UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from                    to                    

Commission file number 0-8933

APCO ARGENTINA INC.

Registrant’s Telephone Number, including area code: (918) 573-2164

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

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 o

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. x

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).,

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates on June 30, 2003, the last business day of the registrants most recently completed second fiscal quarter, was $50,793,616. This value was computed by reference to the closing price of the registrant’s stock of $22.23, as reported to the registrant by the National Association of Securities Dealers. Since the shares of the registrant’s stock trade sporadically in the over-the-counter marker, the bid and asked prices and the aggregate market value of stock held by non-affiliates based thereon may not necessarily by representative of the actual market value. See Item 5 for more information.

As of March 4, 2004 there were 7,360,311 shares of the registrant’s 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

Table of Contents

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 Neuquén 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, a 81.82 percent interest in a third joint venture engaged in oil exploration and development in the Cañadón Ramirez concession located in the province of Chubut in southern Argentina, and a 50 percent interest in the Yacimiento Norte 1/B Block, an exploration permit (the “Capricorn Permit”), also located in the province of Salta.

In 2003, for a second year consecutive year, the Company increased its ownership interests in its existing properties. In January 2003, it completed the purchase of all of the outstanding shares of Fimaipu S.A. (“Fimaipu”) for $1.8 million. Fimaipu is a private Argentine holding company whose sole asset is 7,895 shares of Petrolera Entre Lomas S.A. (“Petrolera”), representing 1.58 percent of Petrolera’s total shares outstanding. Petrolera is the operator of the Entre Lomas concession and owns a 73.15 percent interest in the concession. The purchase of Fimaipu increased the Company’s total ownership in Petrolera from its former level of 39.224 to 40.803 percent. Furthermore, because Petrolera owns a 73.15 percent interest in Entre Lomas, the Company’s increased ownership in Petrolera 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 Cañadón Ramirez concession from Tyax S.A. (“Tyax”), a partner in the concession, for a total consideration of $155 thousand. This purchase increased the Company’s interest in Cañadón Ramirez to 81.82 percent.

In April 2003, the Company entered into a farm-in agreement with Netherfield Corporation (“Netherfield”), a wholly owned subsidiary of Antrim Energy Inc., a Canadian company. In August 2003, the Company earned a 50 percent interest in the Capricorn Permit through the farm-in agreement after fulfilling a commitment to acquire seismic in a portion of the permit. The cost to the Company of earning this interest was $650 thousand.

During 2003, the Company generated net income of $12.4 million compared with $7.3 million and $8.5 million during 2002 and 2001, respectively.

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 17 and in “Argentine Economic and Political Environment,” on page 27.

2

(b) Financial Information About Industry Segments

None.

(c) Narrative Description of Business

ENTRE LOMAS

The Company participates in a joint venture with Petrolera and Petrobras Energia S.A. (“Petrobras Energia”), formerly Pecom Energia S.A. (“Pecom Energia”). 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 Neuquén 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 40.803 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 January 2003, the Company purchased all of the outstanding shares of Fimaipu, whose sole asset is 7,895 shares, or 1.58 percent of Petrolera’s total shares outstanding, for $1.8 million. The purchase increased the Company’s ownership in Petrolera to 40.803 percent.

The Fimaipu purchase was completed only four months after the Company increased its stock interest in Petrolera by purchasing 27,700 additional shares in October 2002 from members of the Perez Companc Family (“PC Family”) for $6.9 million. The Company made the 2002 purchase by exercising a right of first refusal to purchase the stock 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 simultaneously purchased the balance of the PC Family’s shares in Petrolera and the PC Family’s shares in Pecom Energia, now renamed Petrobras Energia. Today the principal shareholders of Petrolera are the Company, Petrobras and Petrobras Energia, in which Petrobras is the majority shareholder.

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 that had previously been awarded to Pecom Energia. 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 from the Entre Lomas area 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. Originally, the Entre Lomas area was governed by a production service contract. The decree directed YPF, then the national oil company of Argentina, to negotiate with producers to convert such contracts to concessions.

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 hydrocarbons at the moment they are produced through the wellhead. Under this agreement, the

3

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 to the year 2016 with an option to extend the concession for an additional ten-year period with the consent of the government.

Oil Markets

Oil produced in the Entre Lomas concession is sold to Argentine refiners or exported to Brazil and other countries in the southern cone of Latin America. Entre Lomas production is transported to Puerto Rosales, a major industrial port in southern Buenos Aires Province through the Oleoductos del Valle S.A. (“Oldelval”) pipeline system.

A free market for crude oil produced in Argentina has developed since deregulation of Argentina’s energy industry in 1991. Since this market emerged, the per barrel price for Argentine crude oil has been based on the spot market price of West Texas Intermediate (“WTI”) less a discount to provide for differences in gravity and quality. During this time, market conditions have evolved such that the WTI discount per barrel for oil sold in the country has declined gradually as this market has matured.

During 2003, discounts for the sale of oil produced in the Neuquen basin of Argentina fell to less than 50 cents compared with more than $2 shortly after 1991. Discounts for the sale of oil produced in other basins and for oil exports are generally higher.

The entire Argentine domestic refining market is small. The six largest refiners constitute 99 percent of the market. As a result, the Company’s oil sales have historically depended on a relatively small group of customers. Decisions to sell to these customers are based on advantages presented by the commercial terms negotiated with each customer. Refer to Note 5, of Notes to Consolidated Financial Statements, for a description of the Company’s major customers over the last three years.

Gas Markets

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 consistently found markets for Entre Lomas gas, including selling in the spot market. Argentina has a very well developed natural gas market because gas consumption represents approximately 50 percent of the country’s total energy consumption.

Refer to the section “Liquidity and Capital Resources” on page 17 for a description of the impact of economic reforms implemented in 2002 on natural gas prices in Argentina.

4

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 generally lower natural gas prices during this off-peak period. During 2003, natural gas sales represented 4 percent of the Company’s total operating revenues compared with 6 and 14 percent during 2002 and 2001, respectively. Consequently, the fluctuation in natural gas sales between summer and winter is not significant for the Company.

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.

Petrolera was formerly known as Petrolera Perez Companc S.A. After the sale by the PC Family of all of its shares in Petrolera to the Company and Petrobras, Petrolera changed its name to Petrolera Entre Lomas S.A in October 2003.

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.

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 Neuquén approximately 100 kilometers north of the city of Neuquén. The concession covers a surface area of approximately 183,000 acres and produces oil and gas primarily from the Charco Bayo/Piedras Blancas field (“CB/PB”). Three smaller fields, the Entre Lomas, Lomas de Ocampo and El Caracol fields, located to the northwest of the CB/PB field also produce oil and gas. A fifth field, Borde Mocho, located southwest of the CB/PB field 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. The joint venture extracts propane and butane from this gas in its gas processing plant located in the concession. 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 the CB/PB field 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 the CB/PB field. Since inception 517 wells have been drilled in the concession, of which at year end, 306 are producing oil wells, 21 are producing gas wells, 126 are active water injection wells, 11 are water producing wells, and 53 wells are either inactive or abandoned.

The CB/PB, El Caracol and Entre Lomas oil fields are secondary recovery projects. Injection of water into the Tordillo reservoir has been introduced in the CB/PB field in phases since 1975. Water injection commenced in the El Caracol field in 1989 and in the Entre Lomas field in 1998.

5

Charco Bayo/Piedras Blancas Field

The CB/PB field 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. At year’s end, there were 232 wells producing oil in this field. Secondary recovery was introduced with a successful pilot project in 1975 and has slowly been expanded to include 97 injection wells. The CB/PB field is best described as a mature oil field with 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 will likely 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 water injection through various means including modifying existing patterns of water injection, placing idle wells back on production, and the use of polymer injection, which during the last several years has been introduced throughout the field with beneficial results.

Due to the gradual development of this field, recoveries normally attributed to waterfloods after 20 to 30 years, have not been achieved 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 the CB/PB field will, of course, be dependent on an oil price level that provides adequate returns for the joint venture partners. During 2003, 9 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 fully developed.

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. At December 31, 2003, there were 20 wells producing oil in this field. Limited additional development drilling potential may still exist. Water injection began here in 1989 and response has been favorable. Eight injection wells are active in this field. During 2003, one development well was drilled and completed as an oil producer.

Entre Lomas

The Entre Lomas structure is located in the central part of the concession to the northwest of the CB/PB field. At the depth of the producing formations, 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.

6

Entre Lomas Oil Reservoirs

The Entre Lomas oil field is productive from the Quintuco formation, with some minor production from the Tordillo formation. It now includes 32 producing wells and 21 water injection wells.

This field produced for many years without the benefit of secondary recovery. Reservoir simulation studies predicted that the Entre Lomas oil field would respond favorably to water injection in a manner similar to the response achieved in the El Caracol field. Investments to implement waterflooding in this field commenced in 1997, and after several years of water injection sufficient pressure has now been restored that production declines are diminishing in many of the wells. It is felt that the downdip limits of this field are well defined. No new wells were drilled here in 2003.

Entre Lomas Gas Reservoirs

Deregulation of Argentina’s gas industry in 1994 fueled considerable interest in gas development throughout the country. Starting in 1994, the Entre Lomas partners commenced development of a gas field that is productive from the Petrolifera formation. As of year end, there are nine producing wells in this field. Although the main body of the field now appears to have been defined, additional expansion possibilities exist to the northwest of the Lomas de Ocampo field discussed in the next paragraph. In 2003, no wells were drilled, or recompletions performed with the specific objective of developing additional gas reserves in this region. The pesofication of gas sales contracts that occurred in 2002 and the resulting drop in natural gas prices have caused the postponement of plans to continue the development of the Petrolifera gas reservoir in this region of the concession. Refer to the section “Liquidity and Capital Resources” on page 17 for a description of the impact of economic reforms implemented in 2002 on natural gas prices in Argentina.

Lomas de Ocampo Field

In 1997, the Lomas de Ocampo 4 well, drilled to the northwest of the Entre Lomas gas field, was found to be productive in both the Petrolifera and Quintuco formations. Based on interpretation of seismic data, the partners identified a separate structure that extends toward the northwest. Development drilling has since continued in this direction and the partners have drilled nine additional wells, some of which are Petrolifera and Quintuco dual completion wells while others only reach to the depth of the shallower Quintuco formation. Three field extension wells were drilled in this field in 2003. Of the three, two performed significantly better than expected as the wells encountered a Quintuco formation layer with unanticipated excellent reservoir characteristics. Additional development drilling to the west and northwest is planned for 2004. Seismic based studies are currently underway to evaluate the potential for drilling in the region between Lomas de Ocampo and El Caracol.

Borde Mocho

The Borde Mocho field is the smallest field in the concession. It is located southwest of the CB/PB field near the concession’s southern boundary. To date 9 wells have been drilled and all are producing oil. The discovery well was drilled in 1996. All wells produce from the Tordillo, the main producing formation, and 4 wells are also productive from the Quintuco formation. It is believed that the limits of this field have been identified to the southeast but that additional limited drilling potential may exist to the northwest. One producing field extension well was drilled in 2003 in the northwest. As described in the following paragraph, new 3 dimensional (“3D”) seismic on either side of this field was acquired in 2003 in order to identify subsurface structures and faults that would create potential for trapping hydrocarbon accumulations in this region of the concession.

7

Exploration

There are approximately 142 thousand undeveloped acres in the Entre Lomas concession. Since inception, 517 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.

Since 1993, the Entre Lomas partners have conducted three 3D seismic campaigns. The most recent survey was completed in late 2003 during which the partners acquired 373 square kilometers of 3D seismic over the southern portions of the concession. As a result, with the exception of a thin strip of the concession to the northeast of the Entre Lomas structure, the joint venture has 3D seismic images covering the principal producing fields and all of the surrounding acreage believed to be of most interest. These separate seismic programs are being integrated into one continuous seismic block. The seismic surveys have 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, and utilize 3D seismic in ways that may help exploit the existing producing fields.

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 images. Secondary objectives included investigation of 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 Neuquén basin has been 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.

Los Alamos

The Entre Lomas partners identified the Los Alamos area as a target for lower risk exploration through interpretation of 3D seismic images. In the 1970’s, the Los Alamos #1 well was drilled and found the Tordillo formation to be oil productive and with excellent reservoir characteristics. However, after a short production life the well was shut in due to a rapid increase in water production. Seismic images identified the potential for up dip stratigraphic trapping in the direction of the Piedras Blancas field. As a result, the Los Alamos #2 well was drilled, completed and placed on production in 2003. A confirmation well is scheduled to be drilled in 2004.

Environment and Occupational Health

The Argentine Department of Energy and the government of the provinces in which oil and gas producing concessions are located have environmental control policies and regulations that must be adhered to when conducting oil and gas exploration and exploitation activities. In response to these requirements, Petrolera implemented and maintains an Environmental Management System in the Entre Lomas concession needed to comply with ISO 14001: 1996 environmental standards, and OHSAS 18001: 1999 occupational health standards. Independent party audits are conducted annually to assure that the Entre Lomas certifications remain in full force. These standards surpass those required by the local governing authorities.

8

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 L.L.C. (“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. and the Company which each hold interests of 1.5 percent. Northwest Argentina Corp. is a subsidiary of The Williams Companies, Inc.

San Pedrito Field

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. Due to mechanical problems, the well only penetrated the upper most section of the Huamampampa and was not adequately tested at that time.

In 1998, the Acambuco partners drilled the San Pedrito x-2 (“SPx2”) well at a location approximately 3 miles south of the SPx1 well. Although the well encountered the Huamampampa formation in a structural position lower than SPx1 well, it 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 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.

The joint venture partners subsequently drilled the San Pedrito x-3 (“SP x-3”) and San Pedrito x-4 (“SP x-4”) wells with better results. Both wells not only investigated the Huamampampa formation but the deeper Icla and Santa Rosa formations. During 2003, the San Pedrito wells in which the Company participated produced 50 billion cubic feet of natural gas and 859 thousand barrels of condensate, or 750 million cubic feet of gas and 13 thousand barrels of condensate, net to the Company’s 1.5 percent interest.

9

Macueta Field

In 2000, the joint venture partners drilled the Macueta x-1001 (bis) well on the Macueta structure located just south of the Bolivian border and next to the San Alberto field in Bolivia. This well reached a total depth of 17,500 feet, investigating both the Huamampampa and lcla formations. In 2001, due to lower than expected production test results, the joint venture partners decided to drill a horizontal extension into the crest of the structure. 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 images 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 estimated to contain several trillion cubic feet of natural gas is producing on the opposite side of the Bolivian border.

Timing of the future development of the Macueta field is dependent on the prospects for natural gas prices in Argentina. Gas sales from this field require the construction of a gas pipeline and a capacity expansion of the concession’s gas treatment plant which combined are estimated to cost approximately $60 million, or $900 thousand net to Company’s interest. Engineering design and initiating materials purchases for the gas pipeline and treatment plant expansion is planned for 2004 and it is expected that construction will get underway sometime in 2005.

Other

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 images over Cerro Tuyunti. The interpretation indicates that the structure should be explored to the north of the CTx1 well.

In 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 where 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 wells drilled to the Huamampampa formation have ranged from $30 to $40 million.

Acambuco 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 of both natural gas and condensate from the Acambuco joint venture commenced in March 2001.

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

10

Oil Fields

In addition to natural gas production, Acambuco also produces oil from the Tupambi formation, which has produced oil from fields elsewhere in the region. An old oil field discovered in the 1920’s in Acambuco, the San Pedro field, 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. After evaluating production and pressure data from the Tupambi reservoir in this field, the partners determined that further well reactivations are probably not warranted.

An interpretation of seismic images of the Macueta Sur structure concluded that the subsurface in this structure at the depth of the Tupambi is analogous to subsurface conditions under the San Pedro oil field. As a result, in early 2004, the Acambuco partners commenced the drilling of an exploration well in the Macueta Sur structure to investigate the Tupambi formation. The projected total depth of this well is approximately 7,600 feet and the well is estimated to cost $3.2 million, or $48 thousand, net to the Company.

CAÑADÓN RAMIREZ

The Company owns 81.82 percent in the 92 thousand acre Cañadón Ramirez concession, located in southern Argentina, in the province of Chubut. 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 in the concession from Tyax. The Company obtained its original 45 percent interest in Cañadón Ramirez in 1997 from Pan Am Group S.A. (predecessor to Tyax). 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. The Company acts as operator of the concession.

During 2003, the Company evaluated what investments are required to properly investigate the potential of Cañadón Ramirez and concluded that funds should be allocated both to exploration and exploitation efforts. In 2004, the partners will acquire 130 square kilometers of 3D seismic images in order to evaluate the eastern side of the concession in the area of the Los Monos structure and immediately to the south. In addition, the partners will undertake a reactivation of wells that were produced by the joint venture in 1997 and 1998, and workovers and recompletions of three additional wells in the concession. The estimated cost of this program is $ 1.6 million or, $ 1.3 million net to the Company’s interest.

Capricorn

In April 2003, the Company entered into a farm-in agreement with Netherfield. The agreement entitled the Company to earn a 50 percent interest in an exploration permit granted over the Yacimiento Norte 1/B Block, commonly known as the Capricorn block. The Capricorn block has a surface area of 8,182.87 square kilometers, or approximately 2.1 million acres located in the province of Salta in northern Argentina. The agreement obligated the Company to acquire 40 square kilometers of 3D seismic images, thereby fulfilling Netherfield’s work commitment for the first exploration period pursuant to the terms of an exploration permit granted to it. Prior to the farm-in, Netherfield owned a 100 percent interest in the exploration permit granted in 2001.

11

The Company acquired and processed the seismic images at a cost to the Company of $650 thousand and completed its commitment. These cost were expensed in 2003. In August, when the Company delivered the information to Netherfield, it earned a 50 percent working interest in the block and became the joint venture operator.

Interpretation of the seismic in Capricorn was completed in September. The conclusion is that, in the area of a main fault that was the primary target of the interpretation, there is little hope of finding a drilling location that could target a structure of sufficient size in order to make drilling economics viable given the risk and costs of exploration drilling. Furthermore, the probability of finding hydrocarbons up against this fault was, in the opinion of the partners, too low.

With the completion of the Company’s seismic investment in Capricorn, Netherfield fulfilled its investment commitment required during the permit’s first exploration period that commenced in August 2003. Henceforth, the partners will have two years to evaluate the exploration potential of the block. At the end of the two years, a second exploration period requiring the drilling of an exploration well is optional. If the partners choose to exercise their option, 50 percent of the original block, less any exploitation concession granted, must be relinquished.

Capricorn acreage completely surrounds the Puesto Guardian concession that currently produces 1,100 barrels per day of oil. The El Vinalar concession, that is immediately to the east of Puesto Guardian and which is also oil productive, is bounded on three sides by Capricorn. Prospective reservoirs in Capricorn lie at depths below 3,000 meters, or 10,000 feet.

During the fourth quarter of 2003, the Company commenced the evaluation of the entire inventory of previously shot 2 dimensional seismic lines that it obtained when it earned its 50 percent interest in the permit.

EMPLOYEES

At March 1, 2004, the Company had eight full-time employees.

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.

All statements, other than statements of historical facts, included in this Form 10-K, which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements can be identified by words such as “anticipates,” “believes,” “could,” “continues,” “estimates,” “expects,” “forecasts,” “might,” “planned,” “potential,” “projects,” “scheduled,” or similar expressions. These forward-looking statements include, among others, such things as:

	•		amounts and nature of future capital expenditures;
	•		expansion and growth of the Company’s business and operations;
	•		business strategy;
	•		estimates of proved gas and oil reserves;
	•		reserve potential
	•		development drilling potential; and
	•		oil and gas prices and demand for those products.

12

These statements are based on certain assumptions and analysis made by us in light of experience and perception of historical trends, current conditions and expected future developments as well as other factors believed to be appropriate in the circumstances. 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.

You should carefully consider the following risk factors in addition to other information in this annual report. Each of these factors could adversely affect the value of an investment in the Company’s securities:

	•		changes in economic conditions in Argentina;
	•		changes in Argentine laws and regulations to which the Company is subject, including tax, environmental and employment laws, and regulations;
	•		political instability in Argentina;
	•		conditions of the capital markets the Company utilizes to access capital to finance operations;
	•		the availability and cost of capital;
	•		the effect of changes in accounting policies;
	•		the ability to manage rapid growth;
	•		the ability to control costs;
	•		currency fluctuations and controls and changes in laws and regulation affecting the currency of Argentina;
	•		future unpredictability and volatility of product prices;
	•		the ability of the Company and its partners to find markets for produced hydrocarbons;
	•		changes in, and volatility of, supply, demand and prices for crude oil, natural gas and other hydrocarbons;
	•		the policies of the Organization of Petroleum Exporting Countries;
	•		the inherent imprecision of estimates of hydrocarbon reserves, rates of future production and valuation of reserves;
	•		the competitiveness of alternative energy sources or product substitutes;
	•		the actions of competitors and increased competition in markets in which the Company sells its products;
	•		uncertainties associated with petroleum exploration, future activities and results of operations;
	•		the cost and effects of legal and administrative claims and proceedings against the Company and its subsidiaries;
	•		the potential that certain aspects of the Company’s business that are currently unregulated may be subject to regulation in the future;
	•		the continued threat of terrorist activities and the potential for continued military and other actions could adversely affect the Company’s business;
	•		strikes, work stoppages and protests could increase the Company’s operating costs;
	•		achieving growth is dependent upon the Company’s finding or acquiring additional reserves, as well as successfully developing current reserves, and risks associated with drilling may cause drilling operations to be delayed or cancelled.

(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.

(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

13

domestically in Argentina, or exported from Argentina to either Brazil or Chile. Refer to Note 5 of Notes to Consolidated Financial Statements for a description of sales during the last three years to Petrobras that constitute exports to Brazil and to ENAP S.A. that constitute exports to Chile.

(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 and refer to “Unaudited Supplemental Oil and Gas Information” on pages 44 and 45 for tables that present estimates of the Company’s net proved reserves.

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 2003.

14

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market information, Number of Shareholders and Dividends

On December 31, 2003, there were 866 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 Board of Directors. Refer to “Liquidity and Capital Resources” on page 17 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.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company does not have any compensation plans under which equity securities of the Company are authorized for issuance.

15

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

The Company did not sell any securities of the Company that were not registered under the Securities Act of 1933 during the fourth quarter of 2003.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The Company did not repurchase any of its equity securities registered pursuant to Section 12 of the Exchange Act of 1934 during the fourth quarter of 2003.

ITEM 6.	SELECTED FINANCIAL DATA

The following historical financial information presented below is derived from the Company’s audited financial statements.

Refer to the table “Volume, Price and Cost Statistics” on page 51 for variations in prices that influence the Company’s revenues and net income.

As explained in Note 1 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 33.

16

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

LIQUIDITY AND CAPITAL 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. Historically, the Company has not relied on other sources of capital such as debt or equity, in part due to the Company’s focus on development of the Entre Lomas concession, but also due to the turmoil that has periodically affected Argentina’s economy such as the economic crisis of late 2001 and early 2002 that resulted in a significant devaluation of the Argentine peso.

Reference is made to the section “Argentine Economic and Political Environment” on page 27 for a description of the economic crisis. In general, although the aforementioned crisis created a climate of business uncertainty for companies in Argentina, the environment for oil and gas companies operating in the country stabilized as 2002 came to a close and throughout 2003. During this period, the value of Argentina’s currency stabilized, inflation fell to lower than four percent, the country’s economy grew in 2003, and the price of oil improved significantly. Although these positive indicators are noteworthy, two important problems remain unresolved. Argentina’s sovereign debt remains in default and the rate of unemployment remains historically high at 15 percent.

During 2003, the Company generated cash flow from operating activities of $12.1 million, that included $6.1 million in dividends from Petrolera. These amounts compare with net cash provided by operating activities of $14.1 million and $10.2 million, and Petrolera dividends of $6.4 million and $4.7 million for the years 2002 and 2001, respectively.

Of the $12.1 million of operating cash flow generated during 2003, $3.0 million was used for the Company’s capital program, of which almost the entire amount represented funds for the continuing development of the Entre Lomas concession, $1.8 million was used for the previously described purchase of the shares of Fimaipu, and $4.8 million was paid to the Company’s shareholders in the form of dividends. The Company ended 2003 with cash and cash equivalents of $17.6 million, representing an increase of $2.5 million during the year.

Major exploration expenditures included in cash flow from operating activities consist of $1.1 million for the acquisition of 3D seismic both in the Entre Lomas concession and the Capricorn permit.

To date, since the end of 2003, the company has received $2.8 million in dividends from Petrolera.

Purchase of Fimaipu S.A.

In January 2003, the Company purchased all of the outstanding shares of Fimaipu whose sole asset is 7,895 shares, or 1.58 percent of Petrolera’s total shares outstanding for $1.8 million. The purchase increased the Company’s ownership in Petrolera to 40.803 percent representing 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. The Fimaipu purchase was completed only four months after the Company increased its stock interest in Petrolera by purchasing 27,700 additional shares in October 2002 from the PC Family for $6.9 million.

17

Effective January 2004, Fimaipu’s name was changed to Apco Argentina S.A.

Oil Prices

Volatility of oil prices has always had a significant impact on the Company’s ability to generate earnings, fund capital requirements and pay shareholder dividends.

World oil prices gradually improved during the latter part of 2002 and throughout 2003, primarily the result of the strike by employees of the national oil company of Venezuela, civil unrest in Nigeria, the war in Iraq, and a gradual improving of economic conditions throughout the world. Oil prices remained near or above $30 per barrel throughout 2003 and have moved higher in early 2004. In spite of a specific oil price limitation imposed by the Argentine government during the first quarter of 2003 that is described below, improved world oil market conditions resulted in significantly higher prices and contributed to improved net income for the Company during 2003.

As reflected in the statistical table on page 51, the per barrel crude oil sales price for 2003 averaged $28.03 compared with $23.04 and $ 24.20 for oil sold during 2002 and 2001, respectively.

Although, the level of oil prices achieved in 2003 had a strong positive impact on the Company’s net income and cash flow during 2003, given the past 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 during 2004 and beyond. 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 future Argentine governmental actions that may result from future economic turbulence such as what occurred in late 2001 and the first half of 2002. These actions could be detrimental to Argentina’s oil and gas industry.

In January 2003, due to the rapid increase in world oil prices and the Argentine government’s desire to maintain stability in domestic fuel prices, the Argentine government requested that crude oil producers and refiners agree to cap amounts payable for a portion of their domestic oil sales contracts at a price of $28.50 per barrel. In addition, producers and refiners also agreed that the difference between the actual price of West Texas Intermediate (“WTI”), the reference price used to determine the Company’s oil sales prices, and the $28.50 temporary cap would be payable at such time as WTI fell below $28.50. The debt payable by domestic refiners to producers accrues interest at an annual rate of seven percent. This agreement that was originally scheduled to expire on March 31, 2003 has since gone through seven iterations. The most recent renewal expires on April 30, 2004. During 2003, 54 percent of the Company’s oil sales in Argentina were subject to the price cap, and cumulative sales resulting from actual prices exceeding the price cap totaled $915 thousand. As of December 31, 2003, the total amount owed to the Company from domestic refiners pursuant to this agreement including accrued interest totaled $954 thousand and is reflected in other long-term assets in the Consolidated Balance Sheet as of December 31, 2003. There currently exists under the cap agreement a maximum WTI price of $36 per barrel. During the first quarter of 2004, the price of WTI has exceeded the $36 maximum. When the price of WTI exceeds $36 per barrel, reimbursement by refiners is limited to the difference between the $36 maximum price and the $28.50 cap.

The Company exported crude oil to Brazil only during the first quarter of the year. Although exports are not subject to the previously described oil price cap, they are subject to a 16.67 percent tax on oil exports implemented by the Argentine government on April 1, 2002 that is described in the section “Argentine Economic and Political Environment” on page 27. During the last three quarters of 2003, the Entre Lomas joint venture partners, and other Neuquen basin producers that sell oil together with

18

the Company and Petrolera, sold to domestic refiners because the net price of selling in country became more favorable, as the discount from WTI offered by domestic refiners during 2003 fell significantly as the year progressed. Currently, the per barrel discount from WTI for the Company’s domestic sales is less than 10 cents.

The Company has always, to the extent possible, made efforts to repatriate profits at every opportunity. Current government regulations allow export customers to pay the Company in US dollars outside of Argentina versus domestic customers that must make payments in Argentina in local currency. As a result, currently exports are a means for repatriation of profits. Nevertheless, the focus on domestic sales in 2003 has benefited the Company by increasing its profitability and providing for local currency needs that included its 2003 capital expenditure program and Argentine income tax payments totaling $7.2 million.

Natural Gas Prices

The Company’s gas is sold to Argentine customers pursuant to peso denominated contracts with occasional spot market sales. As a result of Economic Emergency Law 25,561 enacted by the Argentine government in January of 2002, the Company’s natural gas prices, expressed in US dollars, have fallen in proportion to the devaluation of the Argentine peso since the end of 2001 due to the pesofication of contracts and freezing of gas prices at the wellhead required by that law. Reference is made to the section “Argentine Economic and Political Environment” on page 27 for a description of the economic crisis that led to the enactment of the economic Emergency Law 25,561.

As reflected in the statistical table on page 51, the Company’s average natural gas sales price per thousand cubic foot (“mcf”) for 2003 averaged $.46 compared with $.42 and $1.28 for 2002 and 2001, respectively.

The price of natural gas in Argentina is expected to improve over time in response to declines in drilling for gas in Argentina that were a consequence of the unfavorable gas price environment of the last two years. Without development of gas reserves in Argentina, supplies of gas in the country have declined, while demand for gas has increased because of the low prices and the resurgence of growth of Argentina’s economy in 2003. Indeed, the Company, as have many other natural gas producers in Argentina, suspended gas development activities both in Entre Lomas and in Acambuco until market conditions improve. No significant investments for the development of natural gas are planned for 2004 in either of the concessions in which the Company produces natural gas.

Some energy experts in Argentina have predicted that the current pattern of steady decline in natural gas production and decreasing natural gas reserves in Argentina, if and when combined with a period of lower than normal precipitation, could eventually result in natural gas and power shortages. This could materialize if such conditions were to cause hydroelectric plants to operate at lower than normal levels and thermal power plants were unable to generate sufficient power to make up the difference due to declining gas supplies.

In response to this development, in February 2004, the Argentine government approved measures that enable natural gas producers in the country to sell directly to large industrial users through contracts and prices negotiated directly between the parties. The price of gas destined for use by small industrial users and residential customers is not a part of this immediate initiative to increase gas prices in the country. The Entre Lomas gas sales agreement for 2004, provides for a gas sales price in Argentine pesos, that when converted to US dollars, averages $.60 per mcf throughout the coming year. A new gas contract for the sale of a small percentage of Acambuco gas already provides for a gas price that will gradually increase to $.90 per mcf by the winter of 2005. It is expected that Acambuco gas contracts scheduled to expire in 2004 will be either renegotiated or replaced by new contracts that provide for increases in price.

19

Other than an expectation that natural gas prices will be permitted to increase gradually over time, as has already been demonstrated by the governing authorities, no specific predictions can be made about the future of gas prices in Argentina. The level of natural gas and electric power prices and the rate of inflation in the country are politically charged issues in a country where the purchasing power of salaries and wages were significantly devalued in 2002 due to the country’s economic crisis.

Product Volumes

During 2003, oil sales volumes, net to the Company’s consolidated and equity interests, totaled 1.927 million barrels (“mmbbls”), an increase of 16 percent when compared with 1.657 mmbbls during 2002. The increase is due to three factors, all associated with the Entre Lomas concession. There was a significant volume contribution attributable to the Company’s increased ownership in Petrolera resulting from the purchase of additional shares in late 2002 and January 2003. There were also production increases associated with favorable results of the 2003 Entre Lomas development drilling campaign, and achieving reductions in production declines in existing fields as a consequence of production and injection well workovers, and continued application of polymer injection used to improve waterflood efficiency in the Charco Bayo/Piedras Blancas field.

In 2003, gas sales volumes net to the Company’s consolidated and equity interests, totaled 4.6 billion cubic feet (“bcf”), a decrease of 13 percent when compared with 5.3 bcf during 2002. The reduction is due to a decrease in Entre Lomas production volumes even after taking into consideration the Company’s purchase of additional shares of Petrolera. The Entre Lomas decrease was partially offset by a significant increase in Acambuco production volumes. Entre Lomas gas production declined in 2003 due to a lack of investments designed to increase or maintain gas production levels resulting from the significant drop in natural gas prices in Argentina since January of 2002. Acambuco volumes improved by 26 percent as production from the four wells in the San Pedrito field was increased in response to higher demand for natural gas in markets served by the Acambuco concession.

LPG sales volumes, net to the Company’s consolidated and equity interest, totaled 15.4 thousand tons, an increase of 45 percent when compared with 10.6 thousand tons during 2002. The increase is the result of a revamp of the Entre Lomas concession LPG plant that was completed in mid 2002, and the volume contribution attributable to the aforementioned purchase by the Company of additional shares of Petrolera. The revamp significantly improved plant yields.

Market Concentration

As described in Note 5 of the Notes to Consolidated Financial Statements, the Company’s sales to EG3 S.A., an Argentine refiner owned by Petrobras, represent 75.1 percent of its total operating revenues. The six largest refiners are YPF S.A., Shell C.A.P.S.A., Esso S.A., Refinor S.A., EG3 S.A. and Petrobras Energia. Of these, YPF, that represents 57 percent of the total market, refines exclusively crude oil from its own producing concessions, and EG3 and Petrobras Energia are affiliates of Petrobras.

The discounts from WTI negotiated with EG3 throughout 2003 were competitive with prices received by other producers of Medanito crude oil in the Neuquen basin.

Capital Program

The Company’s capital and investing expenditures for 2003, net to its consolidated interests, totaled $4.8 million, including $2.8 million in the Entre Lomas concession, $1.8 million representing the purchase of Fimaipu, and an additional $0.2 million for the purchase of an additional interest in the Cañadón Ramirez concession. (Including the Company’s equity interest in Petrolera, its 2003 Entre Lomas capital expenditures totaled $6.2 million.)

20

The original Entre Lomas investment program for 2003 provided for drilling 10 development wells. Due to positive drilling results, and in order to take advantage of a favorable oil price environment, in the last half of the year, the partners agreed to amend the program to include drilling an additional 5 development wells and the acquisition of 373 square kilometers of 3D seismic over the remaining southern sectors of the concession that to date lack seismic imaging.

All wells drilled during 2003 were completed and placed on production. The 3D seismic program completed before the end of the year imaged either side of the Borde Mocho field in order to gain a clearer understanding of exploration leads previously identified with 2D seismic. Interpretation of the seismic is currently underway.

No gas development expenditures were scheduled in 2003 in the Acambuco concession. However, as a result of the successful reactivation in 2002 of oil production from the Tupambi formation in one well in the old San Pedro oil field, the Acambuco partners planned to drill a well targeting the Tupambi formation in the Macueta structure in the northern part of the concession in 2003. Drilling this well was postponed beyond 2003 because of weather related delays. However, drilling commenced in February of 2004.

Capital Budget for 2004

Given the current favorable oil price environment, the Entre Lomas joint venture partners have agreed to increase development spending for 2004 compared with previous year’s levels. Currently, the partners plan to drill 21 development wells that include a combination of field extension wells and in-fill wells. In addition, the plan provides for drilling 2 exploration wells that will be contingent upon the identification of new drilling prospects or upgrading previously identified leads to the level of drillable prospects. Exploration wells will likely be drilled to depths required to investigate the known producing formations in the concession. This type of well has a much lower risk profile than deeper wells, such as the El Caracol x-33 exploration well drilled in 2001 that was unsuccessful below the Quintuco formation. However, drilling to investigate deeper sedimentary sequences above the basement is also under consideration. The 2004 spending program also includes conversions of wells to injection, production facility investments, recompletion of wells in existing behind pipe pay, continuation of the ongoing polymer injection program, and an aggressive well workover program. The total Entre Lomas spending program is expected to total just over $30 million, or approximately $7 million, net to the Company’s direct interest, and just over $9 million, net to it’s equity interest.

As a result of the current unfavorable gas price environment in Argentina, no significant investments are planned for the Acambuco concession during 2004. However, as described in the section “Macueta Field” on page 10, engineering design and material purchases for the gas pipeline and expansion of the Acambuco treatment plant, both of which are required to put the Macueta field on production, is planned for 2004. It is expected that construction of these facilities will get underway sometime in 2005.

In the Cañadó Ramirez concession, during 2004, the partners will acquire 130 square kilometers of 3D seismic and undertake a reactivation campaign that will include the workover and stimulation of 6 wells and, when appropriate, the perforation of previously untested zones in each of these wells. The estimated cost of this program is $1.6 million or, $1.3 million net to the Company’s interest.

Capricorn Permit

No significant investments are planned for 2004. The Capricorn partners are evaluating a substantial quantity of 2D seismic that was obtained when the permit was granted. This seismic must be inventoried, reviewed, and reprocessed, if needed, before any interpretive work can commence.

21

Growth Opportunities

In the previous two years, the Company deployed cash resources to increase its presence in Argentina. As described previously, the Company increased its overall ownership interest in the Entre Lomas concession by virtue of its purchase in 2002 of shares in Petrolera from the PC family for $6.9 million, and its purchase in 2003 of Fimaipu for $1.8 million. These two purchases increased the Company’s combined direct and indirect interests in the Entre Lomas joint venture to 52.85 percent.

In 2003, the Company also purchased an additional 36.82 percent interest in the Cañadó Ramirez concession for a consideration of $155 thousand. The purchase increased the Company’s interest in the property to 81.82 percent.

The Company also acquired a 50 percent interest in the Capricorn Permit by acquiring 3D seismic in order to earn the interest.

Despite the backdrop of Argentina’s economic turmoil since the end of 2001, the Company’s management at this time intends to continue to seek additional ways to deploy its financial resources focusing primarily, but not exclusively, on other opportunities in Argentina.

PUESTO GALDAME

In March 2004, the Company entered into a farmout agreement with Chevron San Jorge S.R.L. (“Chevron”) and Advantage Resources International S.R.L. (“Advantage”), both Argentine companies, whereby the Company undertakes to pay a share of the costs to drill, complete and abandon an exploration well in the CNQ 31 (“Puesto Galdame”) Exploration Permit. The well is planned to be drilled to a depth of 3,200 meters and investigate formations known to be productive in this area of the Neuquen basin in Argentina. Upon fulfillment of the commitment the Company will earn a 22.5 percent working interest in Puesto Galdame. Chevron, which currently holds a 100 percent interest in Puesto Galdame, will act as operator of the property. The Company’s share of the estimated drilling cost will be approximately $720 thousand and increases to approximately $990 thousand if the well is completed.

RESULTS OF OPERATIONS

Refer to Consolidated Statements of Operations on page 33.

2003 vs 2002

During 2003, the Company generated net income of $12.4 million compared with net income of $7.3 million during 2002. Net income for 2002, included the cumulative effect of implementing SFAS No. 143 that resulted in a $2.4 million increase in net income. Before the cumulative effect of implementing SFAS No. 143, during 2002, the Company generated net income of $4.9 million.

The following variance explanations will focus on a comparison of income before the effect of implementing SFAS No. 143.

The increase in income before cumulative effect of change in accounting principle of $7.5 million is primarily due to increased operating revenues and greater equity income from Argentine investments.

Operating revenues increased by $6.5 million, or 32 percent, due both to higher oil and plant product sales prices and increased oil and plant product sales volumes. Oil and plant product sales prices during 2003 averaged $28.03 per barrel and $259.65 per metric ton, respectively, as compared with

22

$23.04 per barrel and $160.80 per metric ton, respectively, during 2002. Consolidated oil sales volumes increased by 58 thousand barrels, or seven percent, due to primarily to the success of the 2003 Entre Lomas drilling and workover programs. Consolidated plant product volumes increased in 2003 as a result of the 2002 revamp of the Entre Lomas LPG plant that resulted in improved plant yields. The revamp was completed in mid 2002 and required that the plant close for a brief period.

Equity income from Argentine investments increased by $5.5 million compared with 2002. Of this increase $1.3 million is the result of the purchase by the Company of shares in Petrolera in October of 2002, and the purchase of Fimaipu in 2003. These two purchases increased the Company’s ownership in Petrolera from 33.684 percent to 40.803 percent. Because the Company’s equity income is comprised solely of its share of Petrolera’s earnings, all other variance explanations included herein except for selling and administrative expense and exploration expense, also serve to explain the remaining $4.2 million increase in equity income. Petrolera’s sole business is and has always been its interest in and role as operator of the Entre Lomas concession and, as a result, its revenues and expenses are essentially derived from the same operations as the Company.

Foreign exchange losses decreased by $897 thousand as a result of a stabilization of the Argentine peso during 2003 compared with the significant devaluation that occurred in 2002.

The above favorable variances were partially offset by the following negative variances.

Operating expense increased by $1.1 million due to higher workover costs and expenses associated with other oilfield services, and compensation adjustments given to employees of Petrolera during the latter part of 2002 and the first quarter of 2003 in response to elevated levels of inflation in 2002. During the first nine months of 2002, in spite of inflation, the peso cost of oilfield services and salaries and wages denominated in Argentine pesos remained relatively unchanged due to the uncertainty in Argentina’s overall business environment resulting from the country’s economic crisis. As a result, when expressed in US dollars, by the end of the third quarter 2002, peso denominated operating expenses had decreased approximately in proportion with the devaluation of the Argentine peso and, as a consequence, had by that time reached atypically low levels. Toward the end of 2002, Argentine energy companies began to provide compensation adjustments to employees in recognition of 2002 inflation levels and companies providing oil field services and products were able to negotiate price and tariff increases.

Provincial production taxes increased by $731 thousand and Argentine income taxes increased by $820 thousand. These increases are directly associated with the previously described increases in operating revenues and net income, respectively.

Selling and administrative expenses increased by $628 thousand due to compensation adjustments given to the Company’s branch employees during the fourth quarter of 2002 and the first quarter of 2003, increased cost of services associated with greater regulatory compliance and related governance issues, higher engineering consulting fees and increased costs of insurance and audit expenses. For the same reasons described under operating expense, by September 30, 2002, the cost of the Company’s branch operation, when expressed in US dollars had decreased approximately in proportion with the devaluation of the Argentine peso and, as a consequence, had by that time reached atypically low levels.

Exploration expense increased $1.9 million for three reasons. The Company charged to expense the cost of seismic acquired by the Company in the Capricorn permit pursuant to the farm-in agreement by which the Company acquired a 50 percent interest in the permit, and the related expenses associated with evaluating and interpreting the seismic. The Company also charged to expense its net share of the cost of 3D seismic acquired in the Entre Lomas concession during the fourth quarter of 2003. Finally, the Company charged to expense its share of prior year Acambuco expenditures associated with the drilling of the Cerro Tuyunti x-1 (“CT well”) and Macueta x-1002 (“Mac well”) wells. When drilled, the CT well encountered three repetitions of the Tupambi formation that is oil productive elsewhere in the

23

concession and the region. Evaluation in 2003 of seismic over the Cerro Tuyunti structure enabled the partners to determine that there was no structural closure at the level of the Tupambi and as a result the decision was made to not reenter the well for the purpose of testing the Tupambi. The Company also charged to expense the costs of sidetracking the Mac well after determining in 2003 that it will not be placed on production from its horizontal extension when the Macueta field is put on production in the future.

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 included the cumulative effect of implementing SFAS No. 143 that resulted in increasing net income by $2.4 million. Before the cumulative effect of implementing SFAS No. 143, the Company generated 2002 net income of $4.9 million.

The following variance explanations will focus on a comparison of income before the effect of implementing SFAS No. 143.

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 consolidated 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”).

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

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 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 27 for a description of the Argentine pesos devaluation during 2002.

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 caused peso revenues to rise disproportionately with the increase in peso expenses. This occurred primarily because oil is a dollar denominated commodity. In addition, the failure of the Argentine tax authority to adopt inflation accounting in 2002 diminished the magnitude of peso depreciation i