APCO ARGENTINA INC/NEW, 10-K405, 1999-03-22

APCO ARGENTINA INC/NEW
10-K405, 1999-03-22
CRUDE PETROLEUM & NATURAL GAS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1998

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

(NO FEE REQUIRED)
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)

P. O. Box 2400
Tulsa, Oklahoma 74102
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (918) 573-2164

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

Title of each class Name of each exchange on which registered
None None

Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares $.01 Par Value (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 15, 1999, was $34,273,695. This value
was calculated based upon the average bid and asked prices of the registrant's
stock of $15 on March 15, 1999, as reported to the Company by the National
Association of Securities Dealers. Since the shares of the registrant's stock
trade sporadically in the over-the-counter market, the bid and asked prices and
the aggregate market value of stock held by non-affiliates based thereon may not
necessarily be representative of the actual market value. See Item 5.

At March 15, 1999 there were outstanding 7,360,311 shares, $.01 par value, of
the registrant.

Documents Incorporated By Reference

List hereunder the following documents if incorporated by reference and the part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated:

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P A R T I

ITEM I. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

Apco Argentina Inc. ("the Company") is a Cayman Islands corporation which was
organized April 6, 1979 as a successor to Apco Argentina Inc., a Delaware
corporation organized July 1, 1970. The principal business of the Company is its
47.6 percent participation in a joint venture engaged in the exploration,
production, and development of oil and gas in the Entre Lomas concession located
in the provinces of Rio Negro and Neuquen in southwest Argentina. The Company
also owns a 1.5 percent participation in a joint venture engaged in oil and gas
exploration and development in the Acambuco concession located in the province
of Salta in northwest Argentina, and a 45 percent participation in a third joint
venture engaged in oil exploration and development in the Canadon Ramirez
concession located in the province of Chubut in southern Argentina.

The current decline in oil prices, which commenced in the latter stages of 1997
and continued to worsen through the end of the current year, reaching levels not
seen since 1986, has had a significant negative impact on the Company's net
income and cash flow from operations. During the year, the Company generated net
income of $3.4 million, compared with $13 million and $12.7 million, for 1997
and 1996, respectively. Refer to "Financial Condition" and "Results of
Operations" on pages 16 through 19, for a more detailed discussion of the year's
results.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

None.

ENTRE LOMAS

The Company participates in a joint venture with Petrolera Perez Companc S.A.
("Petrolera") and Perez Companc S.A. ("Perez Companc"). Both partners are
Argentine companies. The purpose of the joint venture is the exploration and
development of the Entre Lomas oil and gas concession in the provinces of Rio
Negro and Neuquen in southwest Argentina. The Company's interest in the joint
venture totals 47.6 percent of which 23 percent is a direct participation and
24.6 percent is owned indirectly by virtue of the Company's 33.6 percent stock
ownership in Petrolera, the operator of the joint venture. Petrolera owns a
73.15 percent direct interest in the joint venture.

YPF CONTRACTS

In 1967, Yacimientos Petroliferos Fiscales ("YPF"), then the national oil
company of Argentina, sought bids for the development of the Entre Lomas area.
Perez Companc won the bid and entered into contract 12,507, dated March 13,
1968, which contract permitted the Entre Lomas joint venture to explore for,
develop, and produce oil in the area. Similar contracts with YPF with respect to
natural gas produced and liquids extracted from natural gas were entered

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into on November 18, 1970, and February 10, 1977, respectively. Originally, the
joint venture's interests in the Entre Lomas area were derived from such
contracts and not from direct ownership of the mineral resources involved. Under
Argentine hydrocarbon laws, the Argentine government retains ownership of the
minerals in place.

JOINT VENTURE AGREEMENTS

On April 1, 1968, Perez Companc and Petrolera entered into a joint venture
agreement with Apco Oil Corporation pursuant to which Petrolera became operator
of the Entre Lomas area. On July 1, 1970, Apco Oil Corporation transferred its
interest in the Entre Lomas area to the Company. Similar joint venture
agreements among the Company, Perez Companc and Petrolera for the development of
natural gas and extraction of propane and butane were entered into February 29,
1972, and March 23, 1977, respectively.

DEREGULATION

On November 8, 1989, the Argentine government issued decree 1212/89 describing
steps necessary to deregulate hydrocarbon production from existing production
and development contracts, including Entre Lomas. The decree directed YPF to
negotiate with producers the conversion of contracts to the concession or
association system described in the 1967 Hydrocarbon Law 17,319, and gave owners
of the converted contracts the right to freely dispose of hydrocarbons produced
at world prices.

Complete deregulation of the Entre Lomas area was implemented by an agreement
that went into effect January 22, 1991, amended in February 1994. Pursuant to
the agreement, Entre Lomas was converted to a concession giving the joint
venture partners ownership of produced hydrocarbons at the wellhead. Under this
agreement, the concession holders, or joint venture partners, have the right to
freely sell produced hydrocarbons in internal or external markets, and have
complete authority over operation of the concession including future exploration
and development plans. The partners, throughout the term of the concession, are
subject to provincial royalties, production taxes, and federal income taxes,
which rates of tax are currently twelve percent (12%), two percent (2%), and
thirty five percent (35%), respectively. The Entre Lomas concession term
currently runs through the year 2016, with an option granted the joint venture
partners to extend the concession for an additional ten years, or 2026.

SALE OF OIL

The Entre Lomas concession participates in several contracts negotiated by the
Perez Companc group. This arrangement allows the joint venturers to pool Entre
Lomas oil with other concessions in the Medanito area providing greater
negotiation strength with Argentine refiners and export customers.

During 1998, forty-eight percent of Entre Lomas oil sold was exported to
Petrobras, the Brazilian national oil company and Tosco Refining Company in New
Jersey. The remainder was sold domestically to Refineria San Lorenzo S.A. and
Shell C.A.P.S.A. under various short-term contracts expiring on different dates
ranging from 1999 through 2001.

3
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Excellent demand exists for Medanito area crude oil because of its relative
quality and favored geographical location. Management is confident that upon
expiration, these contracts can be extended or replaced.

The per barrel price for Argentine crude oil continues to be based on the spot
market price of West Texas Intermediate less a discount to provide for
differences in gravity and quality. The average weighted discount for contracts
in effect during 1998 was $1.58, as compared with $1.26 for contracts in effect
in 1997, and $1.32 for contracts in effect during 1996. Since deregulation of
Argentina's energy industry in 1991, domestic market conditions have evolved to
the point that the discount for oil sold in country appears to have stabilized
in the $1.20 to $1.50 range depending on market conditions. Discounts for oil
exported to Brazil are approximately forty percent higher. Export oil is not
subject to domestic production tax.

SALE OF GAS

Since 1994, the Entre Lomas joint venturers have sold gas to Litoral Gas S.A.,
the gas distribution company for the province of Santa Fe pursuant to a
five-year contract. The daily volume commitments under this agreement are 28
million cubic feet ("mmcf") during peak winter months and 25 mmcf during the
remainder of the year. The sales price varies depending on seasonal demand.
During 1998, a daily average volume of 27 mmcf was sold pursuant to this
contract at an average price of $1.30 per thousand cubic feet ("mcf"). The
contract expires in April 1999.

Gas sales volume for 1998 averaged 44 mmcf per day. The additional 16 to 19 mmcf
above the Litoral Gas S.A. commitment were spot market sales principally to
Metrogas S.A. and Camuzzi Gas Pampeana S.A. The Entre Lomas partners have over
the years been successful selling additional gas production through temporary
arrangements. The concession is well situated in the Neuquen basin with two
major pipelines, in close proximity, that feed the Buenos Aires market. In 1998,
the average price of gas sold under temporary arrangements was $1.38 per mcf.

Upon expiration of the Litoral Gas S.A. contract, a new three-year sales
contract with Camuzzi Gas Pampeana S.A., will go into effect. The daily volume
commitments under this new agreement will be 28 mmcf during peak winter months
and 13 mmcf during the remainder of the year. The average sales price
throughout the year under this contract will be $1.41 per mcf. Although the
off-season volume commitment under this new contract is significantly lower,
the joint venture partners are confident that the average volumes sold in
previous years can be achieved, for the reasons described in the previous
paragraph.

TRANSPORTATION

Oil produced in the Entre Lomas concession is sold in Puerto Rosales, a major
industrial port in southern Buenos Aires Province, and is shipped there through
the Oleoductos de Valle S.A. ("Oldelval") pipeline system. From the concession,
oil is transported through the joint venture's 8 inch, 6 3/4 mile pipeline. This
line has a capacity of 16,000 barrels per day and is directly connected to the
Medanito-Allen leg of the system. Medanito-Allen, with a daily capacity of
130,000 barrels, transports oil to the Allen terminal. Two Oldelval lines,
originating in Allen, with a daily capacity of 175,000 barrels, complete the
journey to Puerto Rosales. The Entre

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Lomas joint venture's current volume allocation in this pipeline system is
11,600 barrels per day. The system at this time is operating at 90 percent of
capacity.

The cost to transport oil through this system and use the storage and handling
facilities in Puerto Rosales averaged $1.13 per barrel in 1998. Current
transportation tariffs were established by government decree in 1992.

PETROLERA

Petrolera was established for the express purpose of carrying out production and
development operations in the Entre Lomas area. Major investment and
distribution decisions are made by the joint venture and implemented by
Petrolera. Petrolera has a board of 15 directors, 7 of whom are nominees of the
Company and 8 of whom are nominees of Perez Companc or its affiliates.
Petrolera's senior officers are generally the same as those of Perez Companc
with other general office and field personnel being employed exclusively by
Petrolera. The Company understands that Petrolera's sole business at present is
its role as joint venture operator.

With the assistance of its branch office in Buenos Aires, the Company obtains
operational and financial data with which it monitors joint venture operations.
The branch also provides technical assistance to Petrolera and makes
recommendations regarding field operations.

DISTRIBUTIONS AND DIVIDENDS

During 1998, the Company received direct distributions of $3.6 million and
Petrolera dividends of $1.5 million. Due to the effect of the decline in oil
prices mentioned under "BUSINESS, General Development" on page 1, and described
in greater detail under "Financial Condition" and "Results of Operation" on
pages 16 through 19, this year's level of distributions and dividends is
substantially below that of the prior years. During 1997 and 1996, direct
distributions totaled $7.5 million and $6.1 million, respectively, and Petrolera
dividends totaled $3.7 million in both years. Future distributions and dividends
are necessarily dependent upon numerous factors, including among others, the
joint venture's ability to generate future earnings, the level and timing of
future investments in the area, and fluctuations in crude oil and natural gas
prices.

DESCRIPTION OF THE CONCESSION

The Entre Lomas concession is located about 950 miles southwest of the city of
Buenos Aires on the eastern slopes of the Andes mountains. It straddles the
provinces of Rio Negro and Neuquen approximately 100 kilometers north of the
city of Neuquen. The concession produces oil and gas primarily from the Charco
Bayo/Piedras Blancas field complex ("CB/PB"). Two smaller fields, the Entre
Lomas and El Caracol fields, located to the northwest of the main field complex
also produce oil and gas. In 1996 the well Borde Mocho x-1, located southwest of
CB/PB, discovered oil in a small structure yet to be developed.

The largest oil producing formation is called Tordillo which in the CB/PB field
has generated 82 percent of all oil produced in the concession. The Tordillo
also produces associated gas which is consumed for field operations. Propane and
butane are extracted from this gas in the joint venture's gas processing plant.
Other important formations are the Quintuco, which produces

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gas in CB/PB and oil in the Entre Lomas and El Caracol fields and the
Petrolifera formation which produces gas in the Entre Lomas gas field and some
oil in CB/PB. Since inception 444 wells have been drilled in the concession, of
which at year end, 273 are oil wells, 18 are gas wells, 90 are water injection
wells, 11 are water producing wells, 28 wells are shut-in, and 24 wells are
abandoned or awaiting abandonment.

The CB/PB and El Caracol fields are secondary recovery projects. Water injection
has been introduced in CB/PB in phases since 1975. There still exist areas in
CB/PB which lack injection. The El Caracol field has been under injection since
1989. Secondary recovery operations commenced in the Entre Lomas oil field in
1998.

CHARCO BAYO/PIEDRAS BLANCAS FIELD

CB/PB produces principally from the Tordillo formation with some minor
production from the Petrolifera formation. Production in the CB/PB field
commenced in 1968, with the largest part of this complex developed before 1974.
Additional development drilling has continued through the present with two
significant drilling campaigns occurring during 1979-1981 and 1986- 1988. These
two campaigns were the result of renegotiations of the original Entre Lomas
contract. Secondary recovery was introduced with a successful pilot in 1975 and
has slowly been expanded to include 73 injection wells. CB/PB can best be
described as a mature oil field with remaining potential. Development of this
field has historically been gradual due to the sporadic nature of past major
investment programs which, until the Entre Lomas area was converted to a
concession, occurred as a result of major renegotiations of the original
contract.

The field's ultimate development is likely to result from a combination of
expansion of secondary recovery throughout the entire producing field, selective
infill drilling, continued step out drilling, and recompletion of existing wells
with behind pipe reserves. The results of these programs can be enhanced, and
higher percentage recoveries achieved, by improving the efficiency of the
waterflood through various means. Such means include substantially increasing
the rate of water injection in areas of the field already under flood, modifying
existing patterns of injection, increasing lift capacity to handle greater
volumes of fluid by accelerating the conversion of wells from gas lift to pump,
placing idle wells back on production, and attempting to reduce the effects of
channeling of injection water.

Although the CB/PB waterflood has been in operation since 1975, there has been
insufficient water injected in some areas of the field already under injection
and other areas in which there has not been injection to date. As a result,
recoveries normally attributed to waterfloods after 15 to 20 years have not been
attained and it is currently estimated that this field has a remaining
productive life in excess of twenty years. Expansion and improvement of
secondary recovery throughout this field is a primary emphasis for the joint
venture. During 1998, five additional producers were converted to injection.

Insofar as future drilling activity in the CB/PB field, it is felt that the
oil/water contact, or the lowest structural point at which oil can be produced,
is fairly well defined. Nevertheless, there remain undrilled step out locations
in the flanks of the structure and selective infill locations which should be
drilled in order to produce from areas of the field not currently drained by
existing wells. The level of development drilling activity in CB/PB will, of
course, be dependent on an oil price level that provides adequate returns for
the joint venture partners. During 1998,

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six additional wells were drilled and completed as producers, of which three
were in-fill wells and three were step out wells.

In the CB/PB field, the Quintuco formation is gas productive. Approximately 37
percent of gas sold by the joint venture is produced from a few gas wells
interspersed among the many Tordillo oil wells located on this structure.
Quintuco gas reserves in this field are believed to be fully developed.

In 1992, the Argentine Department of Energy issued Resolution 105 requiring
environmental control. As a result, from 1993 through 1998, investments have
been made to change the system of produced water disposal in the Entre Lomas
concession. Until this year, fresh water has been the sole source of injection
in all waterflood projects in the concession. Prior to 1996, produced water was
disposed of in evaporation and filtration pits, however, this practice was
forbidden by the province in that year. Produced water has since been injected
into a shallower formation with high injectivity capacity. Commencing 1998,
produced water in CB/PB is being reinjected into the producing formation.
Eventually all produced water will be reinjected. The joint venture is now
involved in a multi phase program to replace surface and down hole injection
lines to tolerate the corrosive effects of reinjecting formation water.

EL CARACOL FIELD

The El Caracol field is located in the northwestern most part of the concession.
This field produces oil from the Quintuco formation. Thirty one wells have been
drilled here to date. Additional development drilling potential may still exist.
Water injection began here in 1989 and response has been favorable. Potential
for further expansion of the waterflood may also exist. During 1998, one
additional producing well was converted to injection.

ENTRE LOMAS FIELDS

The Entre Lomas structure is located in the central part of the concession to
the northwest of CB/PB. This anticline is cut by a fault near its crest. An oil
field exists on the southwest or upthrown side of this fault and a gas field
exists on the northeast or downthrown side.

OIL RESERVOIRS

The oil field is productive from the Quintuco formation, with some minor
production from the Tordillo formation. Quintuco continues to demonstrate
development potential toward the northwest. During the last three years,
seventeen development wells have been drilled and completed in this field, some
with very good results. Eight wells were drilled and completed in 1998. Over
this time, the size of the field has been extended in all directions, but
principally to the northwest, where one well was placed on production in
mid-year with an initial oil rate of one thousand barrels per day. This well has
accumulated nearly one hundred thousand barrels of oil in less than six months.
Some of the recent wells drilled in this field have encountered a conglomerate
seam within the Quintuco formation with improved petrophysical qualities that
make these wells more productive than wells drilled previously. Since 1995, the
percentage of oil production in the concession contributed by this field has
increased from approximately ten percent to thirty percent. Additional wells
will be drilled in 1999.

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The southeast, or older part of this field, has shown signs of pressure
depletion. The Quintuco formation responded favorably to water flooding in the
El Caracol field. Reservoir simulation studies have predicted that the Entre
Lomas field will have a similar response to secondary recovery. Investments to
implement waterflooding in this field commenced in 1997 and continued into 1998
when water injection commenced. Secondary recovery will be expanded throughout
this field in the next two to three years.

GAS RESERVOIRS

In 1970, the Entre Lomas 4 ("EL 4") well was drilled and discovered significant
gas potential from several sections of the Petrolifera formation. EL 4 was never
produced due to its remote location and lack of market. In 1989, this well
experienced casing problems and is believed, over a period of months, to have
lost an unknown quantity of gas before repairs could be carried out.

Deregulation of Argentina's gas industry in 1993 fueled considerable interest in
gas development throughout the country. As a result, in mid 1994, the EL4 well
was placed on production at a rate of 8 mmcf per day. Since then, seven wells
have been drilled, of which five are productive. Another well drilled in the
early 1970's was also put on production making a total of seven wells on
production in this field. Although this field now appears to have been defined
for the most part, additional expansion possibilities still may exist to the
northwest. Late in 1997, the Lomas De Ocampo 4 well, drilled to the northwest of
the existing field was found to be productive in both the Petrolifera and
Quintuco formations. This well was produced intermittently during 1998. Results
are being evaluated to determine potential for further expansion of this field.
The drilling of an additional well is planned for 1999.

EXPLORATION

In the Entre Lomas concession, there are approximately 147,000 undeveloped
acres. Since inception, 444 wells have been drilled inside the concession of
which only a few have been drilled significant distances from the main producing
fields. Although the joint venture partners believe the major producing
structures have been identified and are being developed, the concession remains
relatively unexplored.

During 1993 and 1994, the partners carried out a seismic campaign which included
reprocessing seismic shot in prior years and shooting approximately 480
kilometers, of new 2D seismic. Several structures were identified as potential
drilling targets. New prospects target both oil and gas in formations already
known to be productive in the concession and uninvestigated deeper formations.
This was followed up in 1995 with 3D seismic covering 90 square kilometers in
the center of the concession. The area included the Entre Lomas structure and
the acreage immediately to the northwest and southeast of the Entre Lomas oil
and gas fields. Results of this 3D seismic campaign proved helpful in the
efficient development of the Entre Lomas gas field and the current northwestern
extension of the Entre Lomas oil field. As a result of that program, the joint
venture is evaluating the exploration potential of the Los Alamos and Lomas de
Ocampo areas which were lightly explored in the early life of the concession and
have produced small amounts of oil from a few wells in the Tordillo and Quintuco
formations.

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During 1998, the joint venture partners completed an ambitious 3D seismic
program that covered the remaining areas of most interest in the concession not
covered in 1995. The program consisted of 230 square kilometers of 3D seismic
shot over the CB/PB and Borde Mocho fields and surrounding areas and 143 square
kilometers of 3D seismic shot over the El Caracol field and Lomas de Ocampo
region. The objectives of this latest campaign are to gain a better
understanding of prospective structures in the concession identified with the
previous 2D campaign, and obtain a clearer picture of the stratigraphy of deeper
formations from the base of the Tordillo to the basement floor. This just
acquired seismic will enable the partners to integrate it and the 1995 program
into one continuous seismic block. It is the intention of the partners to
identify the most attractive exploration prospects, and thereafter, when the oil
price environment improves, undertake exploration drilling in the concession.

BORDE MOCHO

In early 1996, the joint venture partners drilled the Borde Mocho x-1 well. This
exploration well was completed in both the Quintuco and Tordillo formations. Its
performance over three years reveals a potential for development of the
surrounding area. After completion of the aforementioned 3D seismic campaign,
which will also cover this area, additional wells will be drilled to help define
the production potential of this structure.

ACAMBUCO

The Company owns a 1.5 percent participation interest in the Acambuco joint
venture, an oil and gas exploration and development concession located in
Northwest Argentina, in the province of Salta, on the border with Bolivia. The
Acambuco concession covers an area of 267,000 acres.

DESCRIPTION OF THE CONCESSION

The Company has been a participant in the Acambuco area since 1981. The
principal objectives in Acambuco are the Huamampampa and Santa Rosa formations,
deep fractured limestones considered to have sizable gas exploration potential.
In Acambuco, these formations occur at depths in excess of 14,000 feet. The
Ramos and Aguarague concessions, immediately to the south and east of Acambuco,
has major gas fields with significant gas production and reserves from these
formations. Acambuco also has potential for oil development in shallower
formations considered secondary targets.

Acambuco is situated in an overthrust belt wherein drilling can be difficult and
costly not only because of the depths of the primary objectives, but also from
the risk of mechanical problems during drilling.

BACKGROUND

Three wells were drilled unsuccessfully in the early 1980's to depths ranging
from 16,000 to 18,000 feet. Although two wells gave indications of oil and gas
productive potential, they had to be abandoned for mechanical reasons.

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Little activity occurred in Acambuco between 1983 and 1994 due to a lack of
market for potential gas. During the early to mid 1990's, the rapid growth of
demand for energy in southern Brazil generated significant interest in the
construction of pipelines to deliver gas from Bolivian and Northwest Argentine
gas producing basins to the markets of Sao Paulo and Rio de Janeiro. Due to
deregulation of the gas industry in Argentina in 1991, and as major pipeline
alternatives to Brazilian markets began to materialize, interest in the Acambuco
area was rekindled.

In 1994, the Acambuco partners consisting of Bridas S.A.P.I.C., Northwest
Argentina Corporation, and the Company, entered into a farmout agreement with
YPF, whereby YPF received a 45 percent interest in the concession in exchange
for drilling, within five years, four exploration wells on four separate
geologic structures, the costs of which were to be paid 100 percent by YPF. The
agreement also provided that YPF would finance development drilling which might
result from successful exploration. The Company had the option, in each
exploration prospect drilled, to either proportionately reduce its 1.5 percent
interest by 45 percent; pay its share of the exploration costs; or exercise the
non-consent penalty provisions of its 1984 agreement with Bridas while retaining
its 1.5 percent interest.

Pursuant to the terms of the farmout agreement, the San Pedrito x-1 well, with a
target depth of 15,700 feet commenced drilling in March 1995. Due to mechanical
problems, drilling was stopped at a depth 14,500 feet and the well penetrated
only the uppermost section of the Huamampampa formation. Although not traversing
the formation completely, the well successfully tested 42 million cubic feet per
day, and 1,900 barrels per day of condensate. For this initial well, the Company
exercised its non-consent option. The total cost of the well reached $45 million
due to problems encountered during drilling such as severe formation pressures,
sidewall cave-ins and stuck drill pipe.

In May 1996, YPF commenced drilling the second exploration well, the San Antonio
x-1, on a separate structure. One year later, the well reached its intended
depth of 15,700 feet at a cost of $36 million. The Company again exercised its
non-consent option. The well penetrated the Huamampampa formation in a
structurally unfavorable position and produced water. However, this well tested
oil in a secondary target, the Tupambi formation. Confirmation of oil potential
in the Tupambi is now a primary objective in this structure. The Huamampampa
formation is still considered prospective.

As a result of the final outcome of the San Pedrito x-1 well, a dispute arose
between Bridas and YPF regarding the well's failure to reach its objective
depth. Before the dispute was resolved, Bridas and Amoco Argentina S.A. formed a
strategic alliance by combining certain of each Company's oil and gas assets in
the southern cone of South America. In the combination Pan American Energy
Investments Ltd. was formed to hold the combined assets. Bridas' interest in
Acambuco is now held by Bridas P.I.C.S.R.L., a wholly owned subsidiary of Pan
American.

In January 1998, the aforementioned dispute between Bridas and YPF was settled.
As part of the settlement, YPF assigned to O&G Developments Ltd., a wholly owned
subsidiary of Bridas P.I.C.S.R.L., 22.5 percent of the 45 percent interest it
had acquired in the 1994 farmout agreement, in exchange for cancellation of
YPF's remaining obligation to drill the last two wells of its four well drilling
commitment. Bridas P.I.C.S.R.L. became the operator of the concession.

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In mid 1998, Shell C.A.P.S.A. purchased O & G Development's Ltd's 22.5 percent
interest for $200 million. The Acambuco joint venture now consists of Pan
American Energy (representing Amoco and Bridas) with 52 percent Shell and YPF,
with 22.5 percent each, and the Company and Northwest Argentina with 1.5 percent
each.

CURRENT AND FUTURE ACTIVITY

In September 1998, the Acambuco partners commenced drilling the San Pedrito x-2
well at a location approximately 3 miles south of the San Pedrito x-1 discovery
well. This well is expected to reach a depth of 18,100 feet. Its principal
objective is to confirm the Huamampampa discovery and investigate the deeper
Santa Rosa formation. Santa Rosa is productive in both the nearby Aguarague and
Ramos concessions. The well should reach total depth by September 1999 and is
estimated to cost $36 million ($540 thousand net to the Company.)

Another well, the Cerro Tuyunti x-1, commenced exploration drilling in January
1999 on the largest and as yet unexplored structure in the concession. This
well, also estimated to cost over $30 million will be drilled to a similar depth
and investigate both the Huamampampa and Santa Rosa formations. Subsequently,
the joint venture will reenter one of the three Macueta wells drilled in the
early 1980's and attempt to sidetrack the well to a higher position in the
anticline. The sidetrack will be located near a well that discovered gas in the
San Alberto block immediately on the opposite side of the Bolivian border.

Exploration activity in the concession is expected to remain strong through the
year 2000 and the joint venture expects to spend in excess of $100 million in
1999 alone, or $1.5 million net to the Company.

MARKETS

The first major pipeline to supply gas to markets in Sao Paulo and Rio de
Janeiro is the Bolivia to Brazil pipeline commonly referred to as the "BTB
Pipeline". This 32 inch, 1,800 kilometer line has been under construction since
July 1997. The line commences at Rio Grande/Santa Cruz, Bolivia and currently
extends to Sao Paulo. Estimated to cost approximately $2 billion, the line's
capacity is 1 BCF per day. It is scheduled to start operation in April 1999 and
is expected to operate at full capacity within four years. Current plans are to
extend this line from Sao Paulo to Rio de Janeiro and the southern Brazilian
city of Porto Allegre.

The contractual commitments to supply gas to southern Brazil through the BTB
Pipeline give preference to Bolivian gas. Approximately 8 trillion cubic feet of
gas reserves are needed to fill the line to capacity for twenty years. When
construction of the line commenced, there were insufficient Bolivian reserves to
satisfy commitments and it was believed the line would have capacity
availability for gas produced in Northwest Argentina. It now appears that
sufficient gas reserves have been discovered in southern Bolivia during the last
two years and that gas produced in the Acambuco region will not have access to
the BTB line. For the short-term, new gas produced in Northwest Argentina will
need to find alternative markets in Argentina, Chile, or await a second pipeline
route into southern Brazil.

<PAGE> 12

CANADON RAMIREZ

On September 30, 1997, in exchange for its commitment to pay $1.75 million for
exploration and well workovers, the Company acquired a 45 percent interest in
the 92,000 acre Canadon Ramirez concession, located in southern Argentina, in
Chubut province. This region produces hydrocarbons from the Golfo San Jorge
basin, the oldest oil producing province in the country.

The Company obtained its interest in Canadon Ramirez from Pan Am Group S.A.
("Pan Am"), owned by the Melhem family in Argentina. Pan Am previously purchased
the concession from Chubut province, which had acquired it from YPF. A third
partner in the concession is ROCH S.A. which holds a 10 percent interest and is
operator.

During the 1980's YPF drilled eighteen wells in Canadon Ramirez, with several
giving evidence of potential oil production. Objective formations in the area
are fairly shallow and occur at depths of less than 6,000 feet. Production
operations have never been conducted in the block, hence it is considered
exploratory in nature. The Company's investment commitment was fulfilled by mid
1998 and included well workovers and recompletions, extended production testing,
and reprocessing and reinterpretation of existing seismic. The joint venture
partners have postponed further action in the concession until the oil price
environment improves. In the meantime, the partners review results of production
testing and seismic interpretation to determine if drilling an exploration well
is warranted.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, excluding historical information,
include forward- looking statements. Although the Company believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be reached. Such statements are made in
reliance on the safe harbor protections provided under the Private Securities
Litigation Reform Act of 1995.

As required by such Act, the Company hereby identifies the following important
factors that could cause actual results to differ materially from any results
projected, forecasted, estimated or budgeted by the Company in forward-looking
statements: risks and uncertainties impacting the Company as a whole relate to
changes in general economic conditions in Argentina; future unpredictability and
volatility of product prices, in particular oil prices, which can be affected by
political events in producer nations; the availability and cost of capital;
changes in laws and regulations to which the Company is subject, including tax,
environmental and employment laws and regulations; the cost and effects of legal
and administrative claims and proceedings against the Company or its
subsidiaries or which may be brought against the Company. It is also possible
that certain aspects of the Company's business that are currently unregulated
may be subject to regulation in the future.

<PAGE> 13

ITEM 2. PROPERTIES

See ITEM 1(c) for a description of properties.

ITEM 3. LEGAL PROCEEDINGS

Other than as described in the financial statements, there are no material
pending legal proceedings to which the Company is a party.

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

None.

<PAGE> 14

P A R T II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

At December 31, 1998, there were 1,201 record holders of the Company's ordinary
shares, $0.01 par value. The ordinary shares are traded sporadically in the
over-the-counter market. The Company understands that the trades which occur are
made both at the quoted market price or on a negotiated basis outside of the
quoted market. The high and low bid prices listed below were provided to the
Company by the National Association of Securities Dealers Automated Quotation
System (NASDAQ).

The Company currently pays its shareholders a quarterly dividend of 16.25 cents
per share. Future dividends are necessarily dependent upon numerous factors,
including, among others, earnings, levels of capital spending, changes in
governmental regulations and changes in crude oil and natural gas prices. The
Company reserves the right to change the level of dividend payments or to
discontinue or suspend such payments at the discretion of the Directors.

Stock Price
-------------------------
High Low Dividend
-------- -------- -------------
<S> <C> <C> <C> <C>
Quarter of 1998
First $ 31 1/2 $ 26 1/4 $ .16 1/4
Second 29 24 .16 1/4
Third 25 18 .16 1/4
Fourth 23 17 .16 1/4

Quarter of 1997
First $ 27 $ 19 3/4 $ .16 1/4
Second 28 1/2 23 1/2 .16 1/4
Third 33 25 .16 1/4
Fourth 41 31 1/2 .16 1/4

</TABLE>

The Company has been advised that: a Cayman Islands company may not pay
dividends to shareholders out of its share capital or share premium account;
there are no Cayman Islands laws, decrees or regulations relating to
restrictions on the import or export of capital or exchange controls affecting
remittances of dividends, interest and other payments to non-resident holders of
the Company's ordinary shares; there are no limitations either under the laws of
the Cayman Islands or under the Company's Memorandum or Articles of Association
restricting the right of foreigners to hold or vote the Company's ordinary
shares; there are no existing laws or regulations of the Cayman Islands imposing
taxes or containing withholding provisions to which United States holders of the
Company's ordinary shares are subject; and there are no reciprocal tax treaties
between the Cayman Islands and the United States.

14
<PAGE> 15

ITEM 6. SELECTED FINANCIAL DATA

1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands
except per share amounts)

Revenues $34,105 $48,009 $46,765 $36,942 $33,267

Net Income 3,368 13,023 12,661 8,268 8,168

Income per
Ordinary Share,
Basic and Diluted .46 1.77 1.72 1.12 1.11

Dividends Declared per
Ordinary Share .65 .65 .65 .975 1.30

Total Assets at
December 31 62,274 64,990 55,684 46,498 44,342

Stockholders' Equity at
December 31 50,401 51,817 43,578 35,702 34,610

</TABLE>

<PAGE> 16

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

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

The Company and its Entre Lomas partners continue their efforts to maximize cash
flow from the Entre Lomas concession. During 1998, the Company received $5.1
million in distributions and dividends compared with $11.2 million and $9.8
million in 1997 and 1996, respectively. The decrease in distributions and
dividends received was caused by the sharp decline in oil prices which commenced
in the latter stages of 1997, and continued to worsen through the end of the
current year, reaching levels not seen since 1986.

Receipt of future distributions and dividends will depend on the joint venture's
ability to generate earnings, cash availability exceeding capital requirements,
stable oil and gas prices, and continued ability to repatriate funds free from
government control and restrictions.

OIL PRICES

Throughout 1996 and most of 1997, the Company benefited from favorable world oil
prices. The Company's per barrel sales price averaged $20.87 and $19.52 during
1996 and 1997, respectively. This favorable price environment was a major
contributor to the record levels of net income reported by the Company during
those years.

Likewise, energy companies and oil producing countries around the world also
benefited from favorable oil prices during those years. Exploration and
development investments surged worldwide leading to increases in oil production,
while in late 1997, the Organization of Petroleum Exporting Countries ("OPEC")
increased its production targets. These events occurred, as the Far East Asian
and Russian financial crises began to worsen and chain react through Latin
America and other developing regions. The result was an oversupply of oil
production which led to a sharp drop in oil prices.

During 1998, the sales price for Entre Lomas oil averaged $12.71, reaching as
low as $10.09 in December, a drop of nearly 50 percent from the prior two years.
This drop in prices has had a significant negative impact on net income and cash
flow during 1998. Should oil prices remain at these levels, this impact will be
prolonged. Net income for the year was $3.4 million, compared with $13 million
and $12.7 million for 1997 and 1996, respectively.

OIL PRODUCTION

Entre Lomas oil production for 1998 totaled 3.69 million barrels, or 1.75
million net to the Company. This was two percent below the previous year's
production of 3.77 million barrels, or 1.79 million net. As described on page 7,
under "Entre Lomas Fields - Oil Reservoirs", the year was marked by the
continuation of successful development drilling in the Entre Lomas oil

<PAGE> 17

field in the middle of the concession. In October when the drilling program for
the year was completed, daily production volume in the concession peaked in
excess of 11,500 barrels, or 5,500 barrels net.

Natural gas production during the year remained stable. Concession production
for the year totaled 16.2 BCF, or 7.7 BCF net to the Company, the same total
volume as 1997.

CAPITAL SPENDING

The Company is strategically committed to the long-term development of its
properties. In spite of the sharp decline in the sale price of Entre Lomas oil
during 1998, the joint venture partners invested in exploration and development
and major expense items such as well workovers, $36 million, or $17.2 million
net to Company. In addition to the above mentioned workovers, the major
components of 1998's program included development drilling, continued expansion
of secondary recovery in CB/PB, increases in lift capacity, implementation of
secondary recovery in the Entre Lomas oil field, and completion of the 3D
seismic program described under "Exploration" on page 8.

The joint venture's initial capital plan for 1999 estimated investments of $26
million, or $12.5 million net to the Company. This level of investment was
contemplated, in spite of the price decline, due to the commitment of the
partners to accelerate full development of the concession. However, as oil
prices continued to drop, reaching $10.09 in December, the joint venture was
forced to reevaluate its investment program, cutting 1999 investments by fifty
percent to just over $12 million, or $5.8 million net. This reduction will
result in a modest drop in anticipated production for 1999.

ACAMBUCO

As described on page 11, under "Current and Future Activity", the Acambuco joint
venture is projecting capital spending in excess of $100 million during 1999 in
the Acambuco concession. The Company's net share is equivalent to $1.5 million.
There is no reason to believe that this program will be modified.

DIVIDENDS

The Company currently pays its shareholders a quarterly dividend of 16.25 cents
per share. Future dividends are necessarily dependent on numerous factors,
including among other, earnings, levels of capital spending, changes in
governmental regulations, and fluctuations in crude oil and natural gas prices.

The Company reserves the right to change the level of dividend payments or to
discontinue or suspend such payments at the discretion of the directors.

YEAR 2000 COMPLIANCE

During 1999, most companies will face a potentially serious information systems
problem because many software applications and the operational programs written
in the past may not properly recognize calendar dates beginning in the year
2000. This problem could force

<PAGE> 18

computers to shut down or provide incorrect data or information. Petrolera, the
operator of the Entre Lomas concession, from which the Company derives
one-hundred percent of its operating revenue, has initiated the process of
identifying changes required to computer programs that impact the critical
aspects of the joint venture's business and guarantee continuation of its
production and sales operations, including major interfaces with customers and
suppliers such as pipelines that carry products to market and companies that
provide power to the concession.

Petrolera has completed an inventory of all equipment and software that may be
affected by the change of the century, and is evaluating modifications required
to become Year 2000 compatible. At this time, new financial, accounting and
administrative systems have been implemented which are fully compatible.
Petrolera, and the Company, believe that systems over which they have direct
control will be fully compliant. It is estimated that by the end of June 1999,
Petrolera will have achieved the fundamental objective of full Year 2000
compliance of the systems over which it has direct control at a cost which is
not material to the joint venture's business, financial condition, or results of
operation.

Although Petrolera is monitoring compliance efforts by major third party
companies upon which the Entre lomas concession depends, there does exist the
possibility of operation disruptions in the event of non-compliance by third
parties. Sales disruption would be the worst case manifestation of this
possibility exposing the Company to a loss of sales revenue of approximately $60
thousand per day. Based on Petrolera's discussions with third parties, the
Company expects them to also be fully compliant by mid 1999 thereby minimizing
the chance of a disruption of operations.

Petrolera is currently in the process of developing contingency plans in the
event that disruptions occur as a result of third party non-compliance or any
failure of its systems.

FOREIGN OPERATIONS

As described on page 20, under "Argentine Economic and Political Environment"
the Company believes that its Argentine operations present minimal currency
risk. Argentina's inflation rate was less than two percent in 1998. The
governments' convertibility law essentially guarantees an exchange rate of one
Argentine peso to one U.S. dollar.

RESULTS OF OPERATIONS

REFER TO CONSOLIDATED STATEMENT OF OPERATIONS ON PAGE 24.

1998 VS 1997

During 1998, the Company generated net income of $3.4 million compared with $13
million during 1997. The primary reasons for the decrease are explained in the
following paragraphs.

Operating revenues decreased by $13.7 million, or thirty percent, compared with
1997, due to sharply lower oil prices. There is a discussion of the oil price
decline experienced by the Company under "Liquidity and Capital Resources" on
page 16. The average oil sales prices for the current and prior two years are
listed in the table of "Sales and Price Statistics" on page 38.

<PAGE> 19

Provincial royalties decreased by $1.4 million. The decrease was directly
related to the sharp decline in oil prices.

The increase of $1.1 million in selling and administrative expenses was
primarily the result of severance and contract termination costs recorded during
the year.

Completion of the 3D seismic program in the Entre Lomas concession, described
under "Exploration" on page 8, and exploration expenses incurred in both the
Acambuco and Canadon Ramirez concessions, caused the increase in exploration
expense.

Argentine taxes decreased by $4.5 million. The decrease is primarily the result
of the sharp decline in oil sales prices.

The decrease of $0.9 million in other expenses is explained in the 1997 vs 1996
comparison. No similar accrual for contingent liabilities was made in 1998, and
year end crude oil inventories did not fluctuate significantly from last year to
this year.

1997 VS 1996

During 1997, the Company generated net income of $13 million compared with $12.7
million during 1996. The primary reasons for the increase are explained in the
following paragraphs.

Operating revenues increased by $1.1 million compared with 1996 due to higher
oil sales volumes which resulted from drilling successes which occurred in the
Entre Lomas oil field in late 1996 and early 1997 described on the previous page
under "Oil Production". This effect was partially offset by lower average oil
sales prices resulting from the sharp decline in world oil prices which occurred
during the latter part of 1997, and lower gas sales volumes.

Depreciation, depletion, and amortization expense decreased by $815 thousand due
to completion, in mid 1997, of the amortization of the Company's $8.3 million
share of settlement costs associated with obtaining the right, commencing in
1994, to sell in the open market gas produced in the Entre Lomas concession.

Argentine taxes were higher by $473 thousand due to greater income taxes
associated with the greater Argentine taxable income generated during the year.

The variation in other expense of $1.5 million results from a combination of two
factors. The first is an increase in the general provision for contingent
liabilities of approximately $800 thousand, which is reflected on the Company's
Consolidated Balance Sheets by the increase in "Other liabilities". The second
is inventory fluctuation expense of $400 thousand associated with the reduction,
through sales during the year, of crude oil inventories in the Entre Lomas
concession.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

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

19
<PAGE> 20

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.

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 changes in foreign currency
exchange risks, weak economic conditions, or changes in Argentina's political
climate.

ARGENTINE ECONOMIC AND POLITICAL ENVIRONMENT

Since 1989, the government of President Menem has pursued free market policies,
including the privatization of state-owned companies, deregulation of the oil
and gas industry, which included the successful sale of YPF shares in public
markets, tax reform to equalize income tax rates for domestic and foreign
investors, liberalization of import and export laws, and the lifting of exchange
controls.

The cornerstone of the country's economic reforms since 1989 has been its change
in monetary policy. In April 1991, the convertibility law was implemented
establishing an exchange rate of one Argentine peso to one U.S. dollar. The
convertibility plan requires that the country's monetary base be backed by an
equivalent amount of international reserves, including U.S. dollars and gold.
Essentially, the policy guarantees an exchange rate of 1:1. The Argentine
government has not strayed from this policy since implementation of the plan.

These policies have been successful as evidenced, first, by a reduction in
annual inflation from the 1989 rate of 5,000 percent to less than one percent in
1998 and, second, an influx of foreign investment capital into the country. In
July 1996, Domingo Cavallo, Economy Minister and author of the convertibility
plan, was replaced by Roque Fernandez, formerly president of the Central Bank.
The country's economy showed no adverse reactions to this replacement.

The Far East Asian and Russian financial crises of 1997 and 1998 have impacted
the economies of many emerging market countries. Argentina was not affected
significantly but did experience a slow down in economic growth. In 1998, the
country's Gross Domestic Product grew at a rate of 4 percent compared with 8.6
percent in 1997.

Argentina is a part of "Mercosur" a common market established by customs
agreements between Argentina, Brazil, Uruguay, and Paraguay. The "Mercosur"
market comprises a population of approximately 200 million with a total gross
domestic product of $1.1 trillion. The devaluation of Brazil's currency in early
1999 is having an adverse impact on Argentine economic growth. Brazil is
Argentina's largest trading partner.

<PAGE> 21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----
<S> <C>
Report of Independent Public Accountants 22

Consolidated Balance Sheets
December 31, 1998 and 1997 23

Consolidated Statements of Operations
Three Years Ended December 31, 1998 24

Consolidated Statements of Stockholders' Equity
Three Years Ended December 31, 1998 25

Consolidated Statements of Cash Flows
Three Years Ended December 31, 1998 26

Notes to Consolidated Financial Statements 27
</TABLE>

Schedules--All schedules have been omitted, as the required information has been
included in the consolidated financial statements and notes thereto, or because
the schedules are not applicable or required.

<PAGE> 22

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Apco Argentina Inc.:

We have audited the accompanying consolidated balance sheets of Apco Argentina
Inc. (a Cayman Islands corporation) and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apco Argentina Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Tulsa, Oklahoma
March 9, 1999

<PAGE> 23

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands) December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS

Current Assets:
Cash and cash equivalents $ 13,596 $ 21,183
Accounts receivable 5,653 7,028
Inventory 865 2,477
Other current assets 472 327
-------- --------

Total Current Assets 20,586 31,015
-------- --------

Property and Equipment:
Cost 79,596 67,075
Accumulated depreciation (38,458) (33,890)
-------- --------

41,138 33,185
-------- --------

Other Assets 550 790
-------- --------

$ 62,274 $ 64,990
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable $ 5,415 $ 2,727
Accrued liabilities 2,092 6,048
Dividends payable 1,196 1,196
-------- --------

Total Current Liabilities 8,703 9,971
-------- --------

Other Liabilities 3,170 3,202
-------- --------

Stockholders' Equity, per accompanying statements:
Ordinary shares, par value $.01 per share;
15,000,000 shares authorized;
7,360,311 shares outstanding 74 74
Additional paid-in capital 9,326 9,326
Retained earnings 41,001 42,417
-------- --------

Total Stockholders' Equity 50,401 51,817
-------- --------

$ 62,274 $ 64,990
======== ========
</TABLE>

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

<PAGE> 24

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands Except Per Share) For the Years Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Operating revenues $ 33,333 $ 47,065 $ 45,954
Other revenues 772 944 811
-------- -------- --------

34,105 48,009 46,765
-------- -------- --------

COST AND EXPENSES:
Operating expense 15,283 14,772 14,186
Provincial royalties 3,577 4,936 5,155
Selling and administrative 3,027 1,891 2,162
Depreciation, depletion and amortization 4,568 4,761 5,576
Exploration expense 1,358 313 684
Argentine taxes 2,543 7,035 6,562
Other (income) expense, net 381 1,278 (221)
-------- -------- --------

30,737 34,986 34,104
-------- -------- --------

NET INCOME $ 3,368 $ 13,023 $ 12,661
======== ======== ========

INCOME PER ORDINARY SHARE, Basic and Diluted $ .46 $ 1.77 $ 1.72
======== ======== ========

AVERAGE ORDINARY SHARES
OUTSTANDING, Basic and Diluted 7,360 7,360 7,360
======== ======== ========
</TABLE>

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

<PAGE> 25

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands)
Ordinary Shares Additional
----------------------- Paid-in Retained
Shares Amount Capital Earnings
---------- ---------- ----------- ----------

<S> <C> <C> <C> <C>
BALANCE, January 1, 1996 7,360 $ 74 $ 9,326 $ 26,302

Net income -- -- -- 12,661

Dividends declared
($0.65 per share) -- -- -- (4,785)
---------- ---------- ---------- ----------

BALANCE, December 31, 1996 7,360 74 9,326 34,178

Net income -- -- -- 13,023

Dividends declared
($ 0.65 per share) -- -- -- (4,784)
---------- ---------- ---------- ----------

BALANCE, December 31, 1997 7,360 74 9,326 42,417

Net income -- -- -- 3,368

Dividends declared
($ 0.65 per share) -- -- -- (4,784)
---------- ---------- ---------- ----------

BALANCE, December 31, 1998 7,360 $ 74 $ 9,326 $ 41,001
========== ========== ========== ==========
</TABLE>

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

<PAGE> 26

APCO ARGENTINA INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(Amounts in Thousands)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:

Net income $ 3,368 $ 13,023 $ 12,661
Adjustments to reconcile to cash
provided by operating activities:
Depreciation, depletion and amortization 4,568 4,761 5,576
Abandonment of well drilled in prior year -- -- 496
Changes in accounts receivable 1,375 (653) (676)
Changes in inventory 1,612 1,621 (1,618)
Changes in other current assets (145) 37 (147)
Changes in accounts payable 2,688 (108) (1,087)
Changes in accrued liabilities (3,956) 361 2,381
Other, including changes in non-current
assets and liabilities 208 156 (63)
-------- -------- --------

Net cash provided by operating activities 9,718 19,198 17,523

CASH FLOW FROM INVESTING ACTIVITIES:

Capital expenditures (12,521) (12,184) (11,029)

CASH FLOW FROM FINANCING ACTIVITIES:

Dividends paid (4,784) (4,784) (4,785)
-------- -------- --------

NET CHANGES IN CASH AND
CASH EQUIVALENTS (7,587) 2,230 1,709

CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 21,183 18,953 17,244
-------- -------- --------

CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 13,596 $ 21,183 $ 18,953
======== ======== ========

Supplemental disclosures of cash flow information:

Cash paid during the year for Argentine income taxes $ 3,916 $ 7,451 $ 4,043
</TABLE>

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

<PAGE> 27

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

GENERAL AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of
Apco Argentina Inc. (a Cayman Islands corporation) and its wholly
owned subsidiary, Apco Properties Ltd. (a Cayman Islands
corporation), which are herein collectively referred to as the
Company. The Company is engaged in joint ventures in oil and gas
exploration, development and production in Argentina. Its
principal business is a 47.6 percent participation in the Entre
Lomas Concession, which is accounted for following the
proportional consolidation method.

The Williams Companies, Inc. ("Williams") owns 68.96 percent of
the outstanding ordinary shares of the Company.

Oil and gas operations are risky in nature. A successful
operation requires that a Company deal with uncertainties about
the subsurface that even a combination of experience, scientific
information and careful evaluation cannot always overcome.

Because the Company's assets are located in Argentina,
management, in previous years, was required to deal with threats
from inflation, devaluation and currency controls (see Note 8).
Since 1991, the economic and political environment in the country
has improved dramatically due to free market economic policies
implemented by the government of President Carlos Menem. These
policies have resulted in significantly reducing inflation and
stabilization of the Argentine peso.

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities, if any, at the date of the financial statements, and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.

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, costs of drilling successful
exploration wells and development costs are capitalized. Costs of
unsuccessful drilling are expensed as incurred.

<PAGE> 28

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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. Oil and gas properties are depreciated over their
productive lives using the units of production method.

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 assumed
costs would escalate annually and that the current low oil and
gas price environment would return to more historical levels over
a period of time. 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 years ended December 31,
1998, 1997 and 1996, the Company did not record any impairment
expense as the estimated future undiscounted net revenues
exceeded the carrying value of its properties.

NET INCOME PER ORDINARY SHARE

Net income per ordinary share is based on the weighted average
number of ordinary shares outstanding. Basic and diluted net
income per ordinary share are the same as the Company has not
issued any potentially dilutive securities such as stock options.

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, using the United States dollar as the
functional currency.

INCOME TAXES

Provision is made for deferred income taxes applicable to
temporary differences between the financial statements and tax
basis of the assets and liabilities, if any.

<PAGE> 29

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), establishing standards for reporting and display of
comprehensive income and its components in financial statements.
SFAS No. 130 defines comprehensive income as the total of net
income and all other non-owner changes in equity. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The
Company had no non-owner changes in equity other than net income
during the years ended December 31, 1998, 1997 and 1996.

In June 1997, the FASB issued Statement No. 131, Disclosures
About Segments of an enterprise and Related Information ("SFAS
No. 131"), which changes the way the Company reports information
about its operating segments. SFAS No. 131 has no impact on the
Company's financial statements as the Company has only one
operating segment for which the Chief Executive Officer makes
decisions. Furthermore, 100 percent of the Company's revenues
from outside customers are generated in Argentina, and
approximately 100 percent of the Company's long-lived assets are
located in Argentina.

In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No.
133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows
a derivative's gains and losses to offset related results on the
hedged item in the income statement. Companies must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting.

SFAS No. 133 is effective for fiscal years beginning after June
15, 1999; however, beginning June 16, 1998, companies may
implement the statement as the beginning of any fiscal quarter.
SFAS No. 133 cannot be applied retroactively and must be applied
to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and,
at the Company's election, before January 1, 1998). SFAS No. 133
has no impact on the Company's financial statements as it
currently is not using derivative instruments.

<PAGE> 30

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(2) ENTRE LOMAS JOINT VENTURE

The Company owns a 23 percent direct interest in the Entre Lomas
joint venture. It also owns a 24.6 percent indirect interest by
virtue of its 33.68 percent stock ownership in Petrolera Perez
Companc S.A., the operator of the joint venture, which owns 73.15
percent of the joint venture. Consequently, the Company's
combined direct and indirect interests in the Entre Lomas joint
venture total 47.6 percent. The joint venture is engaged in the
exploration, development and production of oil and gas in the
Entre Lomas concession located in the provinces of Rio Negro and
Neuquen in southern Argentina.

The Company's pro-rata share of the assets, liabilities, revenues
and expenses of the Entre Lomas joint venture and Petrolera Perez
Companc are reflected in the Company's Consolidated Financial
Statements using proportional consolidation.

(3) CASH EQUIVALENTS

Cash equivalents are defined by the Company as short-term
investments with original maturities of three months or less.
Amounts are stated in thousands of dollars.

Principal
-----------------
1998 1997
------- -------
<S> <C> <C>
Short-term investments:

Eurodollar term deposits with interest ranging from 4.719 -
4.875% in 1998 and 5.305 - 5.4375% in 1997, maturing in
January and February 1999 and
January 1998, respectively $ 9,262 $13,456

Argentine time deposits 4,334 7,727
------- -------

$13,596 $21,183
======= =======
</TABLE>

The carrying amount reported in the balance sheet for short-term
investments is equivalent to fair value.

<PAGE> 31

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(4) MAJOR CUSTOMERS

Sales to customers with greater than ten percent of total sales
consist of the following:

For the Years Ended December 31,
--------------------------------
1998 1997 1996
------ ------ -------

<S> <C> <C> <C>
San Lorenzo S.A 24.1% 54.3% 62.1%
Petrobras S.A 17.3% * *
Litoral S.A 13.8% 10.9% 13.1%
Shell C.A.P.S.A 16.7% 16.0% *
</TABLE>

* Less than 10 percent

(5) RELATED PARTY TRANSACTIONS

The Company paid approximately $164,000, $166,000, and $182,000
in 1998, 1997 and 1996, respectively, to Williams and affiliates
for management services, overhead allocation, general and
administrative expenses and purchases of materials and supplies.
Accounts payable to Williams and affiliates outstanding at
December 31, 1998 and December 31, 1997, of approximately
$141,000 and $24,000, were paid or are payable in 1999 and 1998,
respectively.

(6) CAYMAN ISLANDS AND UNITED STATES INCOME TAXES

In 1979, the Company changed the jurisdiction of its
incorporation from Delaware to the Cayman Islands. The Company's
income since that date, to the extent that it is derived from
sources outside the U.S., generally is not subject to U.S.
Federal income taxes. Also, the Company has been granted an
undertaking from the Cayman Islands government, expiring in 1999,
to the effect that the Company will be exempt from tax
liabilities resulting from tax laws enacted by the Cayman Islands
government subsequent to 1979. The Cayman Islands currently has
no applicable income tax or corporation tax and, consequently,
the Company believes its earnings are not subject to U.S. income
taxes or Cayman Islands income or corporation taxes.

<PAGE> 32

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(7) ARGENTINE TAXES

The Company recorded Argentine taxes as presented in the
following table. Amounts are stated in thousands of dollars. The
Company is not subject to taxes in any other jurisdiction.

1998 1997 1996
-------- -------- --------

<S> <C> <C> <C>
Income taxes $ 2,089 $ 6,208 $ 5,830
Other taxes 454 827 732
-------- -------- --------

$ 2,543 $ 7,035 $ 6,562
======== ======== ========
</TABLE>

INCOME TAXES

A tax reform enacted by the Argentine government in 1998, served
to increase the corporate income tax rate from 33 percent to 35
percent. The new rate goes into effect in January, 1999.

TAX DISPUTES

In 1988, the Argentine government amended the obligatory Savings
Law requiring that all taxpayers deposit with the government,
both in 1988 and 1989, amounts computed on the basis of prior
year taxable incomes. The deposits were to be repaid after five
years and earned interest at the rate stipulated by the law. It
was the opinion of the joint venture and its legal and tax
counsels that it was exempted from these deposits due to the tax
exemption granted in the original Entre Lomas contract number
12,507. As a result the deposits were not made.

In August 1993, the Direccion General Impositiva ("DGI"), the
Argentine taxing authority, made a claim against Petrolera for
the delinquent deposits pertaining to the Entre Lomas operation,
which including interest and indexation for inflation, amounted
to $9.2 million. An appeal was filed by Petrolera in Argentine
Federal Tax Court which ruled in favor of the DGI in April 1997.
Petrolera appealed the ruling before Federal Appeals Court which
in November 1998, ruled in favor of Petrolera. The DGI has now
filed an appeal before the Supreme Court. As of the date of these
Consolidated Financial Statements the Supreme Court had not yet
rendered its decision. Although the DGI can require that the
amount in question be deposited, it has not done so pending the
Supreme Court's final ruling. In the opinion of Petrolera's
management and its legal and tax counsel, the possibility that
this claim will result in an unfavorable outcome for the joint
venture is remote. The Company has no reason to believe
otherwise, and accordingly, has not recorded a liability for its
share of the asserted claim.

<PAGE> 33

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

In February 1993, the Neuquen Tax Bureau demanded that Petrolera
pay the Stamp Tax on Additional Clause No. 3, the third amendment
to the original Entre Lomas contract number 12,507. Petrolera
appealed this decision before the Tax Court of the province and
lost. In March 1994, Petrolera deposited $1.6 million, the sum
claimed, and subsequently filed a suit before the Neuquen
Superior Court asking for full reimbursement.

Should Petrolera not prevail in Superior Court, in the opinion of
its management and legal counsel, it is entitled to seek
reimbursement from YPF pursuant to terms of contract 12,507.
Accordingly, the amount deposited has been recorded as a
receivable by Petrolera and the Company.

(8) ARGENTINE CURRENCY FLUCTUATIONS

Argentina has in previous decades experienced cycles of acute
inflation followed by extreme devaluation. However, inflation and
devaluation have diminished since 1991 due to implementation of
the convertibility law, privatization of public sector companies,
deregulation and modifications in fiscal and monetary policy.

In April of 1991, the convertibility law was implemented
establishing an exchange rate of one Argentine peso to one U.S.
dollar. The convertibility law requires that the country's
monetary base be backed by an equivalent amount of international
reserves, including U.S. dollars and gold. Essentially the policy
guarantees an exchange rate of 1:1. No exchange gains or losses
have been realized by the Company during the three years ended
December 31, 1997 as the rate of exchange has remained 1 to 1.

<PAGE> 34

APCO ARGENTINA INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(9) QUARTERLY FINANCIAL DATA (UNAUDITED)

First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- ---------- -----------
(Amounts in Thousands Except
Per Share Amounts)

1998

<S> <C> <C> <C> <C>
Revenues $ 8,621 $ 8,200 $ 9,824 $ 7,460
Costs and expenses 6,811 6,969 8,312 8,645
Net income (loss) 1,810 1,231 1,512 (1,185)
Net income (loss) per ordinary share .25 .16 .21 (.16)

1997

Revenues $ 12,978 $ 10,823 $ 12,294 $ 11,914
Costs and expenses 9,211 7,994 8,411 9,370
Net income 3,767 2,829 3,883 2,544
Net income per ordinary share .51 .39 .52 .35
</TABLE>

The loss generated in the fourth quarter is attributable to
various factors the most important being that oil sales prices
reached their lowest level in the fourth quarter, combined with
certain severance and contract termination costs and 3D seismic
charged to expense in the quarter.

<PAGE> 35

SUPPLEMENTAL OIL AND GAS INFORMATION

OIL AND GAS RESERVES (UNAUDITED)

The following tables summarize, for each of the years presented, changes in
quantities, and balances of net proved oil and gas reserves for all the
Company's interests in Argentina.

Proved Oil, Condensate and
Plant Products

(Millions of Barrels)
--------------------------
1998 1997 1996
------ ------ ------

<S> <C> <C> <C>
Beginning of year 33.2 34.7 37.4
Revisions of previous estimates
-Engineering revisions (1.9) 0.1 (1.7)
-Due to oil price decline (9.7) -- --
Extensions and discoveries 0.8 0.2 0.8
Production (1.8) (1.8) (1.8)
------ ------ ------

End of Year 20.6 33.2 34.7
====== ====== ======

Proved developed oil reserves 15.5 23.7 24.2
====== ====== ======
</TABLE>

Natural Gas

(Billions of cubic feet)
--------------------------
1998 1997 1996
------ ------ ------

<S> <C> <C> <C>
Beginning of year 36.6 46.8 53.5
Revisions of previous estimates (1.4) (8.6) 1.7
Extensions and discoveries -- 6.1 --
Production (7.7) (7.7) (8.4)
------ ------ ------

End of Year 27.5 36.6 46.8
====== ====== ======

Proved developed gas reserves 26.8 35.8 44.3
====== ====== ======
</TABLE>

There were no estimates of total proved net oil or gas reserves filed with any
other United States Federal authority or agency during 1998.

<PAGE> 36

SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.

Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

The following table summarizes as of December 31, for each of the years
presented, the standardized measure of discounted future net cash flows from
proved oil and gas reserves that could be produced from all of the concessions
in which the Company holds interests in Argentina.

(Millions of U.S. Dollars)
--------------------------
1998 1997 1996
------- ------ -------

<S> <C> <C> <C>
Future revenues (1 and 2) $ 250 $ 619 $ 911
Future expenditures (3) 199 378 409
------ ------ ------
51 241 502

Argentine taxes (4) 11 67 155
------ ------ ------

Future net cash flows 40 174 347

Effect of discounting 10% 13 90 182
------ ------ ------

Standardized measure of
discounted future net cash flows $ 27 $ 84 $ 165
====== ====== ======
</TABLE>

(1) Estimates are made of quantities and timing of future production of oil
and gas reserves.

(2) Estimates of gross revenues from sales are made using prices in effect
at December 31 for each year presented. The year end per barrel oil
price for 1998 was $10.09, as compared with $17.20 and $24.52 for 1997
and 1996 respectively. Gas prices for all years are based on gas sales
contracts in effect during the respective years.

(3) Estimated production, transportation, marketing and development costs
are based on the current cost of similar services and include all future
capital expenditures.

(4) Estimated taxes consider all taxes to which the Company is subject in
Argentina.

(5) Conversion to U.S. dollars is made utilizing the rate of exchange at
December 31 for each of the years presented.

DISCOUNTED FUTURE NET CASH FLOWS PRESENTED HEREIN MAY NOT BE RELIABLE DUE TO THE
IMPRECISION OF ESTIMATING REMAINING RECOVERABLE RESERVES. ESTIMATES OF OIL AND
GAS RESERVES AND RATES OF FUTURE PRODUCTION ARE INHERENTLY IMPRECISE AND CHANGE
OVER TIME AS NEW INFORMATION BECOMES AVAILABLE. AS A RESULT, SUBSEQUENT
REVISIONS OF THE QUANTITY AND VALUATION OF PROVED RESERVES MAY BE SIGNIFICANT.

<PAGE> 37

SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.

CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
OIL AND GAS RESERVES (UNAUDITED)

The following analysis summarizes for each of the years presented the factors
that caused the increases (decreases) in the amount of standardized measure
attributable to the estimate of the Company's proved oil and gas reserves.

(Millions of U.S. Dollars)
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Prices and costs:
Net changes in prices and
production costs $ (82) $ (129) $ 118

Quantities:
Revenues, net of
production costs (18) (15) (15)
Additions and revisions
of previous estimates - net (50) 1 (8)

Other:
Changes in estimated
future development costs (4) 6 (10)
Accretion of discount 12 24 16
Net changes in Argentine
taxes 42 40 (35)
Timing of future
production and other 43 (8) (15)
------- ------- -------

Net increase (decrease) in
standardized measure $ (57) $ (81) $ 51
======= ======= =======
</TABLE>

Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years known reservoirs
under existing economic and operating conditions. Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. Proved undeveloped oil and
gas reserves are reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major expenditure
is required for recompletion.

<PAGE> 38

SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.

SALES AND PRICE STATISTICS (UNAUDITED)

The following table shows total sales of crude oil and condensate and natural
gas and average sales prices and production costs for the last three years.

1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Total Sales-Net to Company

Crude Oil and Condensate (bbls) 1,732,261 1,811,956 1,584,291
Gas (mcf) 7,734,396 7,733,392 8,433,543
LPG (tons) 6,192 6,607 6,829

Average Sales Prices (in U.S. Dollars)

Oil (per bbl) $ 12.71 $ 19.52 $ 20.87
Gas (per mcf) 1.33 1.34 1.33
LPG (per ton) 168.78 198.72 182.60

Average Production Costs (in U.S. Dollars)

Oil (per bbl) $ 9.09 $ 8.27 $ 8.15
Gas (per mcf) .23 .21 .22
LPG (per ton) 86.55 89.70 82.59
</TABLE>

Volumes presented in the above table represent those sold to customers and have
not been reduced by the 12 percent provincial royalty, which is paid separately
and is accounted for as an expense by the Company. In calculating royalty
payments, the 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 the costs of remedial well workovers and depreciation of
property and equipment.

<PAGE> 39

SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.

COSTS INCURRED IN ACQUISITIONS, EXPLORATION, AND DEVELOPMENT

The following table details total investments for acquisitions, exploration, and
development made by the Company during the current and two previous years.

(Millions of U.S. Dollars)
---------------------------
1998 1997 1996
------- ------- -------

<S> <C> <C> <C>
Property Acquisitions $ -- $ 1 $ --
Exploration 2 -- 1
Development 13 11 10
Workovers 2 3 3
------- ------- -------

Total $ 17 $ 15 $ 14
======= ======= =======
</TABLE>

DRILLING ACTIVITY

During 1998, the Company participated in the drilling of 18 gross, and 8 net
wells. In both 1997 and 1996, the Company participated in the drilling of 11
gross, and 5 net wells. All wells were drilled in Argentina. Of the 40 gross,
and 18 net wells drilled over the three year period, all wells were development,
except two wells drilled in Acambuco, in which the Company has a 1.5 percent
participation. All wells drilled over the three year period were productive
except the San Antonio x-1 well, in Acambuco, the status of which is still
undetermined.

WELL COUNT AND ACREAGE

The total gross and net well count from all acreage in which the Company has an
interest for the years ended December 31, 1998 and 1997, are as follows:

1998 1997
------------- -------------

Gross Net Gross Net
----- ----- ----- -----

<S> <C> <C> <C> <C>
Oil 299 144 288 135
Gas 19 9 20 9
Abandoned and Inactive 36 11 36 11
Injection 125 48 95 45
----- ----- ----- -----

Total 479 212 439 200
----- ----- ----- -----
</TABLE>

The Company currently holds interest in three concessions with a total surface
area of 542,000 acres, 132,586 acres net to the Company. Gross and net developed
acres held by the Company total 37,140 acres, and 17,093 acres, respectively.
Gross and net undeveloped acres held by the Company total 404,860 acres, and
115,943 acres, respectively.

39
<PAGE> 40

SUPPLEMENTAL OIL AND GAS INFORMATION - CONT.

CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES

(Thousands of U.S. Dollars)
----------------------------
1998 1997
------------ ------------

<S> <C> <C>
Unproved $ 892 $ 875
Proved oil and gas properties 78,265 65,766
Accumulated depreciation,
depletion and amortization (38,079) (33,545)
------------ ------------

Net capitalized costs $ 41,078 $ 33,096
============ ============
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

40
<PAGE> 41

P A R T III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) IDENTIFICATION OF DIRECTORS

Director's
Term of
Director Office
Name Age Position Since Expires
--------------- --- -------------------------- -------- -----------
<S> <C> <C> <C> <C>
J. C. Bumgarner 56 Chairman of the Board and 1994 2000
Chief Executive Officer

J. H. Williams 80 Director 1992 1999

T. Bueno 47 Director 1998 1999

R. J. LaFortune 72 Director 1998 1999
</TABLE>

Stephen L. Cropper was named a Director of the Company, to
replace Keith E. Bailey, at the June 1998 Directors Meeting, and
subsequently elected a Director at the Annual General Meeting of
Shareholders held on September 15, 1998. Subsequent to his
election, he resigned from the Board. Messrs. Thomas Bueno and
Robert J. LaFortune were named to the Board, at the December 1998
Directors meeting, to serve until the next Annual General Meeting
of Shareholders of the Company.

(b) IDENTIFICATION OF EXECUTIVE OFFICERS

Executive officers of the Company are elected by the Board
of Directors and hold office until relieved of such office by
action of the Board of Directors.

Officer
Name Age Position Since
----------------- --- -------------------------- -------
<S> <C> <C> <C>
John C. Bumgarner 56 Chairman of the Board and 1996
Chief Executive Officer

J. D. McCarthy 56 Vice President and 1991
Chief Financial Officer

Thomas Bueno 47 Controller and Chief 1991
Accounting Officer
</TABLE>

Mr. Bueno also serves as General Manager over the Company's
operations in Argentina.

<PAGE> 42

None.

(d) FAMILY RELATIONSHIPS

There are no family relationships between any director or
executive officer and any other director or executive officer in
the Company.

(e) BUSINESS EXPERIENCE

Mr. Bumgarner is Senior Vice President Corporate Development and
Planning of Williams and President of Williams International
Company. He has held various officer level positions with
Williams since 1977.

Mr. Williams is engaged in personal investments. He was Chairman
of the Board and Chief Executive Officer of Williams prior to
retiring in 1978. Mr. Williams is also a director of General
Cable Corporation and Unit Corporation.

Mr. Bueno has been employed by Williams since 1984 and has held
various positions with the Company since 1985.

J. D. McCarthy is Senior Vice President of Finance of Williams.
He was previously Vice President and Treasurer of Williams from
1987 through 1991.

Mr. LaFortune is engaged in personal investments. He is a
Director of The Williams Companies, Inc.

(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None.

ITEM 11. EXECUTIVE COMPENSATION

(a) CASH COMPENSATION

The Company has not paid its present executive officers any cash
compensation or bonuses.

(b) COMPENSATION PURSUANT TO PLANS

None.

<PAGE> 43

(d) COMPENSATION OF DIRECTORS

Directors who are employees of Williams receive no additional
compensation for service on the Board of Directors. Directors who
are not employees of Williams receive an annual retainer of
$8,000 and an additional fee for attending Board meetings of $500
per meeting.

(e) TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT

None.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AT DECEMBER 31,
1998

Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership Class
--------------- ---------------------------- ----------- -------
<S> <C> <C> <C>
Ordinary Shares The Williams Companies, Inc. 5,075,398 68.96
$.01 Par Value One Williams Center
Tulsa, Oklahoma 74172

Ordinary Shares Lehman Brothers Holdings Inc. 404,540 5.5
$.01 Par Value 3 World Financial Center, 24th Floor
New York, NY 10285
</TABLE>

(b) SECURITY OWNERSHIP OF MANAGEMENT AT DECEMBER 31, 1998

Each of the directors of the Company beneficially owns ten shares
of the Company's ordinary shares, $.01 par value, as director's
qualifying shares.

None.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain relationships and related-party transactions are
disclosed elsewhere herein in Notes 1 and 6 to the Notes to
Consolidated Financial Statements.

<PAGE> 44

P A R T IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements filed in this report are set forth in the
Index to Consolidated Financial Statements under Item 8. All
schedules have been omitted as the required information has been
included in the consolidated financial statements and notes
thereto, or because the schedules are not applicable or required.

(b) REPORTS ON FORM 8-K

None.

Exhibit
Number

*(3) - Memorandum of Association of Apco Argentina Inc.
as amended August 20, 1980, as filed with Form 10-K
of the Company for the fiscal year ended on December
31, 1980, Commission File No. 0-8933 dated April 30,
1981.

*(3) - Articles of Association of Apco Argentina Inc. as
filed with Form S-14 (Registration No. 2-6354),
dated March 16, 1979.

*(10) - Agreement dated April 23, 1981, among the Company
and Bridas S.A.P.I.C., with respect to the Acambuco
project, Salta province, Argentina, as filed with
Form 10-K, No. 0-8933, dated April 14, 1982.

*(10) - Agreement between The Williams Companies, Inc.,
Northwest Argentina Corporation and Apco Argentina
Inc. dated April 15, 1987 relating to reimbursement
of costs incurred by Williams pursuant to the
guarantee by Williams of the bank loan made to
Bridas in connection with the release by Bridas of
Northwest Argentina Corporation's and Apco Argentina
Inc.'s liability in the Acambuco Joint Venture as
filed with Form 10-K, No. 0-8933, dated April 11,
1988.

*(10) - Agreement dated March 13, 1968, between Perez
Companc and YPF for the Exploration, Exploitation
and Development of the "Entre Lomas" area, Contract
Number 12,507 as filed with Form S-1, Registration
No. 2-62187 dated September 26, 1978.

*(10) - Translation dated November 18, 1970, of agreement
dated March 13, 1968, between Perez Companc and YPF
as filed with Form S-1, Registration No. 2-62187
dated September 26, 1978.

<PAGE> 45

*(10) - Joint Venture Agreement dated April 1, 1968, among
Apco Oil Corporation, Perez Companc and Petrolera as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Joint Venture Agreement dated February 29, 1972,
among the Company, Perez Companc and Petrolera as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Joint Venture Agreement dated March 23, 1977,
among the Company, Perez Companc and Petrolera as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Contract dated December 1977 amending the March
13, 1968 Agreement between Perez Companc and YPF as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Memorandum of Agreement dated August 16, 1979,
among the Company, Perez Companc and Petrolera as
filed with Form 10-K, No. 0-8933, dated March 28,
1980.

*(10) - Agreement dated December 7, 1983, between
Petrolera and YPF regarding the delivery of propane
and butane from the Entre Lomas area, as filed with
Form 10-K, No. 0-8933, dated April 12, 1983.

*(10) - CONTRACT FOR THE EXPLORATION, EXPLOITATION AND
DEVELOPMENT OF THE "ENTRE LOMAS" AREA, dated July 8,
1982 between Yacimientos Petroliferos Fiscales
Sociedad Del Estado and Petrolera Perez Companc,
Inc. relating to the extension of Contract No.
12,507, as filed with Form 10-K, No. 0-8933, dated
April 12, 1983.

*(10) - ADDITIONAL CLAUSE NUMBER 3 dated December 18,
1985, to the agreement between Perez Companc and YPF
covering the Entre Lomas area dated March 13, 1968
and attached translation as filed with Form 10-K,
No. 0-8933, dated April 11, 1988.

*(10) - Agreement between the Joint Committee created by
the Ministry of Public Works and Services and the
Ministry of Energy, YPF and Petrolera Perez Companc
S.A. dated December 26, 1990, constituting the
conversion to concession and deregulation of the
original Entre Lomas contract number 12,507.

(24) - Power of attorney.

(27) - Financial data schedule.

* Exhibits so marked have heretofore been filed with the
Securities and Exchange Commission as part of the
filing indicated and are incorporated herein by
reference.

<PAGE> 46

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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)

Dated: March 19, 1999 By: /s/ Thomas Bueno
-----------------------------------
Thomas Bueno
Attorney-in-Fact

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.

/s/ *John C. Bumgarner March 19, 1999
- --------------------------------------------
John C. Bumgarner, Chairman of the Board
and Chief Executive Officer

/s/ *Jack D. McCarthy March 19, 1999
- --------------------------------------------
Jack D. McCarthy, Vice President and
Chief Financial Officer

/s/ *Thomas Bueno March 19, 1999
- --------------------------------------------
Thomas Bueno, Director, Controller and
Chief Accounting Officer

/s/ *John H. Williams March 19, 1999
- --------------------------------------------
John H. Williams, Director

/s/ *Robert J. LaFortune March 19, 1999
- --------------------------------------------
Robert J. LaFortune, Director

*By: /s/ Thomas Bueno March 19, 1999
---------------------------------------
Thomas Bueno, Attorney-in-Fact

<PAGE> 47

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C> <C>
*(3) - Memorandum of Association of Apco Argentina Inc.
as amended August 20, 1980, as filed with Form 10-K
of the Company for the fiscal year ended on December
31, 1980, Commission File No. 0-8933 dated April 30,
1981.

*(3) - Articles of Association of Apco Argentina Inc. as
filed with Form S-14 (Registration No. 2-6354),
dated March 16, 1979.

*(10) - Translation dated November 18, 1970, of agreement
dated March 13, 1968, between Perez Companc and YPF
as filed with Form S-1, Registration No. 2-62187
dated September 26, 1978.
</TABLE>

<PAGE> 48

<TABLE>

<S> <C> <C>
*(10) - Joint Venture Agreement dated April 1, 1968, among
Apco Oil Corporation, Perez Companc and Petrolera as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Joint Venture Agreement dated February 29, 1972,
among the Company, Perez Companc and Petrolera as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Joint Venture Agreement dated March 23, 1977,
among the Company, Perez Companc and Petrolera as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Contract dated December 1977 amending the March
13, 1968 Agreement between Perez Companc and YPF as
filed with Form S-1, Registration No. 2-62187 dated
September 26, 1978.

*(10) - Memorandum of Agreement dated August 16, 1979,
among the Company, Perez Companc and Petrolera as
filed with Form 10-K, No. 0-8933, dated March 28,
1980.

*(10) - Agreement dated December 7, 1983, between
Petrolera and YPF regarding the delivery of propane
and butane from the Entre Lomas area, as filed with
Form 10-K, No. 0-8933, dated April 12, 1983.

(24) - Power of attorney.

(27) - Financial data schedule.

* Exhibits so marked have heretofore been filed with the
Securities and Exchange Commission as part of the
filing indicated and are incorporated herein by
reference.
</TABLE>

<PAGE> 1

EXHIBIT 24

APCO ARGENTINA, INC.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each of the undersigned
individuals, in their capacity as a director or officer, or both, as hereinafter
set forth below their signature, of APCO ARGENTINA, INC., a Cayman Islands
corporation ("Apco"), does hereby constitute and appoint THOMAS BUENO their true
and lawful attorney and in their name and in their capacity as a director or
officer, or both, of Apco, as hereinafter set forth below their signature, to
sign Apco's Annual Report to the Securities and Exchange Commission on Form 10-K
for the fiscal year ended December 31, 1998, and any and all amendments thereto
or all instruments necessary or incidental in connection therewith; and

THAT the undersigned Apco does hereby constitute and appoint
THOMAS BUENO its true and lawful attorney its true and lawful attorney for it
and in its name and on its behalf to sign said Form 10-K and any and all
amendments thereto and any and all instruments necessary or incidental in
connection therewith.

Said attorney shall have full power of substitution and
resubstitution, and said attorney or any substitute appointed by him hereunder
shall have full power and authority to do and perform in the name and on behalf
of each of the undersigned, in any and all capacities, every act whatsoever
requisite or necessary to be done in the premises, as fully to all intents and
purposes as each of the undersigned might or could do in person, the undersigned
hereby ratifying and approving the acts of said attorney or of any such
substitute pursuant hereto.

IN WITNESS WHEREOF, the undersigned have executed this
instrument, all as of the 17th day of March, 1999.

/s/ John C. Bumgarner, Jr. /s/ Jack D. McCarthy
- ------------------------------------- --------------------------------
John C. Bumgarner, Jr. Jack D. McCarthy
President, Chief Executive Chief Financial Officer
Officer, and Director (Principal Financial Officer)
(Principal Executive Officer)

/s/ Thomas Bueno
-------------------------------
Thomas Bueno
Controller and Director
(Principal Accounting Officer)

<PAGE> 2

/s/ Robert J. LaFortune /s/ John H. Williams
- ------------------------------------- --------------------------------
Robert J. LaFortune John H. Williams
Director Director

APCO ARGENTINA, INC.

By /s/ John C. Bumgarner, Jr.
---------------------------------
John C. Bumgarner, Jr.
President

ATTEST:

/s/ Shawna L. Gehres
- ------------------------------------
Shawna L. Gehres
Secretary

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,596
<SECURITIES> 0
<RECEIVABLES> 5,653
<ALLOWANCES> 0
<INVENTORY> 865
<CURRENT-ASSETS> 20,586
<PP&E> 79,596
<DEPRECIATION> 38,458
<TOTAL-ASSETS> 62,274
<CURRENT-LIABILITIES> 8,703
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 50,327
<TOTAL-LIABILITY-AND-EQUITY> 62,274
<SALES> 33,333
<TOTAL-REVENUES> 34,105
<CGS> 0
<TOTAL-COSTS> 26,455
<OTHER-EXPENSES> 2,193
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,457
<INCOME-TAX> 2,089
<INCOME-CONTINUING> 3,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,368
<EPS-PRIMARY> .46
<EPS-DILUTED> .46

</TABLE>