The following discussion and analysis explains the significant factors that have affected our results of operations for the three-month period ended March 31, 2009, compared with the three-month period ended March 31, 2008, and our financial condition since December 31, 2008. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 1 of this document and our 2008 Annual Report on Form 10-K.

Overview

During the first quarter of 2009, net income attributable to Apco Argentina Inc. was $5.0 million, a decrease of $1.4 million compared with $6.4 million for the same period in 2008. Additionally, net cash provided by operating activities was $1.6 million, representing a $6.2 million decrease compared with the first quarter of 2008. These decreases in net income and cash flow are largely attributable to the following factors:

· Total oil sales volumes, net to our consolidated and equity interests, increased 14 percent to 711 thousand barrels ("Mbbls");

· Operating revenues increased by 11 percent, or $1.6 million;

· Total costs and operating expenses increased by 26 percent, or $2.9 million;

· No dividends from Argentine investments were received in the current quarter; and

· Cash spent on capital expenditures for oil and gas exploration and development activities was $4.3 million net to our consolidated interests.

Product Volumes

During the first quarter of 2009, oil sales volumes, net to the Company's combined consolidated and equity interests, totaled 711 Mbbls, an increase of 14 percent compared with 624.7 Mbbls during the comparable quarter in 2008. Higher oil sales volumes are the result of successful exploration and development drilling in our Neuquén basin properties and field re-activation activities in Bajada del Palo.

Natural gas sales volumes, net to the Company's combined consolidated and equity interests, totaled 1.8 billion cubic feet ("Bcf"), an increase of six percent compared with 1.7 Bcf during the first quarter of 2008. The increase in production is a result of having completed and put into operation production facility enhancements in our Tierra del Fuego operations in the fourth quarter of 2008, which has enabled us to produce and sell greater natural gas volumes during the first quarter of 2009 compared with the same period in 2008.

Liquefied petroleum gas ("LPG") sales volumes, net to the Company's consolidated and equity interest, totaled 4.6 thousand tons during the first quarter of 2009, a three percent decrease compared with 4.7 thousand tons during the first quarter of 2008.

Oil Prices

As mentioned in our Annual Report on Form 10-K for the year ended December 31, 2008, oil prices have a significant impact on our ability to generate earnings, fund capital projects, and pay shareholder dividends. In general, oil prices are affected by changes in market demands, global economic activity, political events, weather, inventory storage levels, refinery infrastructure capacity, OPEC production quotas, and other factors. More importantly to Apco, oil sales price realizations for oil produced and sold in Argentina are significantly influenced by Argentine governmental actions.

In Argentina, politically driven mechanisms have been in place for some time which significantly influence the sale price of oil produced and sold in the country. To alleviate the impact of higher crude oil prices on Argentina's economy, the Argentine government created an oil export tax and enacted price controls over gasoline prices to force producers and refiners to negotiate oil sales prices significantly below international market levels.

The spot market price of West Texas Intermediate crude oil ("WTI") continues to be the reference price for oil sold in Argentina. However, producers and refiners have incorporated reduction factors into pricing formulas that considerably reduce the sale price net back to Argentine producers such that net back reductions escalate to higher and higher levels as WTI increases. Conversely, our realized price as a percentage of WTI increases as WTI decreases.

Consequently, the volatility of world oil prices as experienced in the first quarter of 2009 compared with the first quarter of 2008 is not reflected in our comparative results of operations for the two periods. The average WTI spot market price was $43.09 for the first three months of 2009 compared with $97.86 in 2008. However, due to the price controls and marketing environment in Argentina, our average realized price for our direct working interests consolidated in our operating revenues was $41.00 per barrel in the first quarter 2009 compared with $41.99 per barrel in 2008. The average oil sales price for our equity interests was $41.69 for first quarter 2009 compared with $42.03 for 2008.

The price of commodities exported from Argentina has fallen sharply during the past several months. As a result, Argentina's economy is being impacted by the recession spreading throughout world economies and economic activity in the country has contracted. The Company currently finds itself in an environment in which refinery demand for Argentine oil production has decreased. Thus far in 2009, our oil price realizations are being negotiated on a monthly basis, and as such, we cannot accurately predict how they will evolve throughout the year.

Increasing Costs

Sharp increases in oil prices over the past several years have increased the demand for oil-field services, and drilling and oil-field service companies have negotiated correspondingly sharp tariff increases. These tariff increases occurred in Argentina even though producers there were not able to enjoy the benefits of dramatically higher oil prices. As a result, the Company has experienced significant cost increases in drilling, labor and oil-field services. This effect has been compounded by high levels of inflation in Argentina where oil-field labor unions have negotiated steep increases in wages. This has resulted in increased wage and benefit expenses associated with field personnel from our Neuquén basin and Tierra del Fuego operations. It has also resulted in increased tariffs charged by our oil-field service providers who have experienced similar increases in the cost of their labor.

In addition to increases in operating expenses, our general and administrative expense has also increased. Within our industry in Argentina, it has been common to grant salary increases to technical and administrative personnel as a result of increases obtained by the oil-field workers' union. Apco has also granted salary increases which has contributed to increased general and administrative costs.

The trend of increasing costs continued through the first half of 2008. However, as oil prices have deteriorated in the second half of 2008 and thus far in 2009, we do not anticipate a continuation of the trend of steep cost increases throughout the remainder of 2009.

Results of Operations

The table below presents selected financial data summarizing our results of
operations for the three-month period ended March 31, 2009 and 2008. Please read
in conjunction with the Consolidated Statements of Income.


                                              For the Three Months Ended
                                                       March 31,                   $ Change         % Change
(Amounts in Thousands)                         2009                2008           from 2008*       from 2008*

Operating revenues                         $      17,257       $      15,610     $      1,647               11 %
Total costs and operating expenses                13,980              11,122           (2,858 )            -26 %
Operating income                                   3,277               4,488           (1,211 )            -27 %
Investment income                                  3,212               3,643             (431 )            -12 %
Argentine income taxes                             1,464               1,675              211               13 %
Less: Net income attributable to
noncontrolling interests                               7                   7                -                0 %
Net Income attributable to Apco
Argentina Inc.                             $       5,018       $       6,449     $     (1,431 )            -22 %

* + = Favorable change to net income ; - = Unfavorable change to net income ; NM = A percentage calculation is not meaningful due to change in signs, a zero-value denominator, or a percentage change greater than 200.

Operating Revenues

Operating revenues for the quarter increased by $1.6 million, or 11 percent
compared with 2008. The increase reflects the benefits of higher oil and natural
gas sales revenues which were partially offset by lower LPG revenues.

The three-month comparison of our oil, natural gas, and LPG sales volumes and
average sales prices for our consolidated interests accounted for as operating
revenues is shown in the following tables.

                                               Three Months Ended March 31,

                                            2009            2008         % Change

        Sales Volumes
        Oil (bbls)                           337,367         296,364            14 %
        Natural Gas (mcf)                  1,291,750       1,212,179             7 %
        LPG (tons)                             2,091           2,345           -11 %
        Oil, Natural Gas and LPG (boe)       577,195         525,913            10 %

        Average Sales Prices
        Oil (per bbl)                    $     41.00     $     41.99            -2 %
        Natural Gas (per mcf)                   1.80            1.38            31 %
        LPG (per ton)                         258.26          469.80           -45 %

        Revenues ($ in thousands)
        Oil revenues                     $    13,831     $    12,443            11 %
        Natural Gas revenues                   2,331           1,675            39 %
        LPG revenues                             540           1,102           -51 %
                                         $    16,702     $    15,220            10 %

The volume and price changes in the tables above caused the following changes to our oil, natural gas and LPG revenues between the three months ended March 31, 2009 and 2008.

                                       Oil          Gas         LPG        Total
                                                (Amounts in Thousands)

            2008 Sales               $ 12,443     $ 1,675     $ 1,102     $ 15,220
            Changes due to volumes      1,681         144         (66 )      1,759
            Changes due to prices        (293 )       512        (496 )       (277 )
            2009 Sales               $ 13,831     $ 2,331     $   540     $ 16,702

Oil Revenues

Due to a 14 percent increase in oil sales volumes, oil revenues were greater by $1.7 million. Higher oil sales volumes are the result of successful exploration and development drilling in our Neuquén basin properties and field re-activation activities in Bajada del Palo.

The benefits of higher oil volumes were partially offset by $293 thousand due to a two percent decrease in average oil sales prices from our consolidated interests.

Natural Gas Revenues

A seven percent, or 79,571 mcf, increase in production caused natural gas revenues to increase by $144 thousand. The increase in production is a result of recently completed production facility enhancements in our Tierra del Fuego operations.

Natural gas revenues increased by $512 thousand as a result of a 31 percent increase in our realized price. The increase in prices is primarily attributable to a new gas sales contract allowing for a portion of Tierra del Fuego production volumes to be delivered to higher priced industrial markets. We also received higher prices in Entre Lomas and Acambuco due to delivering less volumes to lower priced residential markets during the summer months in the southern hemisphere.

LPG Revenues

LPG revenues decreased by $66 thousand due to lower sales volumes and $496 thousand due to lower average sales prices during the first quarter of 2009 compared with 2008. Sales volumes were negatively affected by plant maintenance in Tierra del Fuego. LPG sales prices were lower due to decreased international commodity prices and market conditions in Argentina.

Total Costs and Operating Expenses

Total costs and operating expenses increased by $2.9 million, or 26 percent, primarily due to the following factors:

· Production and lifting costs increased by $337 thousand, or 11 percent due to higher volumes of oil and total fluid volumes lifted and an increase in the number of producing wells in Entre Lomas, Bajada del Palo, and Tierra del Fuego resulting from drilling activities, combined with higher wage and salary increases granted after the first quarter of 2008. We have also incurred greater well-service expenses and higher electricity expense.

· Depreciation, depletion and amortization (DD&A) increased $954 thousand, or 32 percent due to increased unit rates and greater sales volumes.

· Selling and administrative expense increased by $600 thousand due to higher business development activity reflecting management's strategy to search for and evaluate growth opportunities, increased salaries and wages in response to trending-higher compensation levels in the industry, and greater administrative expenses charged by our joint venture operators.

· Foreign exchange loss increased by $524 thousand due to the devaluation of the Argentine peso in the current period. The peso to US dollar exchange rate increased from 3.45:1 at December 31, 2008, to 3.72:1 at March 31, 2009. This devaluation of the Argentine peso has reduced the US dollar value of our net monetary assets denominated in pesos.

Depreciation, Depletion and Amortization Expenses ("DD&A")

The changes in our total volumes, DD&A rates per unit and DD&A expense of oil and gas properties (excluding any straight-line depreciation) between the three months ended March 31, 2009 and 2008 are shown in the following table:

                                             For the Three Months Ended
                                                      March 31,                 $ Change        % Change
                                                2009               2008         from 2008       from 2008

Total Consolidated Sales Volumes (boe)            577,195          525,913          51,282              10 %
DD&A Rate per boe                          $         6.75       $     5.59     $      1.16              21 %
DD&A Expense (In thousands)                $        3,895       $    2,940     $       954              32 %

The following table details the changes in DD&A of oil and gas properties between the three months ended March 31, 2009 and 2008.

                    2008 DD&A                $          2,940
                    Changes due to volumes                346
                    Changes due to rates                  605
                    2009 DD&A                $          3,895

Our DD&A is based on the units-of-production method, which in basic terms multiplies the percentage of estimated proved reserves produced each period times the costs of those reserves. Our proved developed reserves are limited to an area's concession life, or generally until 2016, even though a concession's term can be extended for 10 years with the consent of the Argentine government. Our DD&A rate has been increasing for the past several years and will continue to increase at an accelerating rate until our concession extensions are obtained. With each year that passes without obtaining the ten-year extensions, we will add less proved reserves per well drilled, resulting in an increased DD&A rate.

Investment Income

Investment income for the first quarter of 2009 decreased by $431 thousand compared to 2008 as lower yields on our financial investments and lower balances of cash equivalents resulted in a $311 thousand decrease in interest and other income.

Additionally, equity income from Argentine investments decreased by $120 compared with first quarter 2008. The decrease in our equity income is due to a decrease in the net income of our equity investee, Petrolera Entre Lomas S.A. The comparative decrease in Petrolera's net income is primarily a result of increased operating expenses attributable to much the same reasons described previously for the Company and foreign exchange losses experienced by Petrolera. These two factors more than offset the benefits of greater oil sales volumes attributable to successful exploration and development drilling in our joint operations in the Neuquén basin.

Summary of Total Volumes, Sales Prices and Production Costs

The following table reflects our total sales volumes, average sales prices, and
our average production costs per unit for the periods presented.


Volume, Price and Cost Statistics                  Three Months Ended March 31,

                                                      2009                2008

Sales Volumes (1):
Consolidated interests
Crude oil and condensate (bbls)                          337,367           296,364
Gas (mcf)                                              1,291,750         1,212,179
LPG (tons)                                                 2,091             2,345
Barrels of oil equivalent (boe)                          577,195           525,913
Equity interests (3)
Crude oil and condensate (bbls)                          373,577           328,318
Gas (mcf)                                                473,763           449,708
LPG (tons)                                                 2,483             2,379
Barrels of oil equivalent (boe)                          481,681           431,189
Total volumes
Crude oil and condensate (bbls)                          710,944           624,682
Gas (mcf)                                              1,765,513         1,661,887
LPG (tons)                                                 4,574             4,724
Barrels of oil equivalent (boe)                        1,058,876           957,103


Average Sales Prices:
Consolidated interests
Oil (per bbl)                                    $         41.00       $     41.99
Gas (per mcf)                                               1.80              1.38
LPG (per ton)                                             258.26            469.80
Equity interests (3)
Oil (per bbl)                                    $         41.69       $     42.03
Gas (per mcf)                                               1.85              1.42
LPG (per ton)                                             266.73            439.17

Average Production Costs (2):
Oil, gas, and LPG operating expense per boe      $          5.99       $      5.93

Oil, gas, and LPG depreciation expense per boe   $          6.75       $      5.59

(1) Volumes presented in the above table represent those sold to customers and have not been reduced by the 12 percent provincial production tax that is paid separately and is accounted for as an expense by the Company. In calculating provincial production tax payments, Argentine producers are entitled to deduct gathering, storage, treatment, and compression costs.
(2) Average production costs including oil inventory fluctuation expense and depreciation costs are calculated using total costs divided by consolidated interest sales volumes expressed in barrels of oil equivalent ("boe"). Six mcf of gas are equivalent to one barrel of oil equivalent and one ton of LPG is equivalent to 11.735 barrels of oil equivalent.
(3) The equity interest presented above reflects our interest in our equity investee's sales volumes and prices. The revenues resulting from the equity interest sales volumes and prices are not consolidated within the Company's revenues. See the financial statements and Note 1 and Note 3 of Notes to Consolidated Financial Statements for additional explanation of the equity method of accounting for our investment in Petrolera.

Financial Condition

We have historically funded capital programs and past property acquisitions with internally generated cash flow. Although we have interests in several oil and gas properties in Argentina, our direct participation in the Entre Lomas concession and dividends from our equity interest in Petrolera generate most of our cash flow.

We have historically not relied on debt or equity as sources of capital due to the turmoil that periodically affects Argentina's economy which makes financing difficult to obtain at reasonable terms. Consequently, the deterioration of credit markets since the latter part of 2008 has not impacted the Company as significantly as other E&P companies that have relied on capital markets to fund capital expenditures. With a cash balance equal to 14 percent of total assets, no bank debt, and the ability to adjust capital spending as necessary, we believe the Company continues to be well positioned during the current global recession. Management believes that the current economic environment and downturn in the oil and gas sector has created buying and investing opportunities and, as a result, we are actively seeking such opportunities in Colombia and Argentina.

However, and as previously discussed, oil price realizations in Argentina have decreased thus far in 2009, while operating costs have continued to increase. Accordingly, we have reduced our planned capital expenditures for 2009 and lowered shareholder dividends to preserve cash.

We estimate capital expenditures net to our direct working interests will total approximately $11 million in 2009, with approximately $6.8 million to be incurred over the remainder of the year. After taking into consideration the portion of capital expenditures attributable to our equity interest in Petrolera, we estimate that our combined consolidated and equity capital expenditures will be $23 million for 2009.

In April 2009, our board of directors approved a regular quarterly dividend of $.02 per share. This represents a reduction compared with the $.0875 per share declared during each of the four quarters of 2008.

We believe that the reductions in our 2009 capital program and the quarterly shareholder dividend are necessary to preserve cash in the current economic environment, thus providing us with the financial resources and liquidity needed to continue development drilling in our core properties over the long-term, fund new investment opportunities, meet future working capital needs and fund cash bonus payments that may be negotiated to obtain concession extensions, if any, while maintaining sufficient liquidity to reasonably protect against unforeseen circumstances requiring the use of funds.

As of March 31, 2009, we had a balance of cash and cash equivalents of $28.6 million, representing a decrease of $5.2 million during the first quarter of 2009. The following table summarizes the change in cash and cash equivalents for the periods shown.

Sources (Uses) of Cash                     Three Months Ended March 31,
                                             2009                 2008
                                                    (Thousands)
Net cash provided (used) by:
Operating activities                    $        1,627       $        7,791
Investing activities                            (4,269 )             (5,605 )
Financing activities                            (2,576 )             (2,578 )
Decrease in cash and cash equivalents   $       (5,218 )     $         (392 )

Operating Activities

Our net cash provided by operating activities totaled $1.6 million for the three months ended March 31, 2009, compared with $7.8 million during the same period in 2008. The decrease in cash provided by operating activities is a result of lower net income and negative variations in working capital, in particular a decrease in accounts payable. Additionally, no dividends from Argentine investments were received during the first quarter of 2009, compared with $1.2 million received in the same period of 2008.

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2008, Petrolera's ability to pay dividends is dependent upon numerous factors, including its cash flows provided by its operating activities, levels of capital spending, changes in crude oil and natural gas prices, and debt and interest payments. Due to increased capital spending for development and exploration activities in our Neuquén basin properties and Petrolera's scheduled principal and interest payments, we expect to receive less dividends from Petrolera during the next four years compared with dividends paid over the past three years.

Investing Activities

During the first three months of 2009, capital expenditures totaled $4.3 million, most of which was invested in exploration and development drilling in our Neuquén basin properties. In the first three months of 2008, capital expenditures totaled $6.7 million.

Financing Activities

During the first three months of 2009 and 2008, $2.6 million was paid to the Company's shareholders in the form of dividends.

Capital Program

Neuquén Basin

In Entre Lomas, the Company and its partners continued development drilling in the concession during the first quarter of 2009. During the quarter, we completed and put on production two oil wells that commenced drilling in 2008, three wells were drilled, completed, and put on production, and two development wells were in progress at the end of the quarter. We plan to drill 11 more wells in the area during the remainder of 2009.

In Bajada del Palo, Apco and its partners completed and put on production two exploration wells in the northeast sector of the concession that commenced drilling in 2008, and drilled one productive development well during the quarter. Two more development wells were in progress at the end of the quarter. We plan to drill two more wells in the area during the remainder of 2009 including one horizontal well. Since mid-2008, we have drilled three exploration wells in the northeastern sector of the concession. All three wells have been put into production and are being evaluated.

In the Agua Amarga exploration permit, we drilled the Charco del Palenque x-1007 ("ChdP.x-1007") well in the first quarter of 2009. This is the seventh productive well drilled in the area since the permit was awarded in the second quarter of 2007. Electric log interpretations and initial formation test results . . .