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, 2003

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

Yes [ ] No [X]

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, 2003
Ordinary Shares, $.01 Par Value 7,360,311 Shares

APCO ARGENTINA INC. AND SUBSIDIARY

INDEX

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

Forward-looking statements can be identified by words such as
"anticipates," "believes," "expects," "planned," "scheduled," "could,"
"continues," "estimates," "might," "potential," "projects" or similar
expressions. Although the Company believes these forward-looking statements are
based on reasonable assumptions, statements made regarding future results are
subject to a number of assumptions, uncertainties and risks that may cause
future results to be materially different from the results stated or implied in
this document. 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, 2002.

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 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 the annual
financial statements and, therefore, should be read in conjunction
with the financial statements and notes thereto included in the
Company's 2002 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 month periods ended June 30, 2003 and
2002. 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 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, 2003 and 2002, 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 general policy followed in the translation of the Company's
financial statements of foreign operations into United States
dollars is in accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation, using the United
States dollar as the functional currency. Accordingly, translation
gains and losses that arise from exchange rate fluctuations
applicable to transactions denominated in a currency other than
the United States dollars are included in results of operations as
incurred.

(5) INCOME TAXES

As described in Note 8 of the Notes to Consolidated Financial
Statements included in the Company's 2002 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 35 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 differs from Argentina's statutory rate of
35 percent because the Company incurs income taxes only in
Argentina, the country where its income generating oil and gas
activities are located. As a result, differences between the
Company's consolidated effective rate and Argentina's statutory
rate of 35 percent 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 ENTRE LOMAS S.A. (FORMERLY PETROLERA PEREZ
COMPANC S.A.)

In 2002, the Perez Companc family sold its interests in Petrolera
Perez Companc S.A. ("Petrolera") to Petroleo Brasileiro S.A. and
the Company. Pursuant to requirements of the sale-purchase
agreements, the name Perez Companc can no longer be associated
with Petrolera. Therefore, the company's name is being changed to
"Petrolera Entre Lomas S.A."

The Company uses the equity method to account for its investment
in Petrolera, a non-public Argentine corporation. In January 2003,
the Company acquired an additional 1.58 percent of Petrolera for
$1.8 million and increased its ownership to 40.8 percent.

8

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

(7) IMPLEMENTATION OF SFAS 143

In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations
(SFAS 143). SFAS 143 was 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.

As part of the adoption of SFAS 143, an engineering analysis was
obtained which projected that through 2016, the last year of the
Entre Lomas concession's term, the joint venture partners will 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 percent direct interest totaled $433
thousand ($448 thousand on June 30, 2002 and $486 thousand on June
30, 2003). 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 on
June 30, 2002 and $570 thousand at June 30, 2003).

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 estimate of the
number of future wells to be plugged and abandoned could change as
new information is obtained. Also, 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. 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 resulted in a credit
adjustment to income of $2.4 million, which was classified as a
cumulative effect of change in accounting principle and is
reflected as such in the Consolidated Statement of Operations for
2002.

9

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(8) COMPREHENSIVE INCOME

Comprehensive income is as follows:

(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 periods ended June 30,
2003 and 2002 are as follows:

Refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 11 for a description
of the impact recent economic events have had on Petrolera.
Because Petrolera's sole business is its interest and operatorship
of the Entre Lomas concession, the description of how these events
impact the Company serves to explain the impact on Petrolera.

10

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 joint venture 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 the Company's development and exploration
expenditures with internally generated cash flow and generate
excess cash flow for the Company. The past year and a half
certainly qualifies as a turbulent period for Argentina's economy.
The year 2002 tested both the profitability and cash generating
ability of the Company's Argentine operations. It bears repeating
here that, in spite of Argentina's economic crisis, in 2002, the
Company generated net cash provided by operating activities of $14
million that included dividends received from its investment in
Petrolera Entre Lomas S.A. ("Petrolera") totaling $6.4 million.

In 2003, through the six months ended June 30, the Company has
generated net cash provided by operating activities of $2.8
million that includes dividends received from Petrolera of $2
million.

Reference is made to the section "Argentine Economic and Political
Environment" for a description of Argentina's economic crisis.
Since the third quarter of 2002, although Argentina has made
little progress toward solving the root causes of its economic
problems, its economy, by two of the most visible measures, seems
to be stabilizing. Since September 30, 2002, when the peso to US
dollar exchange rate was 3.74:1 the Argentine peso has regained
value vis-a`-vis the US dollar, and by June 30, 2003 the exchange
rate was 2.8:1. Furthermore, inflation, which surged after
Argentina abandoned the convertibility plan at the start of 2002,
has slowed to an annual rate of 4.5 percent in the first six
months of 2003.

The improvement in these two measures is not evidence that
Argentina has solved its economic troubles, but rather, they may
be signs, in particular with respect to the value of the peso,
that possibly currency markets overreacted by driving the value of
the peso down by almost 75 percent during the first nine months of
2002. Progress still needs to be made in three important areas of
the economy. Argentina's sovereign debt remains in default with
only modest progress having been made in negotiations between the
government and the International Monetary Fund. The country's
economy is barely coming out of a four year long recession, and
unemployment is still higher than 15 percent.

Nevertheless, the operating environment in which the Company
operates improved as 2002 came to a close and during the first six
months of 2003. Management is hopeful that the administration of
newly elected President Nestor Kirchner, who assumed the
Presidency in May 2003, will implement policies that enable these
favorable trends to continue and ultimately find solutions to the
very complex economic problems facing the country.

OIL PRICES

World oil prices gradually improved during the latter part of 2002
and the first six months of 2003, primarily the result of a
national oil strike in Venezuela, civil unrest in Nigeria, and the
war in Iraq that resulted in oil price speculation. Oil prices
have remained near or above $30 throughout the first half of 2003.
In spite of a specific price limitation imposed by the Argentine
government during the first six months of 2003 that is described

11

below, improved world oil market conditions resulted in
significantly higher prices and improved net income for the
Company during the first six months of 2003.

As reflected in the table of sales prices and production costs on
page 17 the average per barrel crude oil sales price for the six
months ended June 30, 2003 averaged $28.29 as compared with $20.89
for oil sold during the comparable period in 2002.

In January 2003, due to the rapid increase in world oil prices and
the Argentine government's desire to maintain stability in
domestic fuel prices, the Argentine government requested that
crude oil producers and refiners agree to cap amounts payable for
domestic oil sales contracts at a price of $28.50 per barrel. In
addition, producers and refiners also agreed that the difference
between the actual price of West Texas Intermediate ("WTI"), the
reference price used to determine the Company's oil sales prices,
and the $28.50 temporary cap would be payable at such time as WTI
fell below $28.50. The debt payable by domestic refiners to
producers accrues interest at an annual rate of 7 percent. This
agreement that was originally scheduled to expire on March 31,
2003, was twice extended to July 31, 2003. Negotiations are
underway to extend the agreement through December 31, 2003. During
the first quarter of 2003, the Company's cumulative sales
resulting from actual prices exceeding the price cap totaled $560
thousand. In the second quarter, this total increased by $37
thousand. As of June 30, 2003, the total amount owed to the
Company from domestic refiners pursuant to this agreement totaled
$597 thousand.

The Company exported a significant amount of its crude oil to
Brazil during the first quarter of the year. In that quarter,
export sales as a percentage of overall oil sales totaled 41
percent. Exports are not affected by the $28.50 price cap;
however, they are subjected to the 16.67 percent tax on oil
exports implemented by the Argentine government on April 1, 2002.
The Entre Lomas joint venture partners and other Neuquen basin
producers that are parties to crude oil sales arrangements
currently in effect, did not export oil during the second quarter
because the per barrel discount from WTI for the most recent
domestic sales contracts in which the Entre Lomas partners
participate have fallen below $1, compared with less favorable
discounts currently available for export sales. Simply stated, in
spite of the temporary price ceiling applicable to domestic sales,
and the requirement that domestic sales be settled in pesos at 90
percent of the actual peso to US dollar exchange rate, the
economics of selling in country are currently favorable because
export sales are subject to the 16.67 percent withholding tax and
the price of WTI has fluctuated around the $28.50 level throughout
the second quarter.

NATURAL GAS PRICES

The Company's gas is sold to Argentine customers pursuant to peso
denominated contracts with occasional spot market sales. As a
result of economic Emergency Law 25,561 enacted by the Argentine
government in January of 2002, the Company's natural gas prices,
when converted to US dollars, have fallen in proportion to the
devaluation of the Argentine peso since the end of 2001 due to the
pesofication of contracts and freezing of gas prices at the
wellhead required by that law.

As reflected in the table of sales prices and production costs on
page 17, the Company's average natural gas sales price per
thousand cubic foot ("mcf") for the six months ended June 30, 2003
and 2002 averaged $.44 and $.49 respectively. This compares with
the average price for the year 2001 of $1.28.

The price of natural gas in Argentina may improve over time as
drilling for gas in Argentina declines in response to these
unfavorable prices and the supply of gas in the country begins to
decline. Indeed, the Company, as have many other natural gas
producers in Argentina, has suspended gas development activities
both in Entre Lomas and in Acambuco until market conditions
improve. It is expected that representatives of Argentina's oil
and gas industry and

12

government officials will begin discussions regarding natural gas
prices in Argentina later this year or early in 2004.

LIQUIDITY

Insofar as the Company's liquidity, although under current
government regulations export customers can pay the Company in US
dollars outside of Argentina, and domestic customers must make
payments in Argentina in local currency, during the second
quarter, the Company was not sensitive to this dynamic and, as
described previously, sold oil exclusively in country. In the
current quarter, the Company was a net user of funds because it
was in the midst of executing its 2003 Entre Lomas capital
expenditure program and was required to fund Argentina income tax
payments of $4.5 million.

Through the first six months of 2003, the Company received $2
million in dividends from Petrolera.

CAPITAL PROGRAM UNDERWAY

The Company's capital program for 2003 continues development
efforts in all producing fields in the Entre Lomas concession.
This year's original Entre Lomas investment program provides for
the drilling of 10 wells, or 6 less than were drilled in 2002,
partly to provide the cash needed for the Company to fund the
previously described Argentine income tax payment of $3.5 million
paid on May 7, 2003, and a subsequent income tax deposit of $1
million paid in June. During the first six months of 2003, the
Company has participated in the drilling of the originally
scheduled 10 wells in the Entre Lomas concession, of which 6 were
put on production as of June 30, 2003. The other 4 are in various
stages of drilling and completion. All wells are expected to be
productive. The tenth well drilled in the undeveloped Los Alamos
section of the concession, is somewhat exploratory in nature as
there has only been one well previously drilled in Los Alamos in
the history of the concession that ceased production in the
1970's. As described previously, gas development efforts in Entre
Lomas have been suspended until the gas price environment in
Argentina improves.

The 2003 Entre Lomas capital investment program was originally
estimated to cost $9.2 million, or $2.2 million, net to the
Company's 23 percent direct interest, and $2.7 million, net to its
equity interest in Petrolera. The Entre Lomas partners have now
agreed that the original program will be amended to include the
drilling of 2 additional development wells and the acquisition of
249 square kilometers of three dimensional ("3D") seismic in the
southern portion of the concession. The seismic will be acquired
on either side of the Borde Mocho field in order to gain a clearer
understanding of leads previously identified with two dimensional
seismic. The estimated cost of these additional investments is
$3.4 million, or $0.8 million, net to the Company's direct
interest, and $1 million, net to the Company's equity interest in
Petrolera.

By June 30, 2003, the Company's capital and investing
expenditures, net to its consolidated interests, totaled $3.5
million, including $1.5 million in Entre Lomas, $1.8 million
representing the purchases of Fimaipu S.A., and an additional $0.2
million for the purchase of the additional interest in the Canadon
Ramirez concession.

No gas development expenditures are scheduled in 2003 in the
Acambuco concession. However, as a result of the successful
reactivation in 2002 of oil production from the Tupambi formation
in one well in the old San Pedro oil field, the Acambuco partners
plan to drill a well targeting the Tupambi formation in the
Macueta structure in the northern part of the concession. After
evaluating the condition of the Tupambi reservoir in the old San
Pedro oil field, the partners determined that reactivation of
additional wells in the field would be discontinued.

13

GROWTH OPPORTUNITIES

In the previous 18 months, the Company deployed cash resources to
increase its presence in Argentina. In 2002, when the Perez
Companc family (the "Family") sold its oil and gas interests in
Argentina to Petroleo Braisleiro S.A., the Company seized the
opportunity provided by a preferential right it had acquired in
1968 to purchase additional shares in Petrolera and increase its
overall ownership interest in the Entre Lomas concession. The
Company paid $6.9 million to acquire an additional 5.54 percent of
the outstanding shares of Petrolera, the operator of the Entre
Lomas concession and owner of a 73.15 percent interest in the
Entre Lomas joint venture. Subsequently, in January 2003, the
Company purchased all outstanding shares of Fimaipu S.A. for $1.8
million. Fimaipu is a private Argentine holding Company whose sole
asset is ownership of 1.58 percent of the outstanding shares of
Petrolera. These two purchases increased the Company's combined
direct and indirect interests in the Entre Lomas joint venture to
52.85 percent.

Pursuant to requirements of the sale-purchase agreement for the
Family's sale of its oil and gas interests, the name Perez Companc
can no longer be associated with Petrolera. As a consequence,
Petrolera's name is being changed to "Petrolera Entre Lomas S.A."

Also in January, 2003, the Company purchased an additional 36.82
percent interest in the Canadon Ramirez concession for a
consideration of $155 thousand. The purchase increased the
Company's interest in the property to 81.82 percent. The Company
will act as operator of the concession.

Despite the backdrop of Argentina's economic turmoil, the
Company's management continues to seek additional ways to deploy
its financial resources focusing primarily, but not exclusively,
on other opportunities in Argentina.

CAPRICORN PERMIT

In April 2003, the Company entered into a farm-in agreement with
Netherfield Corporation ("Netherfield"), a wholly owned subsidiary
of Antrim Energy Inc., a Canadian company with offices in Calgary,
Alberta. The agreement entitles the Company to earn a 50 percent
interest in an exploration permit granted over the Yacimiento
Norte 1/B Block, commonly known as the Capricorn block. Capricorn
block has a surface area of 8,182.87 square kilometers, or
approximately 2.1 million acres located in the province of Salta
in northern Argentina. The farm-in requires the Company to acquire
40 square kilometers of 3D seismic. The seismic is estimated to
cost approximately $800 thousand, and will fulfill Netherfield's
work commitment for the first exploration period pursuant to the
terms of an exploration permit granted to it. At this time,
Netherfield holds a 100 percent interest in the exploration permit
granted in 2001.

The seismic program over Capricorn Permit commenced in May 2003
and was completed in early July. Seismic processing is currently
underway and should be completed in August. To date, the Company
has expended $660 thousand on this program. When the Company
delivers the completed seismic to Netherfield, it will have
earned, or purchased, a 50 percent working interest in the block
and will become the joint venture operator. Thereafter the parties
will evaluate the attractiveness of drilling prospects in the area
over which the seismic information was acquired and decide what
other actions are appropriate to fully evaluate the exploration
potential of the entire block.

Once the seismic project is completed, Netherfield will have
fulfilled its investment commitment required during the permit's
first exploration period that commenced in August 2003.
Thereafter, the partners will have two years to evaluate the
exploration potential of the block. At the end of

14

the two years, a second exploration period requiring the drilling
of an exploration well is optional. If the partners choose to
exercise their option, 50 percent of the original block, less any
exploitation concession granted, must be relinquished.

Capricorn acreage completely surrounds the Puesto Guardian
concession that currently produces 900 barrels per day of oil. The
El Vinalar concession, that is immediately to the east of Puesto
Guardian and which is also oil productive, is bounded on three
sides by Capricorn. Prospective reservoirs in Capricorn lie at
depths below 3,000 meters, or 10,000 feet.

PRESIDENTIAL ELECTIONS

Presidential elections were held on April 27, 2003. Nestor
Kirchner, the former governor of the province of Santa Cruz since
1991 emerged victorious. As of this time, the prevailing opinion
is that President Kirchner is not expected to make changes that
will alter significantly Argentina's oil and gas industry and the
environment in which the Company currently operates.

RESULTS OF OPERATIONS

For the three and six months ended June 30, 2003, the Company
generated net income of $3.0 million and $6.5 million,
respectively. This compares with net income of $609 thousand and
$2.7 million for the comparable periods in 2002. Net income for
the six months ended June 30, 2002, included the cumulative effect
of implementing SFAS No. 143 that resulted in increasing net
income by $2.4 million. Before the cumulative effect of
implementing SFAS 143, for the six months ended June 30, 2002, the
Company generated net income of $292 thousand.

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

SECOND QUARTER COMPARISON

The increase in net income is primarily due to increased operating
revenues and greater equity income from Argentine investments.
Operating revenues increased by $2 million, or 46 percent, due
both to higher oil and plant product sales prices and increased
oil and plant product sales volumes. Oil and plant product sales
prices during the current quarter averaged $26.04 per barrel and
$258 per metric ton, respectively, as compared with $24.17 per
barrel and $158 per metric ton, respectively, during the
comparable period in 2002. Oil volumes increased as a result of
production contributions from the ongoing 2003 Entre Lomas
drilling program, exacerbated by the opposite effects of inventory
fluctuations in the two quarters. During the second quarter 2003,
oil inventory decreased because sales volumes were higher than
production volumes, while the opposite situation occurred during
the second quarter 2002. Plant product volumes increased in 2003
as a result of the 2002 revamp of the Entre Lomas LPG plant that
resulted in improved plant yields. The revamp was not completed
until the third quarter 2002 and, therefore, did not impact
volumes during the second quarter of 2002.

Equity income from Argentine investments increased by $1.6 million
compared with the same quarter in 2002. Because the Company's
equity income is comprised solely of its share of Petrolera's
earnings, all other variance explanations included herein also
serve to explain the increase in equity income. Petrolera's sole
business is its interest in and operatorship of the Entre Lomas
concession and, as a result, its revenues and expenses are
essentially derived from the same operations as the Company.

15

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

Operating expense increased by $317 thousand, selling and
administrative expense increased by $217 thousand, provincial
production taxes increased by $167 thousand, and Argentine income
taxes increased by $177 thousand, for the same reasons described
for these categories of expense in the six months comparison that
follows.

SIX MONTHS COMPARISON

The increase in net income before the cumulative effect of change
in accounting principle of $6.2 million is primarily due to
increased operating revenues and greater equity income from
Argentine investments. Operating revenues increased by $4.1
million, or 46 percent, due both to higher oil and plant product
sales prices and increased oil and plant product sales volumes.
Oil and plant product sales prices during the current six months
averaged $28.29 per barrel and $259 per metric ton, respectively,
as compared with $20.89 per barrel and $118 per metric ton,
respectively, during the comparable period in 2002. Oil volumes
increased as a result of production contributions from the ongoing
2003 Entre Lomas drilling program, and plant product volumes
increased in 2003 as a result of the 2002 revamp of the Entre
Lomas LPG plant that resulted in improved plant yields. The revamp
was not completed until the third quarter 2002 and therefore did
not impact volumes during the first six months of 2002.

Equity income from Argentine investments increased by $4.2 million
compared with the first six months of 2002. Because the Company's
equity income is comprised solely of its share of Petrolera's
earnings, all other variance explanations included herein also
serve to explain the increase in equity income. Petrolera's sole
business is its interest in and operatorship of the Entre Lomas
concession and, as a result, its revenues and expenses are
essentially derived from the same operations as the Company.

Foreign exchange losses decreased by $958 thousand as a result of
a stabilization of the Argentine peso during 2003 compared with
the significant devaluation that occurred during the first six
months of 2002.

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

Operating expense increased by $706 thousand due to higher
workover costs and expenses associated with other oilfield
services, and compensation adjustments given to employees of
Petrolera during the second half of 2002 and the first quarter of
2003 in response to elevated levels of inflation in 2002. During
the first half of 2002, in spite of inflation, the peso cost of
salaries, wages and oilfield services remained unchanged due to
the uncertainty in Argentina's overall business environment
resulting from the country's economic crisis. As a result, when
expressed in US dollars, by June 30, 2002, operating expense had
decreased approximately in proportion with the devaluation of the
Argentine peso and, as a consequence, had at that time reached
atypically low levels.

Selling and administrative expenses increased by $522 thousand due
to engineering consulting fees, higher audit expenses, increased
costs of other services associated with greater regulatory
compliance and related governance issues, and compensation
adjustments given to the Company's branch employees during the
second half of 2002 and the first quarter of 2003. For the same
reasons described under operating expense, by June 30, 2002, the
cost of the Company's branch operation, when expressed in US
dollars had decreased approximately in proportion with the
devaluation of the Argentine peso and, as a consequence, had at
that time reached atypically low levels.

16

Provincial production taxes increased by $352 thousand and
Argentine income taxes increased by $501 thousand. These increases
are directly associated with the increases in operating revenues
and income before income taxes, respectively.

The increase of $668 thousand in Argentine taxes other than income
is the result of a combination of factors. Oil export taxes
increased in 2003 due to the increase in taxable exports,
production taxes increased in proportion with the increase in
operating revenues, and the Company paid an asset tax in 2003 on
its investments in Argentina.

The following table illustrates total sales of crude oil,
condensate, natural gas and gas liquids and average sale 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 have not been reduced by the 12 percent provincial
production tax that is paid separately and is accounted for as an
expense by the Company. In calculating provincial production tax
payments, Argentine producers are entitled to deduct gathering,
storage, treating and compression costs.

Average production cost is calculated by taking into consideration
all costs of production including the costs of well workovers and
depreciation of property and equipment. The per unit cost of
depreciation included in average oil and gas production costs are
for the year 2003, $4.65 per barrel and $.21 per mcf, and for
2002, $4.22 per barrel and $.15 per mcf.

17

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 complicated
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.

ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT

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

Late in 2001, the country was unable to obtain additional funding
from the International Monetary Fund. As economic instability
increased, substantial withdrawals of cash from the Argentine
banking system occurred over a short period of time and the
government was forced to implement monetary restrictions severely
limiting the transfer of funds out of the country without the
authorization of the Central Bank of the Republic of Argentina.
Such unpopular measures ultimately led to the resignation of
President De la Rua and his entire administration. After the
resignation of President De la Rua in December 2001, there was for
a few weeks a revolving door of Presidents that were appointed to
office by Argentina's congress but quickly resigned in reaction to
public outcry. Eduardo Duhalde was appointed President of
Argentina in January 2002 to hold office until the next regularly
scheduled Presidential election in 2003.

In January 2002, the government declared default on Argentina's
$130 billion of debt and the national Congress passed Emergency
Law 25,561, which among other things, overturned the long standing
but unsustainable convertibility plan. The government eventually
adopted a floating rate of exchange in February 2002.

President Duhalde, with the single exception of rescheduling
approximately $7 billion of debt in January 2003, was unable to
obtain financial assistance from international lending

18

agencies such as the International Monetary Fund and the World
Bank and his administration's inability to make significant
progress in resolving the country's economic crisis, has resulted
in an almost total loss of public support.

The abandonment of the convertibility plan and the decision to
allow the peso to float in international exchange markets,
resulted in a strong devaluation of the peso. By September 30,
2002, the peso to U.S. dollar exchange rate had increased from 1:1
to 3.74:1. However, since the end of the third quarter 2002,
although Argentina has made little progress toward solving the
root causes of its economic problems, its economy seems to be
showing signs of stabilization.

Nestor Kirchner, the former governor of the province of Santa Cruz
since 1991 won the April 27, 2003 presidential elections. As of
this time, the prevailing opinion is that President Kirchner is
not expected to make changes that will alter significantly
Argentina's oil and gas industry and the environment in which the
Company currently operates.

Refer to the section "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 15 for a
description of the outcome of the April 27, 2003 election and on
page 11 for a discussion of a stabilization in the Argentine peso
and a reduction in the level of inflation.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act)
("Disclosure Controls") was performed as of the end of the period
covered by this report. This evaluation was performed under the
supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and
Chief Financial Officer. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded
that, subject to the limitations noted below, these Disclosure
Controls are effective.

The Company's management, including its Chief Executive Officer
and Chief Financial Officer, does not expect that the Company's
Disclosure Controls or its internal controls over financial
reporting ("Internal Controls") will prevent all error and all
fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in
a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. The Company monitors its
Disclosure Controls and Internal Controls and makes modifications
as necessary. The Company's intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained
as systems change and conditions warrant.

There has been no change in the Company's Internal Controls that
occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the Company's Internal Controls.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The exhibits listed below are filed as part of this report:

31.1 - Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, and Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

31.2 - Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, and Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

32 - 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., and by Landy L. Fullmer, Chief Financial
Officer of Apco Argentina, Inc.

(b) The Company did not file or furnish any reports on Form 8-K
during the quarter for which this report is filed.

19

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, 2003

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INDEX TO EXHIBITS