below $28.50. This agreement was to remain
valid as long as WTI did not exceed $35 per barrel for 10 consecutive days or
the peso to US Dollar exchange rate remained below 3.65:1. Because during
February 2003, the price of WTI exceeded $35 for the required 10 days, effective
February 25, 2003, the parties accorded that the agreement would continue in
effect through the original expiration date.

PURCHASE OF PETROLERA SHARES

The second major event of the year was the completion by the Company of the
purchase of 27,700 additional shares of Petrolera from the PC Family for a total
consideration of $6.9 million. The shares acquired in this purchase represent
5.54 percent of Petrolera's total shares outstanding and increased the Company's
total ownership in Petrolera from its former level of 33.684 percent to 39.224
percent giving the Company a combined direct and indirect participation in the
Entre Lomas concession of 51.69 percent as of December 31, 2002.

The Company made this purchase as a result of exercising a right of first
refusal in the event of a sale of shares by the PC Family. The Company exercised
it right of first refusal after the announcement by the PC Family in July 2002
of a proposed sale of all of its shares in Petrolera to Petrobras. As a result,
the Company purchased 27,700 shares while Petrobras purchased the balance of the
PC Family's shares while simultaneously purchasing the PC Family's shares in
Pecom Energia. Subsequent to the purchase, the principal shareholders of
Petrolera are now the Company, Petrobras and Pecom Energia, in which Petrobras
is now the majority shareholder.

Although the Company's interest in Petrolera has increased, Petrobras' purchase
of shares in Petrolera and its purchase of a controlling interest in Pecom
Energia gives it direct and indirect ownership totaling just under 60 percent of
the shares of Petrolera for a total indirect ownership of 47 percent of the
Entre Lomas concession.

The Company's management and representatives of Petrobras have met and will
continue to meet in the future. As of this time, little to no changes are
expected in the manner and method in which operations in Entre Lomas and within
Petrolera are conducted.

In December 2002, the Company entered into an agreement to purchase all of the
outstanding shares of Fimaipu S.A. for $1.8 million. Fimaipu is a private
Argentine holding company whose sole asset is 7,895 shares of Petrolera
representing 1.58 percent of Petrolera's total shares outstanding. The purchase
of Fimaipu further increased the Company's ownership in Petrolera to 40.8
percent. This transaction closed in January 2003. The Company's increased
ownership in Petrolera after the Fimaipu purchase gave the Company a combined
direct and indirect participation in the Entre Lomas concession of 52.85
percent.

The Company utilized its own cash reserves to make the purchases of the PC
Family's shares of Petrolera and for the purchase of Fimaipu.

PRODUCT PRICES

Volatility in oil prices has a significant impact on the Company's ability to
generate earnings, fund capital requirements and pay shareholder dividends.
During the fourth quarter of 2001, the Company's per barrel sales price averaged
$17 per barrel. During 2002, although the Company's oil prices were negatively
influenced by the pesofication of sales contracts in Argentina, world oil prices
gradually improved throughout the course of the year, increasing quite sharply
in the fourth quarter,

18

in great part due the threat of war in the middle east and the oil workers
strike in Venezuela. The per barrel crude oil sales price for 2002 averaged
$23.04 compared with $24.20 during 2001. By the end of the year, WTI, the
benchmark price for the Company's oil sales contracts in Argentina, exceeded $30
per barrel and has continued to increase during January and February of 2003.
This level of prices should have a positive impact on the Company's expected net
income and cash flow for the first quarter of 2003. However, given the
volatility of world oil prices and their sensitivity to political events and
possible reactions of the Organization of Petroleum Exporting Countries
("OPEC"), there is no assurance that oil prices will remain at these levels over
the remainder of 2003. Many factors affect oil markets, including among others,
major exploration discoveries throughout the world, the level of development
investments in the oil and gas industry, fluctuations in market demand,
adherence by OPEC member nations to production quotas, and future decisions by
OPEC to either increase or decrease quotas. Furthermore, the Company's future
oil prices could also be impacted by any additional governmental actions
detrimental to Argentina's oil and gas industry that may result from its
response to a prolonged extension of Argentina's economic crisis that commenced
in late 2001.

As described previously in this section, the Company's natural gas prices have
decreased significantly in 2002 due to pesofication of contracts in Argentina.
As a result, for the year, the Company's gas sales price averaged $.42 per
thousand cubic feet, compared with an average of $1.28 during 2001.

OIL AND GAS SALES VOLUMES

During 2002, oil sales volumes, net to the Company's consolidated and equity
interests, totaled 1.657 million barrels ("mmbbls"), a decrease of 6 percent
when compared with 1.756 mmbbls during the comparable period in 2001. The
reduction in volumes is due primarily to the nature of the 2002 drilling
campaign in Entre Lomas. This year's drilling program focused primarily on
higher risk down dip step out wells, including a structural saddle area in the
center of the Charco Bayo/Piedras Blancas ("CB/PB") waterflood where there was a
greater chance of producing with higher water cuts. All wells drilled this year
were successful producers but, in general, these higher risk wells produced at
lower oil rates with higher water cuts than wells drilled in previous years.
This has resulted in a reduced oil production contribution from this year's
drilling program than what we have experienced in recent years. A second factor
contributing to the decline in sales, is that in 2001, the Entre Lomas partners
drilled two wells in the Entre Lomas and Lomas de Ocampo fields that had
unusually high volumes. Furthermore, in 2000 and 2001, there was an important
oil production contribution from a recompletion program to exploit a new high
volume reservoir in the CB/PB field that had a limited areal extent. Due to the
limited size of this reservoir, its production has exhibited a steep decline
since its discovery in 2000. Finally, lower gas production described in the
following paragraph, has resulted in lower condensate production during 2002.

During 2002, gas sales volumes net to the Company's consolidated and equity
interest totaled 5.3 billion cubic feet ("bcf"), a decrease of 9 percent when
compared with 5.8 bcf during 2001. The reduction in volume is due to a decrease
in Entre Lomas gas production volumes, partially offset by increases in Acambuco
volumes. Entre Lomas gas production has declined in 2002 due to an almost total
lack of investments designed to increase or maintain gas production levels.
Because of the significant drop in natural gas prices in Argentina in 2002, no
new wells were drilled targeting primarily gas production, and very few
workovers and recompletions of existing wells targeting gas bearing reservoirs
were performed.

The prolonged recession in Argentina has reduced demand for electric power
nationwide. Furthermore, heavy rains in Argentina this year have enabled
hydroelectric plants to operate at higher levels than normal, thereby
restricting thermal power demand and, consequently, resulting in lower demand
for natural gas. In the recent past, the Entre Lomas partners have successfully
sold

19

natural gas in the spot market, but because of lower natural gas demand, Entre
Lomas production is currently limited to meet natural gas contract commitments.

Acambuco production increased during the year as the San Pedrito #4 well,
drilled in 2001, was brought into production in 2002.

CAPITAL SPENDING

The following are the major components of the 2002 capital program. During the
year, the Entre Lomas joint venture partners continued to successfully drill
development wells in the CB/PB, Entre Lomas and Borde Mocho fields while
extending the size of the Lomas de Ocampo field to the northwest. Sixteen
development and extension wells were drilled in the Entre Lomas concession and
three producing wells were converted to injection in the CB/PB field. In
addition, the capital program also included a revamping of the LPG plant that
resulted in an improved gas products yield. Total cost of the program to the
partners was $12 million, or $2.7 million, net to the Company's direct interest
and $2.9 million, net to the Company's equity interest in Entre Lomas.

The Acambuco joint venture's investment program was suspended early in the year
in response to the sharp decrease in gas prices. Other than work completed in
May 2002 to increase capacity of gas treating facilities in Acambuco, no
additional investments were undertaken in 2002. The joint venture does not
contemplate additional gas development investments until gas prices in Argentina
improve.

DIVIDENDS

The Company currently pays its shareholders a quarterly dividend of 16.25 cents
per share. Future dividends are necessarily dependent on numerous factors,
including among others, earnings, levels of capital spending, fluctuations in
crude oil and natural gas prices, changes in Argentine governmental regulations,
and as of the beginning of 2002, restrictions imposed by the Central Bank of
Argentina on the movement of excess cash flow and profits out of Argentina.

The Company reserves the right to change the level of dividend payments or to
discontinue or suspend such payments at the discretion of the directors.

RESULTS OF OPERATIONS

REFER TO CONSOLIDATED STATEMENTS OF OPERATIONS ON PAGE 30.

2002 VS 2001

During 2002, the Company generated net income of $7.3 million compared with $8.5
million during 2001. Net income for 2002 includes the cumulative effect of
implementing SFAS 143 that resulted in increasing net income by $2.4 million.
Before the cumulative effect, the Company generated 2002 net income of $4.9
million.

Operating revenues decreased by $5.3 million, or 21 percent. Lower oil and gas
sales constitute almost the entire decrease. Oil sales declined by $2.4 million
caused by a reduction in the Company's average oil sale price of $ 1.16 per
barrel and a decrease in total oil sales volumes of 60 thousand barrels. Gas
sales declined by $2.5 million caused by a reduction in the Company's average
gas sale price of $ .85 per thousand cubic feet ("Mcf"). Refer to "Liquidity and
Capital Resources" on page 16 for a discussion of the reason for the drop in gas
prices.

Financial and other revenues decreased by $539 thousand due to significantly
lower interest yields on the Company's bank deposits.

20

Depreciation expense increased by $1.6 million primarily due to the
reclassification from proved to the probable category, as of December 31, 2001,
of estimated oil and gas reserves expected to be produced during the Entre Lomas
concession extension period of 2017-2026. Reclassifying these reserves had the
effect of increasing the depreciation factor applied to undepreciated property
and equipment when computing depreciation.

Argentine taxes other than income increased by $973 thousand almost entirely due
to the effects of the new 16.67 percent export tax that the Argentine government
implemented in early 2002.

Foreign exchange losses increased by $1.2 million as a result of the greater
level of devaluation of the Argentine peso that occurred in 2002 versus 2001.
Refer to "Argentine Economic and Political Environment" on page 24 for a
description of the pesos devaluation since December 2001.

Argentine income taxes increased by $ 851 thousand in spite of a decrease in net
income before income taxes because the rise in the peso to US dollar exchange
rate has caused peso revenues to rise disproportionately with the increase in
peso expenses. This has occurred primarily because oil is a dollar denominated
commodity. In addition, the failure of the Argentine tax authority to adopt
inflation accounting has diminished the magnitude of peso depreciation in
arriving at taxable income.

The above negative variances in operating revenues, financial and other
revenues, depreciation, argentine taxes other than income, foreign exchange
losses, and argentine income taxes were partially offset by favorable variances
in operating expense, provincial production tax, transportation and storage
expense and Argentine selling and administrative expense. All but provincial
production taxes decreased primarily as a result of the reduced dollar cost of
operating in Argentina that has resulted from the devaluation of the Argentine
peso. Provincial production taxes declined as a direct result of the decrease in
operating revenues.

The devaluation of the Argentine peso was only part of the reason for the $ 3.1
million decrease in selling and administrative expense. The primary cause of the
decrease was the $ 2.3 million of costs incurred in 2001 that were directly
associated with the proposed merger between the Company and Globex that was
terminated in December 2001 by mutual agreement of the parties.

The decrease of $ 2.4 million in equity income from Argentine investments
relates to decreased equity income from Petrolera. All of the variance
explanations described in the preceding paragraphs, except for the variations in
financial and other revenues and selling and administrative expense, apply as
well to Petrolera because Petrolera's sole business is its ownership interest in
the Entre Lomas concession. Petrolera sells its oil and gas to the same
customers as the Company under the same conditions.

2001 VS 2000

During 2001, the Company generated net income of $8.5 million compared with
$22.2 million during 2000. The primary reasons for the $13.7 million decrease
are explained in the following paragraphs.

Operating revenues decreased by $4.9 million, or 16 percent, as a result of
lower oil sales caused by a decline in the Company's average oil sales price of
$5.21 per barrel during 2001. Refer to the table "Volume, Price and Cost
Statistics" on page 52. Equity income from Argentine investments decreased by
$5.9 million, or 50 percent.

Operating expense increased by $854 thousand due to a greater level of
facilities upgrades and equipment maintenance and overhauls, an increase in the
number of well workovers including injection wells, the cost of employee
severance in the Entre Lomas concession, and operating expenses in Acambuco that
commenced production operations in 2001. Selling and administrative

21

expense increased by $2.7 million as a result of $2.3 million of costs directly
associated with the terminated Apco/Globex merger, and engineering consultant
expenses incurred in connection with a reservoir simulation study. Depreciation,
depletion and amortization increased by $372 thousand. Exploration expense
increased by $379 thousand due to dry hole costs of $923 thousand associated
with the drilling of the El Caracol 33-xp well described in the section
"Exploration" on page 9, partially offset by the lack of exploration expense in
2001 in Acambuco. Since March 2001, when Acambuco went on production, expenses
there are being accounted for as operating expense. Other expense in 2001
includes $557 thousand of foreign exchange losses due to the devaluation of
monetary assets and liabilities at December 31, 2001 that resulted from the
Argentine peso's devaluation described in the section "Liquidity and Capital
Resources" on page 16.

The negative variances described in the previous paragraphs were partially
offset by lower provincial production taxes associated directly with the
decrease in operating revenues, and lower income taxes associated directly with
the decrease in income before income taxes.

With the exception of the negative variances in selling and administrative
expense, and the increase in operating expense relating to the start up of
production operations in Acambuco, the variance comparisons described in the
previous three paragraphs that relate to Entre Lomas serve as explanations for
the 50 percent decrease in the Company's equity income from Argentine
investments. This equity income represents the Company's share of Petrolera's
net income. Petrolera is the operator of the Entre Lomas concession, and its
sole business is its interest in the Entre Lomas joint venture.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of its financial condition and results of
operation are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States ("GAAP"). The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities, if any, at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company's independent reserve engineer bases its estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from these estimates under
different assumptions or conditions. Note 1 to the Company's consolidated
financial statements, contained elsewhere in this report on Form 10-K, contains
a comprehensive summary of the Company's significant accounting policies. The
following is a discussion of the Company's most critical accounting policies,
and judgments and uncertainties that are inherent in the Company's application
of GAAP.

Proved reserve estimates. Estimates of the Company's proved reserves included in
the unaudited supplemental oil and gas information in this report on Form 10-K
are prepared in accordance with guidelines established by GAAP and by the United
States Securities and Exchange Commission ("SEC"). The accuracy of a reserve
estimate is a function of: (i) the quality and quantity of available data; (ii)
the interpretation of that data; (iii) the accuracy of various mandated economic
assumptions; and (iv) the judgment of the third party reserve engineer that
prepares the estimate.

The Company's proved reserve information is based on estimates prepared by its
independent reserve engineer. Estimates prepared by others may be higher or
lower than the Company's estimates. Because these estimates depend on many
assumptions, all of which may substantially differ from actual results, reserve
estimates may be different from the quantities of oil and gas that are
ultimately recovered. In addition, results of drilling, testing and production
after the date of an estimate may justify material revisions to the estimate.

22

The present value of future net cash flows should not be assumed to be the
current market value of the Company's estimated proved reserves. In accordance
with SEC requirements, the Company based the estimated discounted future net
cash flows from proved reserves on prices and costs on the date of the estimate.
Actual future prices and costs may be materially higher or lower than the prices
and costs as of the date of the estimate.

The Company's estimates of proved reserves materially impact depreciation
depletion, and amortization expense. If the estimates of proved reserves
decline, the rate at which the Company records depreciation depletion, and
amortization expense increases, reducing net income. Such a decline may result
from lower market prices, which may make it uneconomic to drill for and produce
higher cost reserves. In addition, the decline in proved reserve estimates may
impact the outcome of the Company's assessment of its oil and gas producing
properties for impairment.

Revenue recognition. Revenue is a key component of the Company's results of
operations and also determines the timing of certain expenses, such as severance
taxes and royalties. The Company's policy is to recognize revenues when oil and
gas are delivered to the purchaser.

Impairment of Oil and Gas Properties. The Company reviews its proved properties
for impairment on a concession by concession basis and recognizes an impairment
whenever events or circumstances, such as declining oil and gas prices, indicate
that a property's carrying value may not be recoverable. If an impairment is
indicated, then a provision is recognized to the extent that the carrying value
exceeds the present value of the estimated future net revenues ("fair value").
In estimating future net revenues, the Company assumes costs will escalate
annually and applies an oil and gas price forecast that it believes to be
reasonable after reviewing long-term forecasts of professional energy
consultants. Due to the volatility of oil and gas prices, it is possible that
the Company's assumptions regarding oil and gas prices may change in the future.
The most important consideration for the Company in testing for impairment is
oil and gas prices. As of December 31, 2002, for impairment testing purposes,
the Company's proved properties can withstand a significant drop in product
price forecasts before the estimated value of its properties would approximate
their carrying value.

Argentina economic and currency measures. The Argentine economic and political
situation continues to evolve and the Argentine government may enact future
regulations or policies that, when finalized and adopted, may materially impact,
among other items, (i) the realized prices the Company receives for the
commodities it produces and sells as a result of new taxes; (ii) the timing of
repatriations of cash to the US; (iii) the Company's asset valuations; and (iv)
peso-denominated monetary assets and liabilities.

23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

The Company's operations are exposed to market risks as a result of changes in
commodity prices and foreign currency exchange rates.

COMMODITY PRICE RISK

The Company produces and sells crude oil and natural gas, and the Company's
financial results can be significantly impacted by fluctuations in commodity
prices due to changing market forces. The Company has historically not used
derivatives to hedge price volatility.

FOREIGN CURRENCY AND OPERATIONS RISK

The Company's operations are located in Argentina. Therefore, the Company's
financial results may be affected by factors such as changes in foreign currency
exchange risks, weak economic conditions, or changes in Argentina's political
climate.

ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT

During the decade of the 1990's Argentina's government pursued free market
policies, including the privatization of state owned companies, deregulation of
the oil and gas industry, tax reforms to equalize tax rates for domestic and
foreign investors, liberalization of import and export laws and the lifting of
exchange controls. The cornerstone of these reforms was the 1991 convertibility
law that established an exchange rate of one Argentine peso to one US dollar.
These policies were successful as evidenced by the elimination of inflation and
substantial economic growth during the early to mid 1990's. However, throughout
the decade, the Argentine government failed to balance its fiscal budget,
incurring repeated significant fiscal deficits that by the end of 2001 resulted
in the accumulation of $130 billion of debt.

During 2000, President De la Rua's administration implemented various policies
in an attempt to reduce Argentina's fiscal deficit including personal income tax
increases and other measures that resulted in the unintended consequence of a
notable reduction in internal consumption at a time when Argentina's economy was
already in recession. Late in 2000, fears arose in financial markets about
Argentina's ability to repay its debt and the possibility of debt default. Late
in 2001, the country was unable to obtain additional funding from the IMF,
ultimately leading to the resignation of President De la Rua and his entire
administration.

Subsequently, the government proceeded to implement monetary restrictions that
severely limited the transfer of funds out of the country with all such
transfers requiring the prior authorization of the Central Bank of the Republic
of Argentina ("BCRA"). The government also prohibited the payment abroad in US
dollars of domestic sales and established the requirement that payments abroad
that resulted from export sales be repatriated and converted to pesos. In the
case of Argentina's oil and gas industry the required repatriation percentage
was set at 30 percent.

In January 2002, the government declared default on Argentina's $130 billion of
debt and the national Congress passed Emergency Law 25,561, which among other
things overturned the long standing but unsustainable convertibility plan. The
government eventually adopted a floating rate of exchange in February 2002. Two
specific provisions of the Emergency Law directly impact the Company. First, a
tax on the value of hydrocarbon exports was established effective April 1, 2002.
The percent of this tax is 16.67 percent for oil exports and 4.76 percent for
natural gas liquids such as propane and butane produced by the company in Entre
Lomas. The second provision, is the requirement that domestic commercial
transactions, or contracts for sales in Argentina that were previously
denominated in US dollars were converted to pesos ("pesofication") by
liquidating those sales in Argentina at an exchange rate to be negotiated
between sellers and buyers.

24

After the resignation of President De la Rua in December 2001, there was for a
few weeks a revolving door of Presidents that were appointed to office by
Argentina's congress but quickly resigned in reaction to public outcry. Eduardo
Duhalde was appointed President of Argentina in January 2002 to hold office
until the next regularly scheduled Presidential election in 2003. Since taking
office, President Duhalde has been unable to obtain additional financial
assistance from international lending agencies such as the International
Monetary Fund and the World Bank and his administrations inability to make
significant progress in resolving the country's economic crisis has resulted in
an almost total loss of public support. As a result, early Presidential
elections have been scheduled for April 2003.

The abandonment of the convertibility plan and the decision to allow the peso to
float in international exchange markets resulted in "maxi-devaluation" of the
peso. Since December 2001, the peso to US dollar exchange rate has increased
from 1:1 to 3:37:1 as of December 31, 2002.

The current outlook for Argentina's economy continues to be negative. However,
due to various causes, including among others, the deep extended recession in
which Argentina finds itself, reduced levels of disposable income and savings in
Argentina, devaluation having exceeded inflation by a considerable margin, and
the government's policies implemented restricting the flow of pesos being
converted to US dollars, devaluation of the peso as expressed by the peso to US
dollar exchange rate has slowed considerably as 2002 passed. This trend has
continued into 2003. The following table illustrates the point.

Presidential elections in Argentina are scheduled for April 2003. At this time
there are multiple candidates and the outcome is uncertain.

It is not possible to predict the direction that Argentina's economy will take
during the remainder of 2003 or the future impact on the Company from the
country's continuing economic crisis and any additional government actions taken
in response to the crises.

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

26

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Apco Argentina Inc.

We have audited the accompanying consolidated balance sheet of Apco Argentina
Inc. as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Apco Argentina Inc. as of December 31,
2001 and for each of the two years in the period then ended were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those statements in their reports dated March 1, 2002.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Apco Argentina Inc. as of December 31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

As explained in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations."

ERNST & YOUNG LLP

Tulsa, Oklahoma
March 21, 2003

27

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Apco Argentina Inc.:

We have audited the accompanying consolidated balance sheets of Apco Argentina
Inc. (a Cayman Islands corporation) and subsidiary as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apco Argentina Inc. and
subsidiary as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States.

ARTHUR ANDERSEN LLP

Tulsa, Oklahoma
March 1, 2002

(This report of independent accountants is a copy of the previously issued March
1, 2002 report . The report has not been reissued by Arthur Andersen LLP.)

28

APCO ARGENTINA INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated statements.

29

APCO ARGENTINA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Continued on following page.)

30

APCO ARGENTINA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (continued)

The accompanying notes are an integral part of these consolidated statements.

31

APCO ARGENTINA INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated statements.

32

APCO ARGENTINA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated statements.

33

APCO ARGENTINA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

GENERAL INFORMATION AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Apco
Argentina Inc. (a Cayman Islands corporation) and its wholly owned
subsidiaries, Apco Properties Ltd. (a Cayman Islands corporation) and Apco
Argentina S.A. (an Argentine corporation), all of which are herein
collectively referred to as the Company. The Company has only one business
segment and is engaged exclusively in joint ventures in oil and gas
exploration, development and production in Argentina. Its principal
businesses are a 23 percent participation in the Entre Lomas Concession
(Entre Lomas, an unincorporated joint venture), which is accounted for
following the proportional consolidation method, and a 39.224 percent
interest in Petrolera Perez Companc S.A. (Petrolera, a privately owned
Argentine corporation), which is accounted for following the equity method
(see Note 4). Petrolera owns a 73.15 percent interest in the Entre Lomas
concession. The Company also owns a 1.5 percent interest in the Acambuco
concession and a 45 percent interest in the Canadon Ramirez concession. All
of the Company's operating revenues and equity income, and all of its
long-lived assets are in Argentina. All percentage interests are as of
December 31, 2002. For information regarding purchases of additional
ownership interests subsequent to December 31, 2002, see Note 12.

A wholly owned subsidiary of The Williams Companies, Inc. ("Williams")
currently owns 68.96 percent of the outstanding ordinary shares of the
Company.

Oil and gas operations are high risk in nature. A successful operation
requires that a company deal with uncertainties about the subsurface that
even a combination of experience, scientific information and careful
evaluation cannot always overcome.

Because the Company's assets are located in Argentina, management has
historically been required to deal with threats from inflation, devaluation
and currency controls.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities, if
any, at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.

CHANGE IN ACCOUNTING POLICY

Effective January 1, 2002, the Company implemented Statement of Financial
Accounting Standards (SFAS) No. 143 as described in Note 2.

REVENUE RECOGNITION

The Company recognizes revenues from sales of oil, gas, and plant products
at the time the product is delivered to the purchaser and title has passed.
Any product produced that has not been delivered is reported as inventory
and is valued at the

34

APCO ARGENTINA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

lower of cost or market. When cost is calculated, it includes total per
unit operating cost and depreciation. Transportation and storage costs are
recorded as expenses when incurred. The Company has had no contract
imbalances relating to either oil or gas production.

PROPERTY AND EQUIPMENT

The Company uses the successful-efforts method of accounting for oil and
gas exploration and production operations, whereby costs of acquiring
non-producing acreage and costs of drilling successful exploration wells
and development costs are capitalized. Costs of unsuccessful exploratory
drilling are expensed as incurred. Oil and gas properties are depreciated
over their productive lives using the units of production method based on
proved producing reserves. Non oil and gas property is recorded at cost and
is depreciated on a straight-line basis, using estimated useful lives of 3
to 15 years.

The Company reviews its proved properties for impairment on a concession by
concession basis and recognizes an impairment whenever events or
circumstances, such as declining oil and gas prices, indicate that a
property's carrying value may not be recoverable. If an impairment is
indicated, then a provision is recognized to the extent that the carrying
value exceeds the present value of the estimated future net revenues ("fair
value"). In estimating future net revenues, the Company assumes costs will
escalate annually and applies an oil and gas price forecast that it
believes to be reasonable after reviewing long-term forecasts of
professional energy consultants. Due to the volatility of oil and gas
prices, it is possible that the Company's assumptions regarding oil and gas
prices may change in the future. For the years ended December 31, 2002,
2001 and 2000, the Company did not record any impairment charges as the
estimated future undiscounted net revenues exceeded the carrying value of
its properties.

NET INCOME PER ORDINARY SHARE

Net income per ordinary share is based on the weighted average number of
ordinary shares outstanding. Basic and diluted net income per ordinary
share are the same, as the Company has not issued any potentially dilutive
securities such as stock options.

FOREIGN EXCHANGE

The general policy followed in the translation of the Company's financial
statements of foreign operations into United States dollars is in
accordance with Statement of Financial Accounting Standards No. 52, Foreign
Currency Translation, using the United States dollar as the functional
currency. Accordingly, translation gains and losses that arise from
exchange rate fluctuations applicable to transactions denominated in a
currency other than the United States dollar are included in results of
operations as incurred.

35

APCO ARGENTINA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

INCOME TAXES

Deferred Argentine income taxes are computed using the liability method and
are provided to reflect the future tax consequences of differences between
the tax basis of assets and liabilities and their reported amounts in the
financial statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method.
Under SFAS 142, goodwill is no longer subject to amortization over its
estimated useful life, but assessed annually for impairment by applying a
fair-value-based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can
be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. Those assets will be amortized over their
useful lives unless they are determined to have an indefinite life. SFAS
142 is required to be applied starting with fiscal years beginning after
December 15, 2001.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Asset. SFAS
No. 144 establishes a single accounting model, based on the framework
established in SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, for long-lived assets
to be disposed of by sale. The provisions of this Statement are effective
for financial statements issued for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The provisions of
this Statement generally are to be applied prospectively. The Company
adopted SFAS 144 as of January 1, 2002. Adoption did not have a material
impact on the Company's financial position or results of operations.

In the second-quarter 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The provisions
of the Statement are effective for exit or disposal activities that are
initiated after December 31, 2002.

36

APCO ARGENTINA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(2) IMPLEMENTATION OF SFAS 143

During the early 1990's the Argentine Department of Energy and Argentine
provinces implemented environmental regulations for Argentina's energy
industry including oil and gas operations. Among those regulations were
resolutions covering the plugging and abandonment of oil and gas wells. As
a result, the Company recognized it would be required to incur future
plugging and abandonment costs for wells in the concessions and began to
gradually accrue for such future costs.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 is required to be adopted by companies for financial
statements issued for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Company elected to adopt SFAS 143
effective January 1, 2002. Prior to the adoption of SFAS 143, the Company
accrued future abandonment costs of wells and related facilities through
its depreciation and amortization calculation, and included the cumulative
accrual in accumulated depreciation, depletion and amortization.

As part of the adoption of SFAS 143, an engineering analysis was obtained
which projects through the last year of the Company's concession terms, the
number of wells that would require plugging and abandoning