UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

(NO FEE REQUIRED)

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 þ 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. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates on June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $82,256,868. This value was computed by reference to the closing price of the registrant’s stock of $36.00. Since the shares of the registrant’s stock trade sporadically in the NASDAQ SmallCap Market^SM, 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 for more information.

As of March 1, 2005, 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

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.

On February 10, 2005, the Company paid $6.2 million to acquire 79,752 shares of Rio Cullen – Las Violetas S.A., an Argentine corporation (“RCLV”), that owns participation interests of 46.5 percent each in the CA-12 “Rio Cullen”, CA-13 “Las Violetas”, and CA-14 “Angostura” hydrocarbon exploitation concession. The shares of RCLV purchased by the Company represent 55.44 percent of the total outstanding shares. The result of the purchase is that the Company has acquired 25.78 percent effective participation interests in each of the above named concessions. Of the $6.2 million paid by the Company, $5.7 million represents the value attributed to the acquired concession interests. The remaining balance represents working capital and other adjustments.

During 2004, the Company generated net income of $15.5 million compared with $12.4 million and $7.3 million during 2003 and 2002, 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.

(b) Financial Information About Segments

None.

(c) Narrative Description of Business

ENTRE LOMAS

The Company participates in a joint venture with Petrolera Entre Lomas S.A. (“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.

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

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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 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 crude oil (“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 2004, discounts for the sale of oil produced in the Entre Lomas concession averaged less than 50 cents compared with more than $2 shortly after 1991. Discounts for the sale of oil produced in the other concessions in which the Company has an interest or for any Argentine oil sold in export markets are generally higher.

As the price of crude oil increased to record levels during 2004, politically driven mechanisms for determining the sale price of oil produced and sold in Argentina changed significantly as the year progressed. WTI continues to be the reference price for oil sold in the country, and the aforementioned gravity and quality discounts still apply. However, additional reduction factors were gradually incorporated into pricing formulas that now act to reduce considerably the sale price net back to Argentine producers such that net back reductions escalate to higher and higher levels as WTI increases. Reference is made to the sections “Oil Prices” and “Commodity Price Risk” on pages 12 and 19, respectively, for additional discussion of the net back reduction.

The entire Argentine domestic refining market is small. Where there were six refiners active in the country at the end of 2003, due to a combination of two refiners in 2004, there are now five active refiners that constitute 99 percent of the total market. As a result, the Company’s oil sales have historically depended on a relatively small group of customers. The largest of these five companies refines only its own crude oil production, while the smallest of the five operates only in the northwest basin of Argentina. That leaves only three domestic refiners to which the Company can sell its Entre Lomas production. Decisions to sell to these customers are based on advantages presented by the commercial terms negotiated with each customer. During 2004, the Company sold all of its Entre Lomas production, that constitutes more than 95 percent of its total oil production, to Petrobras’ refinery in Puesto Galvan, Argentina. This has benefited the Company as sales prices are competitive, and the net backs obtained are greater than those currently received for export sales. Refer to Note 6, 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 “Liquity and Capital Resources” on page 12 for a description of the impact of economic reforms implemented in 2002 on natural gas prices in Argentina.

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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 2004, natural gas sales represented 6 percent of the Company’s total operating revenues compared with 4 and 6 percent during 2003 and 2002, 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, five of whom are nominees of the Company and six 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.

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 and Lomas de Ocampo gas fields and some oil in the CB/PB field. Since inception 541 wells have been drilled in the concession, of which at year end, 323 are producing oil wells, 22 are producing gas wells, 132 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 whereby water is injected into a producing reservoir in order to restore pressure and increase the ultimate volume of hydrocarbons to be recovered. 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.

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 243 wells producing oil in this field. Secondary recovery was introduced with a successful pilot project in 1975 and has slowly been expanded to include 101 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

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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 20 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 2004, 15 additional wells were drilled of which 14 were completed as producers and one was drilled with completion in progress at year end.

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. 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, 2004, there were 22 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. Ten injection wells are active in this field. During 2004, two development wells were drilled and completed as oil producers.

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.

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 33 producing wells and 21 water injection wells. It is believed that the downdip limits of this field are well defined. During 2004, one development well was drilled and completed as an oil producer.

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 2004, no wells were drilled, or recompletions performed with the specific objective of developing additional gas reserves in this region.

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 thirteen additional wells, some of which are capable of both Petrolifera gas production and Quintuco oil production. Others only produce oil from the Quintuco formation. Five field extension wells were drilled in 2004 and one previously drilled well was recompleted as a gas producer in the Petrolifera formation. Of the five wells drilled, three were completed and put on production, one was drilled with completion in progress at year’s end, and one partially drilled well experienced mechanical problems during drilling and could not be salvaged. Additional development drilling to the west and northwest is planned for 2005.

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 10 wells have been drilled and all are producing oil. The discovery well was drilled

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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. In 2004, one development well was drilled and completed as an oil producer.

Exploration

Since 1993, the Entre Lomas partners have conducted three campaigns to gather three dimensional (“3D”) seismic information. The most recent survey was completed in late 2003 during which the partners acquired 373 square kilometers of 3D seismic information 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. 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 images in ways that may help exploit the existing producing fields.

In 2001, the joint venture partners drilled a deep exploration well 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, including the Quintuco, Tordillo, and Petrolifera. The well was drilled to a 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. No additional wells below the depth of the Petrolifera formation have been drilled.

Interpretation of 3D seismic information acquired in 2003 was completed in 2004 and resulted in the identification of several drilling locations both near to and distant from existing production. Although work continues on the evaluation of exploration potential to objectives below the Petrolifera formation, the primary focus to date has been the identification of lower risk drilling targets to formations known to be productive in the concession in structural closures and/or fault traps that have been identified close to the principal producing fields. Two locations were selected and both commenced drilling in the last two months of the year. By year’s end, both wells had reached total depth and log analysis indicated both could have productive potential. The first well, the CB a-247, located near Charco Bayo to the southeast close to the border of the adjacent concession was successfully tested in both the Tordillo and Quintuco formations. The structure on which this well was drilled is of limited size. In early February 2005, the well was put on production from the Quintuco with the Tordillo productive interval remaining behind pipe. The second well drilled, the Entre Lomas a-57, was drilled on a structural fault trap southeast of the Entre Lomas field. Completion operations commenced in late January 2005 and the well was put on production in early March.

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. Additional studies are required here before drilling another well.

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.

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

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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 Corporation and the Company which each hold interests of 1.5 percent. Northwest Argentina Corporation is a subsidiary of The Williams Companies, Inc.

San Pedrito Field

The first well to produce in the San Pedrito field was drilled in 1996 to 14,500 feet and discovered gas in the Huamampampa formation. For this initial well, the Company exercised its non-consent option and will participate in future revenues from this well after its partners recover their costs plus the contractual penalty related solely to this well. Since the discovery, three development wells have been drilled and completed as producers. The Company participated in all three development wells. During 2004, the San Pedrito wells in which the Company participated produced 59 billion cubic feet of natural gas and 964 thousand barrels of condensate, or 892 million cubic feet of gas and 14 thousand barrels of condensate, net to the Company’s 1.5 percent interest.

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 reaching its objective, 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. The well experienced mechanical problems during drilling and 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.

Gas sales from the Macueta field require investments for the construction of a gas pipeline and modifications to the concession’s gas treatment plant. These investments will be made in 2005 with first production expected to occur in the first half of 2006.

Other

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. Wells drilled to date have required as much as one year to drill and the costs to drill and complete wells drilled to the Huamampampa formation have ranged from $30 to $50 million.

Acambuco Sales and Markets

Sales of both natural gas and condensate from the Acambuco joint venture commenced in March 2001. Acambuco gas and condensate are being sold under contracts negotiated by PAE primarily to domestic distribution companies and industrial customers in the northern part of Argentina.

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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. Roch S.A., an Argentine Company, owns the remaining interest. This concession produces hydrocarbons from the Golfo San Jorge basin, the oldest oil-producing province in the country.

During 2003, the Company evaluated what investments would be required to properly investigate the potential of Cañadón Ramirez and concluded that funds should be allocated both to exploration and exploitation efforts, specifically toward the reactivation of existing wells and 3D seismic surveys to determine both the exploration and development potential of the Los Monos structure and the area extending to the southern boundary of the concession. A well reactivation program was completed during the second quarter. Of six workovers performed, two wells were completed and placed on production. After initial higher rates, production from these two wells has declined to a combined rate of approximately 40 barrels per day. Also during the second quarter 2004, the acquisition of 130 square kilometers of 3D seismic information was completed. To date seismic interpretation has identified two drilling prospects. It is the Company’s intention to drill at least one exploration well in 2005. It is also the intention of the Company to shut-in the reactivated wells until the results of exploration drilling are known.

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.

The Company acquired and processed the seismic images thereby completing its commitment and earning a 50 percent working interest in the block. The focus of the seismic survey was a fault trend immediately to the west of the El Vinalar concession that is oil productive. Interpretation of the seismic images resulted in the conclusion that, in the area of a main fault that was the primary target of the interpretation, there was 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 in 2003 of the Company’s seismic commitment in Capricorn, Netherfield fulfilled its obligations for the permit’s first exploration period that commenced in August 2003. There has been no activity in Capricorn in 2004 but the partners are currently evaluating the need for seismic acquisition immediately to the south of the Puesto Guardian concession that is also oil productive. The exploration permit expires in August 2005, at which time 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. If the option is not renewed the entire block must be relinquished.

EMPLOYEES

At March 1, 2005, the Company had nine full-time employees.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this annual report, excluding historical information, include forward looking statements that discuss the Company’s expected future results based on current and pending business operations. 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;

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	•	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.

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 and market 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;

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	•	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;
	•	the rights of the Company to explore for, drill for and produce hydrocarbons in Argentina are generally derived from concessions granted by the government, which have a finite term, the expiration or termination of which could materially affect the Company’s results (for example, the term of the Entre Lomas concession, which comprised approximately 95 percent of the Company’s total production in 2004, 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);
	•	in the event that the Entre Lomas concession partners are granted the option to extend the concession for an additional ten-year period, asset retirement obligations provided for by the Company under current concession terms could be greater than currently estimated.

(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.

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. Refer to Note 6 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.

With exception of cash and cash equivalents deposited in banks in the Cayman Islands, Bahamas 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.

Risks associated with foreign operations are discussed elsewhere in this Item 1 and in Item 7A: “Quantitative and Qualitative Disclosures about Market Risk”.

(e) Available Information

The Company files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other documents electronically with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). You may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain such reports from the SEC’s Internet website at http://www.sec.gov.

The Company does not maintain an Internet website. However, the Company will provide electronic or paper copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, free of charge, upon reasonable request. Such requests should be directed to the Corporate Secretary, Apco Argentina Inc., 4100 One Williams Center, Tulsa, Oklahoma, 74172.

ITEM 2. PROPERTIES

See Item 1 (c) for a description of properties and refer to “Unaudited Supplemental Oil and Gas Information” on pages 38 and 39 for tables that present estimates of the Company’s net proved reserves.

ITEM 3. LEGAL PROCEEDINGS

The information called for by this item is provided in Note 13 of Notes to Consolidated Financial Statements which information is incorporated by reference into this item.

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

Submission of Matters to a Vote of Security Holders.

The Annual General Meeting of Shareholders of the Company was held on October 5, 2004. At the Annual General Meeting of Shareholders, two individuals were elected as directors of the Company and five individuals continue to serve as directors pursuant to their prior election. The appointment of Ernst & Young LLP as the independent registered public accounting firm of the Company for 2004 was ratified.

A tabulation of the voting at the Annual General Meeting of Shareholders with respect to the matters indicated is as follows:

Ratification of Appointment of Independent Registered Public Accounting Firm

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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 March 1, 2005, there were 878 record holders of the Company’s ordinary shares, $0.01 par value. The ordinary shares are traded sporadically on the NASDAQ SmallCap Market^SM. 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 trade prices for each quarter during the years 2004 and 2003 are listed below.

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 12 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.

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 43 for variations in prices that influence the Company’s revenues and net income.

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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 concession 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.

Reference is made to the section “Argentine Economic and Political Environment” on page 20 for a description of the economic crisis that affected Argentina in late 2001 and early 2002. In general, although this crisis created a climate of business uncertainty for companies in Argentina, the environment for oil and gas companies operating in the country has improved. Since the end of 2002, the value of Argentina’s currency has stabilized and inflation has fallen to low single digit levels. In 2003 and 2004, Argentina’s economy grew at rates of nine percent and eight percent and oil prices rose significantly reaching record levels in late 2004.

During 2004, the Company generated cash flow from operating activities of $18.8 million that included $8.6 million in dividends from Petrolera. These amounts compare with net cash provided by operating activities of $12.1 million and $14.1 million, and Petrolera dividends of $6.1 million and $6.4 million for the years 2003 and 2002, respectively.

Of the $18.8 million of operating cash flow generated during 2004, $5.2 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 and $4.8 million was paid to the Company’s shareholders in the form of dividends. The Company ended 2004 with cash, cash equivalents and short-term investments of $26.4 million, representing an increase of $8.8 million during the year.

Oil Prices

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

World oil prices gradually increased throughout 2003 remaining near or above $30 per barrel and moving higher during the first half of 2004. These increases were primarily the result of a combination of events including a strike by employees of the national oil company of Venezuela, civil unrest in Nigeria, the war in Iraq, and a gradual improvement in economic conditions throughout the world in particular accelerating economic growth in China. In the third quarter 2004, because of weather related events and the realization that the world’s excess productive capacity had almost disappeared, commodities markets pushed the price of oil to record levels. In October 2004, the price of West Texas Intermediate (“WTI”), the crude oil type that serves as the reference price for crude oil sales contracts in Argentina, moved higher than $50 per barrel and has since oscillated in a range between $45 and $55 per barrel.

For some time now, the Argentine government has maintained that, in order to prevent excessive levels of inflation, it would do what it could to shield the Argentine consumer from rising fuel prices. Therefore, in order to maintain stability in Argentine gasoline and diesel prices and avoid inflationary pressures on the economy, the Argentine government, through the implementation of an oil export tax that has been raised on multiple occasions, has encouraged producers and refiners to take actions needed to alleviate the impact of higher crude oil prices on Argentina’s economy. In 2003, Argentine producers and refiners entered into a price stabilization agreement to cap domestic oil prices at $28.50 for a portion of domestic oil sales. Refer to Note 1 of Notes to Consolidated Financial Statements for a further description of the price cap and its impact on the Company. The oil price cap expired April 30, 2004, but the continued increase in oil prices necessitated that producers and refiners, including the Company and Petrolera, enact reduction factors in price formulas that reduce considerably the sale price net back to Argentine producers such that net back reductions escalate to higher and higher levels as WTI increases.

As reflected in the statistical table on page 43, although the price of WTI averaged $41 in 2004, the Company’s per barrel crude oil sales price for 2004 averaged $31.21 compared with $28.03 and $23.04 for oil sold during 2003 and 2002, respectively.

Although, the level of oil prices achieved in 2004 had a very positive impact on the Company’s net income and cash flow, given the past volatility of world oil prices and their sensitivity to political events and possible reactions of the Organization

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of Petroleum Exporting Countries (“OPEC”), there is no assurance that oil prices will remain at these levels during 2005 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 be negatively impacted by Argentine governmental actions.

Natural Gas Prices

The Company sells its gas 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, which law pesofied contracts and froze gas prices at the wellhead, the Company’s natural gas sales prices, expressed in US dollars, fell in proportion to the devaluation of the Argentine peso. Reference is made to the section “Argentine Economic and Political Environment” on page 20 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 43, during 2004 the Company’s average natural gas sale price per thousand cubic feet (“mcf”) averaged $.74 compared with $.46 and $.42 in 2003 and 2002, respectively. This compares with a pre-economic crisis average price of $1.28 for all of 2001. The following paragraph describes recent events in Argentina that have caused gas prices to increase in 2004.

Since the end of 2001, as a consequence of a resurgence of growth in Argentina’s economy in 2003 and 2004, and stimulated by low gas prices resulting from the government implemented natural gas price freeze, demand for natural gas in Argentina has grown. The unfavorable gas price environment for producers also acted to discourage gas development activities. Without significant development of gas reserves in Argentina, supplies of gas in the country failed to keep up with increased demand for gas that resulted from low prices and the resurgence of growth of Argentina’s economy in 2003 and 2004. The result has been a natural gas and power supply shortage during 2004 that is projected to continue into 2005. Since the beginning of 2004, the Argentine government has taken several steps in an effort to prevent possible shortages. Gas exports to Chile were curtailed and the country entered into agreements to import natural gas from Bolivia. In February 2004, the Argentine government approved measures that enabled natural gas producers in the country to sell directly to large industrial users through contracts and prices negotiated directly between the parties. Subsequently, in April 2004, the government and natural gas producers entered into an agreement to assure domestic gas supplies. The agreement permitted producers to renegotiate gas sales contracts, excluding those that could affect residential customers, in accordance with price increases permitted by the Secretary of Energy. The Company plans to allocate capital in 2005 toward the development of natural gas reserves.

Product Volumes

During 2004, oil sales volumes, net to the Company’s consolidated and equity interests, totaled 1.981 million barrels (“mmbbls”), an increase of three percent when compared with 1.927 mmbbls during 2003. The increase is due to favorable results from the 2004 Entre Lomas development drilling campaign and a continuation of a trend in production decline reductions in certain fields that are a consequence of production and injection well workovers, and continued application of polymer injection used to improve waterflood efficiency. Oil sales volumes for the last three years are provided in the statistical table presented on page 43.

In 2004, gas sales volumes, net to the Company’s consolidated and equity interests, totaled 4.9 billion cubic feet (“bcf”), an increase of six percent when compared with 4.6 bcf during 2003. The increase is primarily due to greater Acambuco gas production volumes that resulted from operating the San Pedrito field at full capacity throughout the entire year due to increased demand for gas in northern Argentina.

LPG sales volumes, net to the Company’s consolidated and equity interest, totaled 16.4 thousand tons, an increase of six percent when compared with 15.4 thousand tons during 2003. The rise in volumes is attributable to increased plant yields resulting from improvements made to the Entre Lomas concession’s LPG plant since 2002.

Market Concentration

As described in Note 6 of the Notes to Consolidated Financial Statements, the Company’s sales to EG3 S.A. (“EG3”)., an Argentine refiner owned by Petrobras, represents 90 percent of its total operating revenues. In Argentina today there are currently five active refiners operating in the country that constitute 99 percent of the total market. The largest of these five refines only its own upstream production, while the smallest of the five operates only in the northwest basin of Argentina. That leaves only three domestic refiners to which the Company can sell its Entre Lomas production which constitutes over 90

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percent of its total production. Decisions to sell to these customers are based on advantages presented by the commercial terms negotiated with each customer. The Company has the option to broaden its customer base by exporting its crude oil and has done so in previous years. However, this would have disadvantaged the Company during 2004 because net backs obtained by selling oil in Argentina are currently greater than those that can be received for export sales. In addition, because of the Company’s limited size and the volume of oil required to fill an oil tanker, the Company must join other sellers to export. Today almost all producers of Medanito crude oil are selling to Argentine refiners. Refer to Note 6, of Notes to Consolidated Financial Statements, for a description of the Company’s major customers over the last three years.

The discounts from WTI negotiated with EG3 throughout 2004 were competitive with those received by other producers of Medanito crude oil in the Neuquen basin.

Canadon Ramirez

A well reactivation program was completed during the second quarter 2004. Of six workovers performed, two wells were completed and placed on production. After initial higher rates, production from these two wells has declined to a combined rate of approximately 40 barrels per day. In the fourth quarter 2004, the Company decided to impair all carrying costs associated with the concession based on the lack of profitability of these two wells.

During the second quarter 2004, the Company acquired 130 square kilometers of 3D seismic information. To date, seismic interpretation has identified two drilling prospects. The Company plans to drill at least one exploration well in 2005. In the meantime, the Company intends to shut-in the two reactivated wells until the results of exploration drilling are known.

Puesto Galdame

In March 2004, the Company entered into a farm out agreement with Chevron San Jorge S.R.L. (“Chevron”) and Advantage Resources International S.R.L. (“Advantage”), both Argentine companies, whereby the Company undertook to pay a share of the costs to drill, complete and abandon an exploration well in the CNQ 31 (“Puesto Galdame”) Exploration Permit. During April and May, the El Tigre x-1 well was drilled and reached total depth of 3,200 m (10,500 ft). The objective formations were reached, but log analysis clearly indicated water saturations that were too high and little to no indications of hydrocarbons. Consequently, the well was plugged and abandoned. The total cost of the well to the Company was $759 thousand which cost was charged to expense. The Company earned its 22.5 percent interest in the Puesto Galdame block, however, since the expiration date of the exploration permit was approaching, the partners returned the Puesto Galdame block to the provincial authorities.

Capital Program

The Company’s capital expenditures for 2004, net to its consolidated interests, totaled $5.2 million. After taking into consideration the portion of capital expenditures attributable to its equity interest in Petrolera, the Company’s direct and indirect capital expenditures for 2004 totaled $12 million.

In 2004, the Company participated in the drilling of 26 wells in the Entre Lomas concession. Of these wells, 21 were completed and put into production, four were in progress at the end of the year, and one partially drilled well experienced mechanical problems during drilling and could not be salvaged. Entre Lomas capital spending also included well recompletions and production facilities investments.

A well reactivation program in the Canadon Ramirez concession was completed during the second quarter of 2004. Of six workovers performed, two wells were completed and placed on production. In addition, the joint venture partners acquired 130 square kilometers of 3D seismic information in Canadon Ramirez. The net cost to the Company of both the reactivation and seismic programs was $ 1 million all of which was charged to expense when incurred.

Investment Budget for 2005

Given the continuing favorable oil price environment, the Entre Lomas joint venture partners have agreed that, in 2005, we will increase investments above 2004 levels. During 2005, the partners plan to drill 29 wells, including two exploration wells. The 2005 spending program also includes conversions of wells to injection, production facility investments, recompletion of wells to existing behind pipe pay, continuation of the ongoing polymer injection program, and a well workover program. The Entre Lomas investment program is expected to total $8.7 million, net to the Company’s direct interest, and $11.2 million, net to its equity interest.

In Acambuco, the joint venture will proceed with investments to construct a gas pipeline and make modifications to the

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concessions gas treatment plant needed to deliver gas from the Macueta field to market. The Company’s 1.5 percent share of the Acambuco 2005 investment program is expected to total $1 million. First production is expected to occur in 2006. Refer to “Macueta Field” on page 6 for a more detailed discussion.

As of December 31, 2004 and 2003, capitalized costs associated with the Macueta field included in the Company’s Consolidated Balance Sheets as property and equipment totals $670 thousand. Refer to “Macueta Field” on page 6 for a more detailed discussion.

In Cañadón Ramirez, the partners anticipate drilling at least one exploration wells. The estimated cost of this program is expected to cost just under $ 1 million net to the Company’s interest.

Growth Opportunities

In the last three years, the Company has deployed cash resources to increase its presence in Argentina. During this period, the Company twice increased its participation in the Entre Lomas concession by purchasing additional shares of Petrolera. The first increase occurred in 2002 with the purchase of an additional 5.54 percent of the shares of Petrolera from the Perez Companc family for $6.9 million. The second increase occurred in 2003, with the purchase for $1.8 million of Fimaipu S.A. that owns 1.579 percent of the shares of Petrolera. The name of Fimaipu S.A. has since been changed to Apco Argentina S.A.

In addition to the previously described investments, in 2003, the Company also purchased an additional 36.82 percent participation in the Canadon Ramirez concession for $155 thousand, increasing its interest to 81.82 percent and in 2004 invested in the previously described 3D seismic survey and well reactivation programs.

The Company has also acquired a 50 percent interest in the Capricorn permit, an exploration block in northern Argentina covering 2.1 million acres, and participated in the drilling of an unsuccessful exploration well in the Puesto Galdame exploration permit.

The Company’s management, as part of a strategy for growth, will continue to seek additional ways to deploy its financial resources for investing in exploration and reserve acquisition opportunities both in and outside of Argentina.

Rio Cullen — Las Violetas S.A.

In keeping with the Company’s strategy for growth, management was provided the opportunity to evaluate three concessions in the southernmost part of Argentina on the island of Tierra del Fuego with the view toward making an offer for an interest that was available for sale.

As a result of the evaluation and subsequent negotiations with the seller, on February 10, 2005, the Company paid $6.2 million to acquire 79,752 shares of Rio Cullen — Las Violetas S.A., an Argentine corporation (“RCLV”), that owns participation interests of 46.5 percent each in the CA-12 “Rio Cullen”, CA-13 “Las Violetas”, and CA-14 “Angostura” hydrocarbon exploitation concession. The shares of RCLV purchased by the Company represent 55.44 percent of the total outstanding shares. The result of the purchase is that the Company has acquired 25.78 percent effective participation interests in each of the above named concessions. Of the $6.2 million paid by the Company, $5.7 million represents the value attributed to the acquired concession interests. The remaining balance represents working capital and other adjustments.

The purchase was part of an overall purchase of 143,583 shares of RCLV by Apco and its partners, Netherfield Corporation, Sucursal Tierra del Fuego (“Netherfield”), a branch of Netherfield Corporation, a wholly owned subsidiary of Antrim Energy Inc., a Canadian company, and Roch S.A., an Argentine company, (collectively “the Purchasers”) pursuant to a stock purchase agreement executed with the Tower Fund L.P. The 143,583 shares acquired represent all of the outstanding shares of RCLV. The Purchasers and two other Argentine companies that did not sell their interests in the three concessions have formed a joint venture and executed new joint venture and operating agreements.

Operations in Tierra del Fuego are exempt from Argentine income taxes pursuant to Argentine law. Inasmuch, income generated by these concessions will not be subject to Argentine federal taxes as long as the current exemption remains in effect.

At the time of closing, the Company’s net share of the daily oil and liquids production from the acquired concession interests was approximately 200 barrels and gas production was approximately 2.6 million cubic feet. Natural gas produced in these concessions primarily supplies the local residential market in Tierra del Fuego. Because strict gas price controls remain in effect in Argentina for gas sold to residential markets, the sales price of gas produced in these concessions currently averages $.49 per mcf.

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The joint venture partners have commenced investments to acquire 3D seismic information over certain key areas of the concessions.

Tax Increases

In May 2004, the Argentine government increased the tax on oil exports from 16.67 percent to 20 percent and the tax on LPG exports from 4.67 percent to 16.67 percent. The Company was immediately impacted by the increase in the tax on LPG exports. Subsequently, in August 2004, the Argentine government again increased the tax on oil exports from 20 percent to a variable tiered rate that escalates with increases in the price of WTI. At a price of $32 or less, the export tax rate remains at 20 percent and gradually increases up to a maximum rate of 31 percent when the price of WTI reaches $45. These increases in export taxes were in response to the continuing rise in oil prices. During 2004, the Company did not pay oil export taxes because it did not export oil.

Derivative Contracts

On July 15, 2004, the Company entered into a collar for approximately 500,000 barrels of oil during the period from August 2, 2004 through January 31, 2006. The commodity reference price was WTI. The collar established a call strike price, or ceiling, of $53 per barrel and a put strike price, or floor, of $26 per barrel.

As described previously in the section “Oil Prices” on page 12, throughout the third quarter of 2004 oil prices rose very rapidly in response to a combination of unforeseen events. The price of WTI increased from the mid $30 per barrel range in July to record levels. In October 2004, WTI moved higher than $50 per barrel, exceeding the collar’s call strike price of $53 per barrel throughout much of October 2004. The previously described increase in the oil export tax implemented in the third quarter of 2004, coupled with a change in the mechanism for setting domestic oil prices in Argentina that enacted reduction factors in oil price formulas that escalate to higher and higher levels as WTI increases, exposed the Company to further increases in WTI as a result of the $53 per barrel ceiling imbedded in the collar. Because of this exposure, the potential for additional price increases in such a turbulent and unpredictable market and the unpredictable nature of reactions by the Argentine government to continued increases in oil prices, management decided to unwind the original collar at a cost of $1.1 million. As described in Note 8 of Notes to Consolidated Financial Statements on page 34, this cost was recognized as a reduction of operating revenue.

RESULTS OF OPERATIONS

Refer to Consolidated Statements of Income on page 27.

2004 vs. 2003

During 2004, the company generated net income of $15.5 million, an increase of $3.1 million, compared with $12.4 million during 2003. The improvement in net income is due primarily to increases in operating revenues and equity income from Argentine investments.

Operating revenue increased by $3 million. This increase is due primarily to increased oil, gas and plant product prices combined with increased oil sales volumes. The increase would have been $5.1 million, or 19 percent except that operating revenues included a charge of $1.1 million associated with the Company’s hedging activities and $954 thousand that resulted from the write off of the receivable that accumulated in 2003 in connection with the price stabilization agreement described in Note 1 of Notes to Consolidated Financial Statements on page 30. Oil, gas and plant product sales prices during 2004 averaged $31.21 per barrel, $.74 per mcf and $335.33 per metric ton, respectively, as compared with $28.03, $.46 and $259.65, respectively, during 2003. Consolidated oil sales volumes increased by 29 thousand barrels, or three percent, due primarily to the success of the 2004 Entre Lomas drilling and workover programs.

Equity income from Argentine investments increased by $2.6 million compared with 2003. The increase is due primarily to greater Petrolera operating revenues that resulted from favorable price and volume variations comparable to those experienced by the Company. Equity income includes a charge of $1 million that reflects the write off by Petrolera of its receivable, net of applicable provincial production taxes, that accumulated in 2003 in connection with the previously described price stabilization agreement. Except for selling and administrative and exploration expenses, all other variance explanations included herein also serve to explain the increase in equity income. Petrolera’s sole business is its interest and operatorship of the Entre Lomas concession, and as a result, its revenues and expenses are derived from essentially the same operations as the Company.

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Foreign exchange (gains) losses improved by $914 thousand. In 2004, the Company generated exchange gains of $96 thousand compared with $818 thousand of exchange losses in 2003. In the first half of 2003, the Company had outstanding a substantial peso denominated income tax payable during a period when the Argentine peso strengthened considerably against the US dollar.

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

Operating expense rose $1.1 million compared with 2003. The increase is primarily due to greater costs associated with maintaining, improving and replacing existing production facilities in the Entre Lomas concession, together with increased workover expense, severance payments for certain key Entre Lomas operations managers that retired in 2004, and increased salaries and wages of operations personnel in the Entre Lomas concession.

The increase of $1.1 million in depreciation expense was the result of higher depreciation attributable to both the Entre Lomas and Acambuco concessions and the impairment of the Company’s carrying costs pertaining to the Canadon Ramirez concession.

Provincial production taxes increased by $798 thousand compared with 2003. The increase is directly associated with the previously described increases in operating revenues.

Selling and administrative expense was greater by $611 thousand primarily the result of costs incurred in connection with the Company’s assessment of internal controls over financial reporting that was mandated by the Sarbanes-Oxley Act, Section 404, that went into effect for the Company in 2004.

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 $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 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

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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 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.

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