APCO ARGENTINA INC/NEW - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

FOR THE SIX MONTHS ENDED JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER 0-8933

APCO ARGENTINA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CAYMAN ISLANDS
(STATE OR OTHER JURISDICTION OF EIN 98-0199453
INCORPORATION OR ORGANIZATION)

ONE WILLIAMS CENTER, (MD 26-4)
TULSA, OKLAHOMA 74172
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER: (918) 573-2164

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

YES [X] NO [ ]

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE.

CLASS OUTSTANDING AT JULY 31, 2002
ORDINARY SHARES, $.01 PAR VALUE 7,360,311 SHARES

APCO ARGENTINA INC. AND SUBSIDIARY

INDEX

Portions of this document may constitute forward-looking statements as defined
by federal law. Although Apco Argentina Inc. believes any such statements are
based on reasonable assumptions; there is no assurance that actual outcomes will
not be materially different. Additional information about issues that could lead
to material changes in performance is contained in the section "Forward-Looking
Statements" on pages 12 and 13 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

3

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

4

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (CONT.)

(UNAUDITED)

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

5

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

6

APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) GENERAL

The unaudited, consolidated financial statements of Apco Argentina Inc.
and subsidiary (the "Company"), included herein, do not include all
footnote disclosures normally included in annual financial statements
and, therefore, should be read in conjunction with the financial
statements and notes thereto included in the Company's 2001 Form 10-K.

In the opinion of the Company, all adjustments, consisting of normal
recurring matters, have been made to present fairly the results of the
three and six months ended June 30, 2002 and 2001. The results for the
periods presented are not necessarily indicative of the results for the
respective complete years.

(2) REVENUE RECOGNITION

The Company recognizes revenues from sales of oil, gas, and plant
products at the time the product is delivered to the purchaser and
title has passed. Any product produced that has not been delivered is
reported as inventory and is valued at the lower of cost or market.
When cost is calculated, it includes total per unit operating cost and
depreciation. Transportation and storage costs are recorded as expenses
when incurred. The Company has had no contract imbalances relating to
either oil or gas production.

(3) PROPERTY AND EQUIPMENT

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

The Company reviews its proved properties for impairment on a
concession by concession basis and recognizes an impairment whenever
events or circumstances, such as declining oil and gas prices, indicate
that a property's carrying value may not be recoverable. If an
impairment is indicated, then a provision is recognized to the extent
that the carrying value exceeds the present value of the estimated
future net revenues ("fair value"). In estimating future net revenues,
the Company assumes costs will escalate annually and applies an oil and
gas price forecast that it believes to be reasonable after reviewing
long-term forecasts of professional energy consultants. Due to the
volatility of oil and gas prices, it is possible that the Company's
assumptions regarding oil and gas prices may change in the future. For
the three and six month periods ended June 30, 2002 and 2001, the
Company did not record any impairment charges as the estimated future
undiscounted net revenues exceeded the carrying value of its
properties.

7

APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(4) FOREIGN EXCHANGE

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

(5) INCOME TAXES

As described in Note 7 of Notes to Consolidated Financial Statements
included in the Company's 2001 Form 10-K, the Company believes its
earnings are not subject to U.S. income taxes, nor Cayman Islands
income or corporation taxes. Income derived by the Company from its
Argentine operations is subject to Argentine income tax at a rate of
thirty five percent and is included in the Consolidated Statements of
Operations as Argentine income taxes.

The effective income tax rate reflected in the Consolidated Statement
of Operations is greater than Argentina's statutory rate of 35% for the
three and six months periods ended June 30, 2002 and less than the
statutory rate for the three and six month periods ended June 30, 2001
because the Company incurs income taxes only in Argentina, the country
where all of its income generating activities are located. As a result,
differences between the Company's consolidated effective rate and the
statutory rate of 35% are caused primarily by income and expense
generated and incurred outside of Argentina that do not effect the
amount of income taxes paid by the Company. Such items include interest
income resulting from the Company's cash and cash equivalents deposited
in its Cayman Island banks, general and administrative expenses
incurred by the Company in its headquarters office in Tulsa, Oklahoma,
equity income from the Company's investment in Petrolera that is
recorded by the Company on an after tax basis, and foreign exchange
losses resulting from the devaluation of the peso which losses are not
deductible in Argentina.

Provision is made for deferred Argentine income taxes applicable to
temporary differences between the financial statement and tax basis of
the assets and liabilities.

(6) INVESTMENT IN PETROLERA PEREZ COMPANC S. A.

The Company uses the equity method to account for its investment in
Petrolera Perez Companc S. A., a non-public Argentine corporation.

Under the equity method of accounting, the Company's share of
Petrolera's net income (loss) is reflected as an increase (decrease) in
its investment in Petrolera and is also recorded as equity income
(loss) from Argentine investments. Dividends from Petrolera are
recorded as a reduction of the investment.

8

APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(7) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS 141) and Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141
requires that all business combinations initiated after June 30, 2001
be accounted for using the purchase method. Under SFAS 142, goodwill is
no longer subject to amortization over its estimated useful life, but
assessed annually for impairment by applying a fair-value-based test.
Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. As a result, there will be more recognized
intangible assets, such as non-patented technology and database
content, separated from goodwill. Those assets will be amortized over
their useful lives, other than assets that have an indefinite life.
SFAS 142 is required to be applied starting with fiscal years beginning
after December 15, 2001. The Company has no intangible assets and
therefore the adoption of SFAS 142 on January 1, 2002 had no impact on
the Company's financial statements.

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

In second-quarter 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." The rescission of SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,"
requires that gains and losses from extinguishment of debt only be
classified as extraordinary items in the event that they meet the
criteria of APB Opinion No. 30. SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers," established accounting requirements for the
effects of transition to the Motor Carriers Act of 1980 and is no
longer required now that the transitions have been completed. Finally,
the amendments to SFAS No. 13 require certain lease modifications that
have economic effects which are similar to sale-leaseback transactions
be accounted for as sale-leaseback transactions. The Company expects no
impact from implementation of SFAS No. 145.

Also in second-quarter 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement
addresses financial

9

APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

(8) IMPLEMENTATION OF SFAS 143

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

In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations (SFAS
143). SFAS 143 is required to be adopted by companies for financial
statements issued for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Company has elected to adopt SFAS
143 in connection with the preparation of its June 30, 2002 financial
statements. Prior to the adoption of SFAS 143 the Company, as part of
the gradual accrual for plugging and abandonment costs adopted by Entre
Lomas concession partners years ago, accrued future abandonment costs
of wells and related facilities through its depreciation and
amortization calculation, and included the cumulative accrual in
accumulated depreciation, depletion and amortization. As of January 1,
2002, the Company had accrued and classified in accumulated
depreciation, depletion and amortization a total of $1.7 million of
future abandonment costs. Its share of the accrual accumulated by
Petrolera as of June 30, 2002, was $1.8 million.

As part of the adoption of SFAS 143, an engineering analysis was
obtained which projects that through 2016, the last year of the Entre
Lomas concession's term, the joint venture partners would be required
to plug and abandon 98 wells at an average estimated cost, as of June
30, 2002 of $24,500 per well. After considering inflation and present
value factors, the estimated asset retirement obligation as of January
1, 2002 for the Company's 23% direct interest totals $433 thousand
($448 thousand on June 30, 2002). The equity share of the estimated
asset retirement obligation as of January 1, 2002, imbedded in the
Company's investment in Petrolera totaled $464 thousand ($479 thousand
at June 30, 2002).

The above described asset retirement obligation is based on estimates
of the number of wells expected to be abandoned in 2016, the last year
of the Entre Lomas concession's term, and an estimated cost to plug and
abandon a well as discussed with field service companies that would be
expected to perform such services. Both estimates were provided by
Petrolera's engineers and are considered to be the best estimates that
can

10

APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

be derived today based on present information. Such estimates are,
however, subject to significant change as time passes. Given the
uncertainty inherent in the process of estimating future oil and gas
reserves and future oil and gas production streams, the estimate of the
number of future wells to be plugged and abandoned could change as new
information is obtained. Furthermore, given the current economic
situation in Argentina and uncertainties associated with future levels
of inflation in the country and devaluation of the peso, any future
estimate of the cost to plug and abandon a well is subject to a wide
range of outcomes as the estimate is updated as time passes. Finally,
the total asset retirement obligation included in the Company's Balance
Sheets will also be subject to change as SFAS 143 requires the Company
to take into consideration future estimates of inflation and present
value factors based on the Company's credit standing. Given the current
economic situation in Argentina, future inflation rates and interest
rates, upon which present value factors are based, as recent history
demonstrates, may be subject to large variations over short periods of
time.

As the amount accrued by the Company prior to adoption of SFAS 143 was
in excess of the amount required under the provision of SFAS 143.
Implementation of the standard has resulted in a credit adjustment to
income of $2.4 million, which is classified as a cumulative effect of
change in accounting principle. The effect of adoption on operating
expenses in 2002 was immaterial.

11

APCO ARGENTINA INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(9) SUMMARIZED INCOME STATEMENT INFORMATION FOR PETROLERA

The Company accounts for its investment in Petrolera using the equity
method of accounting. Summarized unaudited income statement information
for Petrolera for the six month period ended June 30, 2002 and 2001 are
as follows:

12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion explains the significant factors that have
affected the Company's financial condition and results of operations
during the periods covered by this report.

FINANCIAL CONDITION

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 from internally generated cash
flow. The current economic crisis in Argentina is testing both the
profitability and cash generating ability of the Company's Argentine
operations.

The present economic condition in Argentina has negatively impacted
results from operations. This is evidenced by a comparison of results
with the prior year. For the six months ended June 30, 2002, the
Company generated net income before the cumulative effect of
implementing Statement of Financial Accounting Standards (SFAS) No. 143
of $292 thousand, compared with net income of $9.6 million for the
comparable period in 2001. The variation in net income between the
current and prior year is explained in the section "Results of
Operations". Refer to footnote 8 of Notes to Consolidated Financial
Statements for a discussion of the implementation of SFAS No. 143.
Including the cumulative effect of implementing SFAS No. 143, the
Company generated net income for the six months ended June 30, 2002 of
$2.7 million.

The outlook for the economy in Argentina continues to be quite
negative. In December 2001, because of the country's mounting debt and
inability to control its fiscal deficit, Argentina was unable to obtain
additional funding from international lending agencies such as the
International Monetary Fund and as a consequence declared default on
its $130 billion of debt. This led to a chain of events that culminated
in today's economic crisis.

In January 2002, the currency convertibility plan that had been in
effect since 1991 and which established the decade long 1:1 peg between
the peso and the US dollar was rescinded. The government allowed the
peso to float resulting in a maxi-devaluation of the peso. Since
December, the peso to US dollar exchange rate has increased from 1:1 to
3.8:1.

Many changes in Argentina's economic policy have occurred since the end
of 2001, but the following commercial and fiscal reforms have had the
most impact on the Company.

The first is the requirement that domestic commercial transactions, or
contracts for sales in Argentina that are denominated in US dollars,
must be liquidated in pesos in Argentina at an exchange rate to be
negotiated by the parties. This policy now applies to all products sold
by the Company domestically in Argentina. When implemented, the
negotiated exchange rate for oil, liquid products and natural gas was
significantly below the floating exchange rate. Since December 2001,
natural gas prices in pesos have not been permitted to increase above
pre-crisis levels and, as a consequence, the Company's average sales
price for its natural gas, when expressed in US dollars, has

13

fallen to less than 40% of pre-crisis levels. Such has not been the
case for oil and LPG sales prices. The exchange rates negotiated
between oil producers and refiners for liquidation of domestic oil
sales has been allowed to increase to 90% of the floating rate.
Consequently, the dollar price of crude oil sold domestically in
Argentina has increased over the first six months of 2002 from
approximately 50% of dollar denominated contract prices in January, to
90% of contract prices in June.

With respect to export sales, the Company can continue to collect
proceeds from international banks in US dollars. As a result, the price
of exported oil has not been affected by economic policy. However, 30%
of export sale proceeds must now be repatriated and converted to
Argentine pesos immediately after payment and the government has also
assessed a new export tax of 16.67% on the value of hydrocarbon export
sales.

The previously described devaluation of the peso has resulted in a
substantial loss in the dollar value of the Company's peso denominated
obligatory savings deposit. The original deposit made by all the Entre
Lomas joint venture partners including the Company and Petrolera Perez
Compac, S.A., totaled 9.2 million pesos. The Company's share of the
original deposit pertaining to its 23% direct interest in the
concession was 2.1 million pesos. The equity share of the deposit
imbedded in its investment in Petrolera was 2.2 million pesos.

Since the deposit was made during a period when the peso to US dollar
exchange rate was 1:1, it was originally recorded at an equivalent US
dollar amount on the Company's and Petrolera's accounts. Because of the
peso's devaluation, the dollar value of the Company's direct share of
the deposit has decreased from $2.1 million to $600 thousand and the
dollar value of the Company's equity share of Petrolera's deposit has
decreased from $2.2 million to $645 thousand. Of this cumulative loss
of value, during the six months ended June 30, 2002, the Company has
recorded a foreign exchange loss of $800 thousand attributable to its
direct interest in the original deposit. The foreign exchange loss
associated with its share of Petrolera's deposit is $800 thousand and
is recorded as a reduction of equity income from Argentine investments.

The balance of foreign exchange losses incurred by the Company during
the six months is the result of translation adjustments attributable to
peso denominated net monetary assets of the Company.

Devaluation of the peso has had a positive impact on the Company's peso
denominated expenditures including capital expenditures, and expenses
such as operating, transportation and storage, and selling and
administrative. These expenditures have all decreased to varying
degrees depending on the dollar and peso make up of each category of
expense. For example, expenditures that have a large labor component,
or that consist of a high proportion of domestically made products and
materials, have decreased significantly due to the decline in the value
of the peso. Therefore, the Company has benefited because, the
cumulative rate of inflation in the Argentine economy has, up to now,
lagged considerably behind the cumulative rate of the peso's
devaluation.

As the year has progressed, liquidity has become less of a concern for
the Company. Through June 30, the Company received $1.3 million in
dividends from Petrolera. In July, it received additional dividends
from Petrolera totaling $835 thousand. In general,

14

domestic sales proceeds plus the 30% of repatriated export sales have
been sufficient to fund disbursements in Argentina.

The impact of Argentina's economic crisis on companies operating in the
country has been significant, especially those companies with
international dollar denominated debts. Fortunately, Apco is free from
long-term debt and although negatively impacted by these developments,
we believe we are in a better situation than many companies operating
in the country.

PRODUCT PRICES

Volatility in oil prices has a significant impact on the Company's
ability to generate earnings, fund capital requirements and pay
shareholder dividends. During the first three quarters of 2001, the per
barrel sales price of the Company's oil remained above the $25 level.
During the fourth quarter of 2001, world oil prices quickly dropped and
the Company's per barrel sales price averaged $17. Oil prices have
since strengthened as a result of OPEC production cuts that were
implemented earlier in the year, and recent escalation of violence in
the Middle East. During the second quarter of 2002, the price of West
Texas Intermediate, the benchmark oil price used to establish oil sales
prices in Argentina, has remained above $25 per barrel.

The Company's crude oil sales price has improved as the year has
progressed, both as a result of the increase in the price of West Texas
Intermediate oil, and the improvement throughout the year of the
aforementioned required negotiated exchange rate for the payment of
domestic oil sales. However, average oil prices are lower than the
comparable periods in 2001. The per barrel crude oil sales price for
the second quarter averaged $24.17, compared with $26.93 for the
comparable quarter in 2001. The per barrel price for the current six
months ended June 30, averaged $20.89, compared with $27.18 for the
comparable period in 2001. As described previously, natural gas sales
prices have been negatively impacted in a significant manner by
economic events in Argentina because 100% of the Company's gas is sold
domestically. Natural gas sales price for the current six months ended
June 30, averaged $.49, compared with $1.32 for the comparable period
in 2001.

OIL SALES VOLUMES

During the current six months ended June 30, oil sales volumes net to
the Company's consolidated and indirect interests totaled 799 thousand
barrels, or a decrease of 94 thousand barrels, or 11%, when compared
with the 893 thousand barrels sold during the comparable period in
2001. The decrease in sales volume is due to lower oil production that
reflects normal production declines in existing fields combined with
two other factors, the 2002 drilling campaign commenced in March with
initial production from the first well not starting until late April,
and 2001's six month production was positively impacted by volumes
contributed by the Entre Lomas 53 well which commenced production in
March 2001 with an unusually high initial rate.

CAPITAL EXPENDITURES

Due to the requirements that domestic sales proceeds should be
collected in Argentina and that 30% of export revenues deposited abroad
be repatriated, the Company decided to proceed with its 2002 capital
expenditure program originally estimated to cost $11.7

15

million ($6.3 million net to the company's consolidated interests, and
$5.4 million attributable to its equity interest in Petrolera). The
Company and its Entre Lomas partners, initiated their investment
program in April. In Entre Lomas, the cost of drilling development
wells has decreased by approximately 30% due to economic conditions in
Argentina, and the partners, in order to take advantage of this
condition, will drill more wells over the remainder of the year than
was originally planned.

ARGENTINE ECONOMY

As mentioned previously, the outlook for Argentina's economy remains
quite negative. Although, the peso appears to have stabilized somewhat
during the second quarter, and the cumulative inflation rate for the
year has been modest in comparison with the pesos devaluation, little
apparent progress has been made in solving the problems of economic
recession and continuing fiscal deficits. Argentina's current
unemployment rate currently exceeds 20%.

President Duhalde has been unable to obtain additional financial
assistance from international lending agencies and his administration's
inability to make progress has resulted in an almost total loss of
public support. As a result, early Presidential elections have been
scheduled for early 2003. There is no predicting the direction that
Argentina's economy will take throughout the remainder of 2002 or what
future impact this continued economic crisis or any additional
governmental actions that may result in response to the crisis may have
on the company's results of operations and cash flow from operating
activities.

RESULTS OF OPERATIONS

For the three and six month periods ended June 30, 2002, the Company
generated net income of $609 thousand and $2.7 million, respectively.
Results for the six month period include the cumulative effect of
implementing SFAS No. 143 adopted in the second quarter of the year
that resulted in increasing net income by $2.4 million. Before the
cumulative effect of implementing SFAS 143, for the three months ended
June 30, 2002, the Company generated net income of $609 thousand and
for the six months ended June 30, 2002, the company generated a net
income of $292 thousand. This compares with net income of $5.8 million
and $9.6 million for the comparable periods in 2001.

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

SECOND QUARTER COMPARISON

The decrease in net income is primarily due to decreased operating
revenue and lower equity income from Argentine investments. Operating
revenues decreased $3.6 million, or 46 percent due both to lower oil
sales volumes and lower oil and gas prices. The lower oil sales volume
is the result of the decrease in oil production described in the
section "Financial Condition" in the paragraph "Oil Sales Volumes" on
page 15, exacerbated by the opposite effect of inventory fluctuation in
the two quarters. During the second quarter 2002, oil inventory
increased because oil sales volumes were lower than oil production. The
opposite situation occurred during the second quarter 2001. The
Company's oil and gas sales prices during the current quarter averaged
$24.17 per

16

barrel ("Bbl") and $.44 per thousand cubic feet ("Mcf"), respectively,
compared with $26.93 per Bbl and $1.40 per Mcf, respectively, during
the comparable quarter in 2001.

The above negative variances in revenues were partially offset by
significant decreases in various categories of expense. Operating
expense, transportation and storage expense, and selling and
administrative expense decreased primarily as a result of the reduced
dollar cost of operating in Argentina that has resulted from the
devaluation of the Argentine peso. Provincial production taxes declined
because of the decrease in operating revenues, and Argentine income
taxes fell as a result of lower taxable income.

The consolidated effective tax rate is higher than the statutory rate
of 35% primarily because of foreign exchange losses that do not impact
the Company's tax calculation in Argentina and equity income from the
Company's investment in Petrolera that is recorded on an after tax
basis and other income and expenses generated and incurred outside of
Argentina that do not impact the amount of income tax paid by the
Company.

Depreciation expense increased 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 extension
period of 2017-2026. Reclassifying these reserves has had the effect of
increasing the depreciation factor applied to undepreciated property
and equipment when computing depreciation.

The $400 thousand of foreign exchange losses arose from the devaluation
of the Argentine peso that occurred during the three month period ended
June 30, 2002. No such losses were incurred during the comparable
period in the prior year.

The decrease in equity income from Argentine investments relates to
lower equity income from the Company's equity interest in Petrolera.
All of the variance explanations described in the preceding paragraphs
apply as well to Petrolera because its sole business is its ownership
interest in the Entre Lomas concession. Petrolera sells its oil and gas
to the same customers as the Company under the same terms and
conditions.

SIX MONTH COMPARISON

The decrease in net income during the six-month periods is also due to
decreased operating revenue and lower equity income from Argentine
investments. Operating revenues decreased $5.4 million, or 38 percent
due both to lower oil sales volumes and lower oil and gas prices. The
lower oil sales volume is the result of the decrease in oil production
described in the section "Financial Condition" in the paragraph "Oil
Sales Volumes" on page 15. The Company's oil and gas sales prices
during the current six months averaged $20.89 per Bbl and $.49 per Mcf,
respectively, compared with $27.18 per Bbl and $1.32 per Mcf,
respectively, during the comparable six months in 2001.

The above negative variances in revenues were partially offset by
significant decreases in various categories of expense. Operating
expense, transportation and storage expense, selling and administrative
expense, provincial production taxes, and Argentine income taxes all
decreased for the same reasons described in the second quarter
comparison. With respect to Argentine income taxes, the consolidated
effective tax rate is higher than the statutory rate of 35% for the
same reason described in the quarterly comparison.

17

Depreciation expense for the six-month period also increased due to the
reclassification of reserves described in the quarterly comparison.

The $1.5 million of foreign exchange losses arose from the devaluation
of the Argentine peso that has occurred during the six month period
ended June 30, 2002. No such losses were incurred during the comparable
period in the prior year.

The decrease in equity income from Argentine investments relates to
lower equity income from the Company's equity interest in Petrolera.
All of the variance explanations described in the preceding paragraphs
apply as well to Petrolera because its sole business is its ownership
interest in the Entre Lomas concession. Petrolera sells its oil and gas
to the same customers as the Company under the same terms and
conditions.

The following table shows total sales of crude oil, condensate, natural
gas and gas liquids and average sales prices and production costs for
the six months ended June 30, for the years indicated.

Volumes presented in the above table represent those sold to customers
and do not consider provincial royalties, which are paid separately and
are accounted for as an expense by the Company because such payments
are, in substance, production taxes and do not pertain to a mineral
interest in the concession. In calculating the payments to be made,
Argentine producers are entitled to deduct gathering, storage, treating
and compression costs.

Average production cost is calculated by taking into consideration all
costs of operation, including costs of remedial workovers and
depreciation of property and equipment. The depreciation cost included
in average production costs are for the year 2002, $4.22 per barrel and
$0.15 per thousand cubic feet, and for 2001, $2.58 per barrel and $0.15
per thousand cubic feet.

18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

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

COMMODITY PRICE RISK

The Company produces and sells crude oil and natural gas. As a result,
the Company's financial results can be significantly impacted by
fluctuations in commodity prices due to changing market forces. The
Company has historically not entered into price hedging contracts and
no such contracts are currently in place.

FOREIGN CURRENCY AND OPERATIONS RISK

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

Refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 12, for a description of the impact
to the Company of the changes in the country's monetary policy and the
effects on product prices and results of operations resulting from the
devaluation of the peso.

ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT

Today's economic crisis in Argentina began in December 2001. The
outlook for Argentina's economy remains quite negative. Although, the
peso appears to have stabilized somewhat during the second quarter, and
the cumulative inflation rate for the year has been modest in
comparison with the pesos devaluation, little apparent progress has
been made in solving the problems of economic recession and continuing
fiscal deficits. Argentina's current unemployment rate currently
exceeds 20%.

President Duhalde has been unable to obtain additional financial
assistance from international lending agencies and his administration's
inability to make progress has resulted in an almost total loss of
public support. As a result, early Presidential elections have been
scheduled for early 2003. There is no predicting the direction that
Argentina's economy will take throughout the remainder of 2002 or what
future impact this continued economic crisis or any additional
governmental actions that may result in response to the crisis may have
on the company's results of operations and cash flow from operating
activities.

Also, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 12 of this document for a
further discussion of this crisis.

19

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 - Certification of Chief Executive Officer Pursuant to 18
U.S.C._1350

99.2 - Certification of the Chief Financial Officer Pursuant to 18
U.S.C._1350

(b) Report on Form 8-K

None

20

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

APCO ARGENTINA INC.
-------------------------
(Registrant)

By: /s/ Thomas Bueno
--------------------------------
President, Chief Operating and
Chief Accounting Officer
(Duly Authorized Officer of the Registrant)

August 12, 2002

21

INDEX TO EXHIBITS