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 NINE MONTHS ENDED SEPTEMBER 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 OCTOBER 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 Apco Argentina Inc.'s annual
report on Form 10-K

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 financial 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 nine months ended September 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 nine month periods ended September 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 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
nine month period ended September 30, 2002 and less than the statutory
rate for the nine month period ended September 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 affect 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. Adoption did not have a material impact on the Company's
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 accounting and reporting for costs associated with
exit or disposal activities and nullifies

9

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 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 the
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 September 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 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 ($456 thousand on
September 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 ($488 thousand at September 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 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

10

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 is 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 nine month periods ended September 30, 2002 and
2001 is as follows:

In October 2002, the Company completed the purchase of 27,700
additional shares of Petrolera Perez Companc S.A. from the Perez
Companc family for a total consideration of $6.9 million. Petrolera,
the operator of the Entre Lomas concession owns a 73.15 percent
interest in the concession. The shares purchased by Apco are equivalent
to 5.54 percent of Petrolera's total shares outstanding and increase
Apco's interest in Petrolera from its current level of 33.684 percent
to 39.224 percent.

12

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

The following discussion explains the significant factors, which 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 crisis in Argentina has negatively impacted results from
operations. This is evidenced by a comparison of results with the prior year.
For the nine months ended September 30, 2002, the Company generated income
before the cumulative effect of implementing Statement of Financial Accounting
Standards (SFAS) No. 143 of $2.7 million, compared with net income of $13.9
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
nine months ended September 30, 2002 of $5.1 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 World
Bank, 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 a 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 3.74:1.

However, due to various causes, including among others, the deep extended
recession in which Argentina finds itself, reduced levels of disposable income
and savings in Argentina, devaluation having exceeded inflation by a wide
margin, and government policies implemented in early 2002 to restrict the flow
of pesos being converted to US dollars, devaluation of the currency as expressed
by the peso to US dollar exchange rate has slowed considerably as 2002 has
passed. The following table illustrates the point.

13

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, prices for natural gas sold in Argentina 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 fallen to less than 35% 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 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 and has remained at that level throughout the third
quarter of 2002.

With respect to export sales, the Company continues to collect proceeds from
foreign non-Argentine customers 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. With the view to shoring up
Argentina's foreign currency reserves there has been a push within the Argentina
government to increase the percentage of export sales that must be repatriated
from 30% to 50%. No decree or legislation to this effect has yet been
implemented. The Company expects that there may soon be a decision regarding
whether to increase the percentage level of repatriation required.

Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Form 10-K for the fiscal year ended
December 31, 2001 and Form 10-Q for the three months ended March 31, 2002, for
additional discussion regarding the impact to the Company of changes in the
country's monetary and fiscal policies in response to Argentina's economic
crisis.

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 $628 thousand and the dollar value of the Company's equity share
of Petrolera's deposit has decreased from $2.2 million to $673 thousand. Of this
cumulative loss of value, during the nine months ended September 30, 2002, the
Company has recorded a foreign exchange loss of $739 thousand attributable to
its direct interest in the original deposit. The foreign exchange loss
associated with its share of

14

Petrolera's deposit is $792 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 nine
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. The rate of inflation in
Argentina for the first nine months of 2002, published by the Argentine
government, as measured by the consumer price index and the wholesale price
index has been 39% and 120%, respectively, as compared with the level of
devaluation illustrated in the preceding table.

As the year has progressed, liquidity has become less of a concern for the
Company. Through September 30, the Company received $2.2 million in dividends
from Petrolera as compared with $3.2 million for the comparable period in 2001.
In general, domestic sales proceeds plus the 30% of repatriated export sales
have been more than sufficient to fund disbursements in Argentina.

The impact of Argentina's economic crisis on companies operating in the country
has been significant, especially those companies with international dollar
denominated debts. Fortunately, Apco is free from long-term debt and although
negatively impacted by these developments, has fared better than many of its
competitors with operations 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 gradually strengthened throughout 2002 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 third 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 third quarter averaged $24.62, compared with $25.01 for
the comparable quarter in 2001. The per barrel price for the current nine months
ended September 30, averaged $22.26, compared with $26.47 for the comparable
period in 2001. As described, natural gas sales prices have been negatively
impacted in a significant manner by economic

15

events in Argentina because 100% of the Company's gas is sold domestically.
Natural gas sales price for the current nine months ended September 30, averaged
$.46, compared with $1.36 for the comparable period in 2001.

SALES VOLUMES

During the nine months ended September 30, 2002 oil sales volumes net to the
Company's consolidated and equity interests totaled 1.22 million barrels
("mmbbls"), a decrease of 9% when compared with 1.33 mmbbls during the
comparable period in 2001. The reduction in volumes is due primarily, to the
nature of the 2002 drilling campaign in Entre Lomas. Through September 30, this
year's drilling program focused primarily on high risk down dip step out wells,
including a structural saddle area in the center of the Charco Bayo/Piedras
Blancas ("CB/PB") waterflood where there was a greater chance of producing with
higher water cuts. All wells drilled this year were successful producers but, in
general, these higher risk wells produced at lower oil rates with higher water
cuts than wells drilled in previous years. This has resulted in a reduced oil
production contribution from this years drilling program than what we have
experienced in recent years. Furthermore, in 2001, the Entre Lomas partners
drilled two wells in the Entre Lomas and Lomas de Ocampo fields that had very
high volume initial rates. Finally, in 2000 and 2001, there was an important oil
production contribution from a recompletion program to exploit a new high volume
reservoir in the CB/PB field that had a limited areal extent. Due to the limited
size of this reservoir, its production has exhibited a steep decline since its
discovery in 2000. Finally, lower gas production described in the following
paragraph, has resulted in lower condensate production during 2002.

During the nine months ended September 30, 2002, gas sales volumes net to the
Company's consolidated and equity interest totaled 4.0 billion cubic feet
("bcf"), a decrease of 13% when compared with 4.6 bcf during the comparable
period in 2001. The reduction in volume is due to a 16% decrease in Entre Lomas
gas sales volumes, partially offset by a 78% increase in Acambuco gas sales
volumes. Entre Lomas gas production has declined in 2002 due to an almost total
lack of investments designed to increase or maintain gas production levels.
Because of the previously described significant drop in natural gas prices in
Argentina, to date in 2002, no new wells were drilled targeting primarily gas
production, and very few workovers and recompletions of existing wells targeting
gas bearing reservoirs were performed.

The prolonged recession in Argentina has reduced demand for electric power
nationwide. Furthermore, heavy rains in Argentina this year have enabled
hydroelectric plants to operate at higher levels than normal, thereby
restricting thermal power demand and, consequently, resulting in significantly
lower demand for natural gas. In the recent past, the Entre Lomas partners have
successfully sold natural gas in the spot market, but because of lower natural
gas demand, Entre Lomas production is today limited to meet natural gas contract
commitments.

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

CAPITAL EXPENDITURES

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

16

initiated their investment program in April. In Entre Lomas, the cost of
drilling development wells and performing recompletions and workovers decreased
approximately 40% due to economic conditions in Argentina, and the partners, in
order to prevent the accumulation of pesos in Argentina, have drilled more wells
during 2002 than originally planned. In Acambuco, capital investments ceased
after the San Pedrito field came into full production.

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 and third quarters, 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 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,
Presidential elections have been moved forward to 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.

Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 13, for a description of the impact on the
Company of the changes in the country's monetary and fiscal policies in response
to Argentina's economic crisis.

PURCHASE OF PETROLERA SHARES

In October 2002, the Company completed the purchase of 27,700 additional shares
of Petrolera Perez Companc S.A. from the Perez Companc family ("Family") for a
total consideration of $6.9 million. Petrolera, the operator of the Entre Lomas
concession owns a 73.15 percent interest in the concession. The shares purchased
by Apco are equivalent to 5.54 percent of Petrolera's total shares outstanding
and increase Apco's interest in Petrolera from its current level of 33.684
percent to 39.224 percent. That ownership position, combined with Apco's 23
percent direct participation in the Entre Lomas joint venture now gives Apco a
combined direct and indirect participation in the Entre Lomas concession of
51.692 percent.

Apco increased its participation by exercising rights it acquired pursuant to a
1968 letter agreement among the shareholders of Petrolera that granted Apco a
right of first refusal in the event of a sale by the Family. Apco's purchase,
pursuant to the letter agreement, was triggered by the announcement in July by
the Family of the proposed sale of all of its shares in Petrolera to Petroleo
Brasileiro S.A. ("Petrobras"). Petrobras purchased the balance of the Family's
shares. Subsequent to the purchase, the principal shareholders of Petrolera are
now the Company, Petrobras and Pecom Energia S.A., in which Petrobras is the
majority shareholder.

RESULTS OF OPERATIONS

For the three and nine month periods ended September 30, 2002, the company
generated net income of $2.4 million and $5.1 million, respectively. Results for
the nine months include the cumulative effect of implementing SFAS 143 adopted
in the second quarter of 2002 that resulted in increasing net income by $2.4
million. Before the cumulative effect of implementing

17

SFAS 143, for the nine months ended September 30, 2002, the Company generated
net income of $2.7 million. Net income for the three and nine months ended
September 30, 2001 was $4.3 million and $13.9 million, respectively.

The following variance explanations will focus on a comparison of results of
operations before the cumulative effect of implementing SFAS 143.

THIRD QUARTER COMPARISON

The decrease in net income is due to lower operating revenue and lower equity
income from Argentine investments. Operating revenues decreased $986 thousand,
or 15 percent due primarily to lower gas sales prices and to a lesser extent
lower gas sales volumes. The Company's average gas sales price for the current
quarter averaged $.47 per thousand cubic feet ("Mcf") as compared with $1.41 per
Mcf for the third quarter 2001. Oil sales for the current quarter and the third
quarter 2001 were comparable.

Depreciation expense increased by $353 thousand due to the reclassification from
proved to the probable category, as of December 31, 2001, of estimated oil and
gas reserves expected to be produced during the Entre Lomas concession extension
period of 2017-2026. Reclassifying these reserves has had the effect of
increasing the depreciation factor applied to undepreciated property and
equipment when computing depreciation.

Argentine taxes other than income taxes increased by $515 thousand because of
the effects of the new 16.67% export tax that the Argentine government
implemented in early 2002.

Argentine income taxes increased by $282 thousand in spite of a decrease in net
income before income taxes because in arriving at the provision for Argentine
income taxes in pesos, the deduction for depreciation in historical pesos has to
date not been indexed for inflation. In 2002, Argentina has experienced a high
level of inflation, however, the country's tax authority has yet to adopt
regulations that permit indexation of fixed assets. This condition did not exist
in 2001 because during the past decade the peso to US dollar exchange rate was
fixed at 1:1 and inflation was minimal.

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

The decrease of $1,025 thousand 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 Petrolera's sole business is its ownership interest in
the Entre Lomas concession. Petrolera sells its oil and gas to the same
customers as the Company under the same conditions.

NINE MONTH COMPARISON

The decrease in net income over the nine month period is also due to lower
operating revenues and equity income from Argentine investments. Operating
revenues decreased by $ 6.4 million,

18

or 30 percent due both to lower oil and gas sales volumes and prices. The lower
oil and gas sales volume is the result of the decreases in production described
in the section "Financial Condition" in the paragraph "Sales Volumes" on page
16. The Company's oil and gas sales prices during the current nine months
averaged $22.26 per barrel ("Bbl") and $.46 per Mcf, respectively, compared with
$26.47 per Bbl and $1.36 per Mcf, respectively, during the comparable nine
months in 2001.

Depreciation expense and Argentine taxes other than income increased by $923
thousand and $776 thousand, respectively, for the same reasons described in the
third quarter comparison.

The $1.5 million of foreign exchange losses generated during the nine-month
period in 2002 arose from the devaluation of the Argentine peso that occurred
primarily during the first six months of the year. No such losses were incurred
during the comparable period in the prior year.

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

The decrease of $5.7 million 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 Petrolera's sole business is its ownership interest in the
Entre Lomas concession. Petrolera sells its oil and gas to the same customers as
the company under the same conditions.

19

The following table shows total sales of crude oil, condensate, natural gas and
gas liquids and average sales prices and production costs for the nine months
ended September 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, $4.17 per barrel and $0.16 per thousand cubic feet, and for
2001, $2.69 per barrel and $0.14 per thousand cubic feet.

Prices and costs for the consolidated interest and the equity interest in
Petrolera are one and the same. The two interests represent different ownership
percentages in the Entre Lomas joint venture.

20

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. However, with the view to reducing commodity price risk inherent in the
exploration and production business, the Company has adopted a hedging policy
that management can use at appropriate times as a tool with which to mitigate
volatility of crude oil prices. Argentina's current economic crisis complicates
considerably the process of hedging prices when a Company's operations are
located in Argentina.

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 13, 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 and third quarters of 2002, 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
unemployment rate currently exceeds 20%.

President Duhalde has been unable to obtain additional financial assistance from
international lending agencies and has had much difficulty renewing existing
debt maturities. His administration's inability to make progress has resulted in
an almost total loss of public support. As a result, the next scheduled
Presidential elections have been moved forward to 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.

Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 13 for additional discussion regarding this
economic crisis and its effect on the Company.

21

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of Apco Argentina's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14 (c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.

22

PART II. OTHER INFORMATION

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

The Annual Meeting of Stockholders of the Company was held on September 17,
2002. At the Annual Meeting, five individuals were elected as directors of the
Company and two individuals continue to serve as directors pursuant to their
prior election. The appointment of Ernst & Young LLP as the independent auditor
of the Company for 2002 was ratified.

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

Election of Directors

Ratification of Appointment of Independent Auditors

23

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Jack D. McCarthy, Vice President and Chief Financial
Officer of Apco Argentina Inc.

99.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Ralph A. Hill, Chief Executive Officer of Apco
Argentina Inc.

(b) Reports on Form 8-K

The Company filed a Form 8-K on July 3, 2002 and a Form 8-K/A
on July 18, 2002 describing changes in the registrants
certifying accountant.

24

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)

November 12, 2002

CERTIFICATIONS

I, Ralph A. Hill, Chief Executive Officer of Apco Argentina Inc.,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apco Argentina
Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others

25

within those entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002 /s/ Ralph A. Hill
--------------------------
Ralph A. Hill
Chief Executive Officer

I, Jack D. McCarthy, Vice President and Chief Financial Officer of Apco
Argentina Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apco Argentina
Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

26

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002 /s/ Jack D. McCarthy
-------------------------
Jack D. McCarthy
Vice President and Chief
Financial Officer

27

INDEX TO EXHIBITS