##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from  to .
 Commission File No. 0-15905
 BLUE DOLPHIN ENERGY COMPANY
  Delaware
State or other jurisdiction 
of incorporation or organization
    
    73-1268729
(I.R.S. Employer
Identification No.)
 801 Travis Street, Suite 2100
Houston, Texas
(Address of principal executive offices)
    
    77002
(Zip Code)
 (713) 568-4725
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $0.01 per share
    
    NASDAQ Capital Market
 Securities registered pursuant to Section 12(g) of the Act:
  o þ
 o þ
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



BLUE
DOLPHIN ENERGY COMPANY
 FORM 10-K REPORT INDEX
 PART IITEM 1.
    
    BUSINESS
    
    
    3ITEM 1A.
    
    RISK FACTORS
    
    
    18ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
    
    
    25ITEM 2.
    
    PROPERTIES
    
    
    25ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    25ITEM 4.
    
    RESERVED
    
    
    25PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
    
    
    25ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    28ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    29ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    35ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    35ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    59ITEM 9A(T).
    
    CONTROLS AND PROCEDURES
    
    
    59ITEM 9B.
    
    OTHER INFORMATION
    
    
    60PART IIIITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
    
    60ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    60ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    60ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    
    
    60ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    60PART IVITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    
    
    61SIGNATURES
    
    
    64EX-21.1EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  2




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PART I
 Forward Looking Statements . Certain of the statements included in this annual report
on Form 10-K, including those regarding future financial performance or results or that are not
historical facts, are forward-looking statements as that term is defined in Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. The words expect, plan, believe, anticipate, project, estimate, and similar
expressions are intended to identify forward-looking statements. Blue Dolphin Energy Company
(referred to herein, with its predecessors and subsidiaries, as Blue Dolphin, we, us and
our) cautions readers that these statements are not guarantees of future performance or results
and such statements involve risks and uncertainties that may cause actual results and outcomes to
differ materially from those indicated in forward-looking statements. Some of the important
factors, risks and uncertainties that could cause actual results to vary from forward-looking
statements include:
 
    
    ability to continue as a going concern;
    
    collectability of a $2.0 million loan receivable;
    
    ability to regain compliance for continued listing on NASDAQ;
    
    ability to complete a combination with one or more target businesses;
    
    ability to improve pipeline utilization levels;
    
    ability to secure additional working capital to fund operations;
    
    performance of third party operators for properties where we have an interest;
    
    production from oil and gas properties that we have interests in;
    
    volatility of oil and gas prices;
    
    uncertainties in the estimation of proved reserves, in the projection of future rates of
production, the timing of development expenditures and the amount and timing of property
abandonment;
    
    costly changes in environmental and other government regulations for which Blue Dolphin
is subject; and
    
    adverse changes in the global financial markets.
 Additional factors that could cause actual results to differ materially from those indicated in the
forward-looking statements are discussed in Item 1A Risk Factors. Readers are
cautioned not to place undue reliance on these forward-looking statements which speak only as of
the date hereof. We undertake no duty to update these forward-looking statements. Readers are
urged to carefully review and consider the various disclosures made by us which attempt to advise
interested parties of the additional factors which may affect our business, including the
disclosures made under the caption Managements Discussion and Analysis of Financial Condition and
Results of Operations in this report.
 
 ITEM 1.
    
    BUSINESS
 The Company
  
    
    Blue Dolphin Pipe Line Company, a Delaware corporation;
    
    Blue Dolphin Petroleum Company, a Delaware corporation;
    
    Blue Dolphin Exploration Company, a Delaware corporation;
    
    Blue Dolphin Services Co., a Texas corporation; and
    
    Petroport, Inc., a Delaware corporation.
 3




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http://www.blue-dolphin.com
  Recent Developments
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Pipeline Operations and Activities
   Pipeline
    
    
    
    
    
    
    
    
    
    Miles of
    
    
    Capacity
    
    
    Storage
    
    
    Average ThroughputSegment
    
    Market
    
    
    Ownership
    
    
    Pipeline
    
    
    (MMcf/d)
    
    
    (Bbls)(1)
    
    
    (MMcf/d)2009
    
    
    2008
    
    
    2007BDPS
    
    Gulf of Mexico
    
    
    83.3
    %
    
    
    34
    
    
    
    160
    
    
    
    85,000
    
    
    
    15.5
    
    
    
    22.6
    
    
    
    22.3GA 350
    
    Gulf of Mexico
    
    
    83.3
    %
    
    
    13
    
    
    
    65
    
    
    
    
    
    
    
    19.0
    
    
    
    23.8
    
    
    
    22.6Omega(2)
    
    Gulf of Mexico
    
    
    83.3
    %
    
    
    18
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Storage facility connected in Freeport, Texas.(2)
    
    Inactive.  
    
    Blue Dolphin Pipeline System  The BDPS includes: the Blue Dolphin Pipeline, an
offshore platform, the Buccaneer Pipeline, onshore facilities for condensate and gas
separation and dehydration, 85,000 Bbls of above-ground tankage for storage of crude oil and
condensate, a barge loading terminal on the Intracoastal Waterway and 360 acres of land in
Brazoria County, Texas where the Blue Dolphin Pipeline comes ashore and where the pipeline
systems onshore facilities, pipeline easements and rights-of-way are located. We own an 83%
undivided interest in the BDPS. The BDPS gathers and transports gas and condensate from
various offshore fields in the Galveston Area of the Gulf of Mexico to our onshore facilities
located in Freeport, Texas. After processing, the gas is transported to an end user and a
major intrastate pipeline system with further downstream tie-ins to other intrastate and
interstate pipeline systems and end users.
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The Blue Dolphin Pipeline consists of two segments, an offshore segment and an onshore segment.
The offshore segment transports both gas and condensate and is comprised of approximately 34
miles of 20-inch pipeline originating at an offshore platform in Galveston Area Block 288 and
running to shore. The offshore segment also includes the platform in Galveston Area Block 288
and 5 field gathering lines totaling approximately 27 miles connected to the main 20-inch line.
An additional 2 miles of 20-inch pipeline onshore connects the offshore segment to the onshore
facility at Freeport, Texas. The onshore segment also includes approximately 2 miles of
16-inch pipeline for transportation of gas from the onshore facility to a sales point at a
chemical plant complex and intrastate pipeline system tie-in in Freeport, Texas. The Buccaneer
Pipeline, an approximate 2 mile, 8-inch liquids pipeline, transports condensate from the
onshore facility storage tanks to our barge-loading terminal on the Intracoastal Waterway near
Freeport, Texas for sale to third parties. The Blue Dolphin Pipeline has an aggregate capacity
of approximately 160 MMcf of gas and 7,000 Bbls of crude oil and condensate per day.
 
    
    Galveston Area Block 350 Pipeline  We own an 83% undivided interest in the
Galveston Area Block 350 Pipeline (the GA 350 Pipeline). The GA 350 Pipeline is an 8-inch,
13 mile offshore pipeline extending from Galveston Area Block 350 to an interconnect with a
transmission pipeline in Galveston Area Block 391 located approximately 14 miles south of the
Blue Dolphin Pipeline. Current system capacity on the GA 350 Pipeline is 65 MMcf of gas per
day.
 
    
    Other  We also own an 83% undivided interest in a third offshore pipeline, the
Omega Pipeline, which is currently inactive. The Omega Pipeline originates in the High Island
Area, East Addition Block A-173 and extends to West Cameron Block 342, where it was previously
connected to the High Island Offshore System. Reactivation of the Omega Pipeline will be
dependent upon future drilling activity in the vicinity and successfully attracting
producer/shippers to the system.
 Oil and Gas Exploration and Production Activities
   Oil and Gas Exploration and Production Assets and Activities.
 
    
    Galveston Area Block 321  Galveston Area Block 321 is located approximately 32
miles southeast of Galveston in an average water depth of approximately 66 feet. The block
contains one active well, the A-4 Well, which began production in March 2009. The well is
currently commingled in the 5,400 and 5,300 sands. Once this commingled completion
depletes, there are two upper zones up the hole with booked reserves. We own a 0.5%
overriding royalty interest in the well. The lease is operated by Maritech Resources.
 
    
    High Island Block 115  High Island Block 115 is located approximately 30 miles
southeast of Bolivar Peninsula in an average water depth of approximately 38 feet. The block
contains one active well, the B-1 ST2 Well. The well has been shut-in since August 2009 due
to production handling problems on our downstream production handling platform, High Island
Block 71. We are exploring
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options with the lease operator to resolve the production handling issues. We own a 2.5%
working interest in a single production zone in the well. The lease is operated by Republic
Petroleum.
 
    
    High Island Block 37High Island Block 37 is located approximately 15 miles
south of Sabine Pass, in an average water depth of approximately 36 feet. The block contains
one active well, the A-2 Well, and one inactive well, the B-1 Well. Production from the A-2
Well was restarted in February 2009, after being shut-in as a result of Hurricane Ike. The
B-1 Well is currently shut-in following an unsuccessful workover in September 2009. We own an
approximate 2.8% working interest in this lease that covers 5,760 acres. The lease is
operated by Hilcorp Energy Company.
 Productive Wells
 Producing Wells
    
    
    Non-Producing WellsRegion
    
    Gross Wells
    
    
    Net Wells
    
    
    Gross Wells
    
    
    Net WellsGulf of Mexico
Oil and gas
    
    
    2.0
    
    
    
    0.1
    
    
    
    
    
    
    
    Total
    
    
    2.0
    
    
    
    0.1
    
    
    
    
    
    
    
    
 Developed Acreage
 Non-Producing WellsRegion
    
    Gross Acreage
    
    
    Net AcreageGulf of Mexico
Oil and gas
    
    
    11,520
    
    
    
    310Total
    
    
    11,520
    
    
    
    310
   Proved Oil and Gas Reserves
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Proved Reserves  As of December 31, 2009(1) (2)
 Present Valueof Future NetNet Oil
    
    
    Net Gas
    
    
    Cash InflowsReserves
    
    
    Reserves
    
    
    (Outflows)(1)(Mbbls)
    
    
    (MMcf)
    
    
    (in thousands)Proved ReservesGalveston Area Block 321
    
    
    0.1
    
    
    
    4
    
    
    $
    19High Island Block 115
    
    
    0.6
    
    
    
    112
    
    
    
    293High Island Block 37
    
    
    0.1
    
    
    
    12
    
    
    
    24Total Proved Reserves
    
    
    0.8
    
    
    
    128
    
    
    $
    336Proved DevelopedGalveston Area Block 321
    
    
    0.1
    
    
    
    4
    
    
    $
    19High Island Block 115
    
    
    0.6
    
    
    
    112
    
    
    
    293High Island Block 37
    
    
    0.1
    
    
    
    12
    
    
    
    24Total Proved Developed
    
    
    0.8
    
    
    
    128
    
    
    $
    336
 
 (1)
    
    The estimated present value of future net cash outflows from our proved reserves has
been determined by using prices of $61.08 per barrel of oil and $3.78 per Mcf of gas,
representing the 12-month average price for oil and natural gas, respectively,
calculated as the unweighted arithmetic average of the first-day-of-the-month price for
each month within the 12-month prior period to the end of the reporting period and
discounted at a 10% annual rate in accordance with requirements for reporting oil and
gas reserves pursuant to regulations promulgated by the Securities and Exchange
Commission (the SEC Method).(2)
    
    As of December 31, 2009, we reported no proved undeveloped reserves. Internal Controls over Reserve Estimates
  8




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Capital Expenditures for Proved Reserves
 Estimated Undiscounted Capital Expenditures  Associated with Plugging and Abandonment of Wells
 Years Ending December 31,2010
    
    2011
    
    2012
    
    2013
    
    2014Galveston Area Block 321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    High Island Block A-7
    
    
    
    
    
    $
    238
    
    
    
    
    
    
    
    
    
    
    
    High Island Block 37
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    68
    
    
    
    High Island Block 115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    37
  9




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Production, Price and Cost Data
 Net Production, Price and Cost Data
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Gas:Production (Mcf)
    
    
    33,630
    
    
    
    44,700
    
    
    
    72,788Revenue
    
    $
    108,576
    
    
    $
    526,522
    
    
    $
    476,224Average production per day (Mcf)(*)
    
    
    92.1
    
    
    
    122.5
    
    
    
    199.4Average sales price per Mcf
    
    $
    3.23
    
    
    $
    11.78
    
    
    $
    6.54Condensate:Production (Bbls)
    
    
    250
    
    
    
    117
    
    
    
    177Revenue
    
    $
    17,401
    
    
    $
    14,057
    
    
    $
    10,345Average production per day (Bbls)(*)
    
    
    0.7
    
    
    
    0.3
    
    
    
    0.5Average sales price per Bbl
    
    $
    69.60
    
    
    $
    120.25
    
    
    $
    58.45NGLs:Production (gallons)
    
    
    
    
    
    
    
    
    
    
    36,372Revenue
    
    $
    
    
    
    $
    
    
    
    $
    30,842Average production per day (gallons)(*)
    
    
    
    
    
    
    
    
    
    
    99.7Average sales price per gallon
    
    $
    
    
    
    $
    
    
    
    $
    0.85Production costs (**):Per Mcfe:
    
    $
    2.71
    
    
    $
    5.36
    
    
    $
    3.04
 
 (*)
    
    Average production is based on a 365 day year.
 (**)
    
    Production costs, exclusive of work-over costs, are costs incurred to operate
and maintain wells and equipment and to pay production taxes.
 Drilling Activity
 Net Exploratory(1)2009
    
    
    2008
    
    
    2007Wells DrilledGulf of MexicoProductive
    
    
    
    
    
    
    
    
    
    
    Dry
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
 
 (1)
    
    Gross interest reflects the total wells we participated in, regardless of our
ownership interest. 10




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Customers
  Oil and Gas
    
    
    PipelineSales
    
    
    Operations
    
    
    TotalYear Ended December 31, 2009:Gryphon Exploration Co.
    
    $
    
    
    
    $
    379,828
    
    
    $
    379,828W&T Offshore
    
    $
    
    
    
    $
    332,396
    
    
    $
    332,396Helis Oil & Gas
    
    $
    
    
    
    $
    216,047
    
    
    $
    216,047Maritech Resources
    
    $
    
    
    
    $
    191,512
    
    
    $
    191,512Year Ended December 31, 2008:Arena Offshore
    
    $
    
    
    
    $
    513,634
    
    
    $
    513,634W&T Offshore
    
    $
    
    
    
    $
    488,083
    
    
    $
    488,083Gryphon Exploration Co.
    
    $
    
    
    
    $
    367,153
    
    
    $
    367,153Apex Oil & Gas
    
    $
    
    
    
    $
    338,836
    
    
    $
    338,836
 Markets & Competition
  
    
    the level of domestic production;
    
    actions taken by foreign oil and gas producing nations;
    
    the availability of pipelines with adequate capacity;
    
    the availability of vessels for direct shipment;
    
    lightering, transshipment and other means of transportation;
    
    the availability and marketing of other competitive fuels;
    
    fluctuating and seasonal demand for oil, natural gas and refined products; and
    
    the extent of governmental regulation and taxation (under both present and future
legislation) of the production, importation, refining, transportation, pricing, use and
allocation of oil, gas, refined products and alternative fuels.
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Governmental Regulation
  Federal Regulation of Natural Gas Transportation.
   Federal Regulation of Oil Pipelines
 12




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Safety and Operational Regulations
 Federal Oil and Gas Leases
  Environmental Regulation
 13




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14




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Legislation and Rulemaking
   Employees
  15




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Environmental
  Executive Officers of the Registrant
  OfficerName
    
    Office
    
    Since
    
    AgeIvar Siem
    
    Chairman of the Board and Chief Executive Officer
    
    
    1989
    
    
    
    63Thomas W. Heath
    
    President, Secretary and Assistant Treasurer
    
    
    2007
    
    
    
    47T. Scott Howard
    
    Treasurer and Assistant Secretary
    
    
    2008
    
    
    
    38
 Ivar Siem
 Thomas W. Heath
 T. Scott Howard
 16




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Available Information
  GLOSSARY OF CERTAIN OIL AND GAS TERMS
  Back-in After Payout Interest.
 Bbl.
 Bcf.
 Btu or British Thermal Unit.
 Condensate.
 Development Well.
 Exploratory Well.
 Field.
 Leasehold Interest.
 Mbbls.
 Mcf.
 Mcfe.
 MMbtu.
 MMcf.
 MMcfe.
 17




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Net Revenue Interest.
 Non-operating Working Interest.
 Overriding Royalty Interest.
 Prospect.
 Proved Developed Reserves.
 Proved Developed Producing.
 Proved Developed Non-producing.
 Proved Reserves.
 Proved Undeveloped Reserves.
 Reversionary Interest.
 Royalty Interest.
 Undivided Interest.
 Working interest.
 
 ITEM 1A.
    
    RISK FACTORS
 Risks Related to our Business
 Based on our historical financials, there is uncertainty as to our ability to continue as a going
concern.
  18




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If the $2.0 million loan receivable remains unpaid, we could deplete our cash reserves by the end
of the third quarter of this year.
   We are primarily dependent on revenues from our pipeline systems and our working interests in three
oil and gas producing properties.
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A significant decrease in exploration and production activity in areas where our pipelines are, the
decline in production from existing wells, depressed commodity prices or otherwise, would adversely
affect our revenues and cash flow.
  If we are not able to generate sufficient funds from our operations and other financing sources, we
may not be able to finance our operations.
   The global financial crisis may have impacts on our business and financial condition that we
currently cannot predict.
  If our common stock fails to meet the listing requirements of NASDAQ and is delisted from trading
on the NASDAQ, the market price of our common stock could be adversely affected.
  20




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The geographic concentration of our assets may have a greater effect on us as compared to other
companies.
  Oil and gas prices are volatile and a substantial and extended decline in the price of oil and gas
would have a material adverse effect on us.
  
    
    weather conditions in the United States;
    
    the condition of the United States economy;
    
    the actions of the Organization of Petroleum Exporting Countries;
    
    governmental regulation;
    
    political stability in the Middle East, South America and elsewhere;
    
    the foreign supply of oil and natural gas;
    
    the price of foreign imports;
    
    the availability of alternate fuel sources; and
    
    the value of the U.S. dollar in relation to other currencies.
  
    
    reducing the exploration for and development of oil and gas reserves held by third party
companies around our pipeline systems;
    
    increasing our dependence on external sources of capital to meet our cash needs; and
    
    generally impairing our ability to obtain needed capital.
 21




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We face strong competition from larger companies that may negatively affect our ability to carry on
operations.
  
    
    most of our competitors have greater financial resources than we do, which gives them
better access to capital to acquire assets; and
    
    we sometimes establish a higher standard for the minimum projected rate of return on
invested capital than some of our competitors since we cannot afford to absorb certain
risks. We believe this puts us at a competitive disadvantage in acquiring pipelines and
oil and gas properties.
 Reserve estimates depend on many assumptions that may prove to be inaccurate. Any material
inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net
present value of our reserves to be overstated.
  
    
    the quality and quantity of available data;
    
    the interpretation of that data;
    
    the accuracy of various mandated economic assumptions; and
    
    the judgment of the persons preparing the estimate.
    We cannot control the activities on properties we do not operate.
  22




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We have pursued, and intend to continue to pursue, acquisitions. Our business may be adversely
affected if we cannot effectively integrate acquired operations.
  
    
    inadvertently becoming subject to liabilities of the acquired company that were unknown
to us at the time of the acquisition, such as later asserted litigation matters or tax
liabilities;
    
    the difficulty of assimilating operations, systems and personnel of the acquired
businesses; and
    
    maintaining uniform standards, controls, procedures and policies.
  Operating hazards, including those specific to the marine environment, may adversely affect our
ability to conduct business.
  
    
    pipeline ruptures;
    
    sudden violent expulsions of oil, gas and mud while drilling a well, commonly referred
to as a blowout;
    
    a cave in and collapse of the earths structure surrounding a well, commonly referred to
as cratering;
    
    explosions;
    
    fires;
    
    pollution; and
    
    other environmental risks.
  23




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Losses and liabilities from uninsured or underinsured drilling and operating activities could have
a material adverse effect on our financial condition and results of operations.
   Business requires the retention and recruitment of a skilled workforce and the loss of employees
could result in the failure to implement our business plan.
  Compliance with environmental and other government regulations could be costly and could negatively
impact our operations.
  
    
    require the acquisition of a permit before operations can be commenced;
    
    restrict the types, quantities and concentration of various substances that can be
released into the environment from drilling and production activities;
    
    limit or prohibit drilling and pipeline activities on certain lands lying within
wilderness, wetlands and other protected areas;
    
    require remedial measures to mitigate pollution from former operations, such as plugging
abandoned wells and abandoning pipelines; and
    
    impose substantial liabilities for pollution resulting from our operations.
   24




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ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   
 ITEM 3.
    
    LEGAL PROCEEDINGS
  
 ITEM 4.
    
    RESERVED
 
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Price for Common Stock
   25




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Quarter Ended
    
    High
    
    Low2009December 31, 2009
    
    $
    0.62
    
    
    $
    0.29September 30, 2009
    
    $
    0.58
    
    
    $
    0.39June 30, 2009
    
    $
    0.79
    
    
    $
    0.36March 31, 2009
    
    $
    0.45
    
    
    $
    0.262008December 31, 2008
    
    $
    0.85
    
    
    $
    0.32September 30, 2008
    
    $
    2.20
    
    
    $
    0.75June 30, 2008
    
    $
    2.57
    
    
    $
    1.25March 31, 2008
    
    $
    1.95
    
    
    $
    1.15
  Dividend Policy
   26




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##### Table of Contents



Compensation Plan Information
  Number ofSecuritiesNumber of
    
    
    
    
    
    
    Remaining AvailableSecurities to be
    
    
    
    
    
    
    for Future IssuanceIssued Upon
    
    
    Weighted Average
    
    
    Under EquityExercise of
    
    
    Exercise Price of
    
    
    Compensation PlansOutstanding
    
    
    Outstanding
    
    
    (ExcludingOptions, Warrants
    
    
    Options, Warrants
    
    
    Securitiesand Rights
    
    
    and Rights
    
    
    Reflected in Column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by
security holders
    
    
    424,559
    
    
    $
    2.53
    
    
    
    351,040Equity compensation plans not approved
by security holders
    
    
    
    
    
    $
    0.00
    
    
    
    Total
    
    
    424,559
    
    
    $
    2.53
    
    
    
    351,040
  27




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##### Table of Contents



Item 6. SELECTED FINANCIAL DATA
  Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    Total2009Revenue from operations:Pipeline operations
    
    $
    514,759
    
    
    $
    548,636
    
    
    $
    442,249
    
    
    $
    361,327
    
    
    $
    1,866,971Oil and gas sales
    
    
    21,946
    
    
    
    44,075
    
    
    
    42,269
    
    
    
    17,687
    
    
    
    125,977Total revenue from operations
    
    
    536,705
    
    
    
    592,711
    
    
    
    484,518
    
    
    
    379,014
    
    
    
    1,992,948Cost of operations:Pipeline operating expenses
    
    
    466,260
    
    
    
    491,461
    
    
    
    309,695
    
    
    
    247,946
    
    
    
    1,515,362Lease operating expenses
    
    
    48,031
    
    
    
    674
    
    
    
    29,731
    
    
    
    16,705
    
    
    
    95,141Depletion, depreciation and amortization
    
    
    128,913
    
    
    
    134,227
    
    
    
    133,362
    
    
    
    120,840
    
    
    
    517,342Impairment of oil and gas properties
    
    
    203,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,110Allowance
for doubtful note receivable, net of consulting agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    1,500,000General and administrative expenses
    
    
    602,194
    
    
    
    650,754
    
    
    
    372,159
    
    
    
    364,925
    
    
    
    1,990,032Stock based compensation
    
    
    62,644
    
    
    
    40,320
    
    
    
    62,562
    
    
    
    39,320
    
    
    
    204,846Accretion expense
    
    
    27,918
    
    
    
    27,919
    
    
    
    27,586
    
    
    
    27,420
    
    
    
    110,843Total cost of operations
    
    
    1,539,070
    
    
    
    1,345,355
    
    
    
    935,095
    
    
    
    2,317,156
    
    
    
    6,136,676Other income (expense),
including income tax expense
    
    
    2,356
    
    
    
    2,395
    
    
    
    129,191
    
    
    
    (127,106
    )
    
    
    6,836Net loss
    
    $
    (1,000,009
    )
    
    $
    (750,249
    )
    
    $
    (321,386
    )
    
    $
    (2,065,248
    )
    
    $
    (4,136,892
    )Loss per share:Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.06
    )
    
    $
    (0.03
    )
    
    $
    (0.17
    )
    
    $
    (0.35
    )2008Revenue from operations:Pipeline operations
    
    $
    547,817
    
    
    $
    695,402
    
    
    $
    561,171
    
    
    $
    644,441
    
    
    $
    2,448,831Oil and gas sales
    
    
    130,720
    
    
    
    293,553
    
    
    
    120,108
    
    
    
    (3,802
    )
    
    
    540,579Total revenue from operations
    
    
    678,537
    
    
    
    988,955
    
    
    
    681,279
    
    
    
    640,639
    
    
    
    2,989,410Cost of operations:Pipeline operating expenses
    
    
    415,956
    
    
    
    402,096
    
    
    
    415,581
    
    
    
    489,009
    
    
    
    1,722,642Lease operating expenses
    
    
    50,173
    
    
    
    83,094
    
    
    
    40,710
    
    
    
    69,473
    
    
    
    243,450Depletion, depreciation and amortization
    
    
    131,338
    
    
    
    117,690
    
    
    
    164,689
    
    
    
    114,255
    
    
    
    527,972Impairment of oil and gas properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213,563
    
    
    
    213,563General and administrative expenses
    
    
    561,625
    
    
    
    489,364
    
    
    
    426,342
    
    
    
    476,165
    
    
    
    1,953,496Stock based compensation
    
    
    72,184
    
    
    
    72,184
    
    
    
    75,222
    
    
    
    78,685
    
    
    
    298,275Accretion expense
    
    
    28,576
    
    
    
    26,733
    
    
    
    26,356
    
    
    
    26,355
    
    
    
    108,020Total cost of operations
    
    
    1,259,852
    
    
    
    1,191,161
    
    
    
    1,148,900
    
    
    
    1,467,505
    
    
    
    5,067,418Other income (expense),
including income tax expense
    
    
    55,941
    
    
    
    26,727
    
    
    
    24,884
    
    
    
    4,216
    
    
    
    111,768Net loss
    
    $
    (525,374
    )
    
    $
    (175,479
    )
    
    $
    (442,737
    )
    
    $
    (822,650
    )
    
    $
    (1,966,240
    )Loss per share:Basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.17
    )
 28




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Executive Summary
  Pipeline Transportation.
 Oil and Gas Exploration and Production
 
    
    Galveston Area Block 321  The well is currently commingled in the 5,400 and
5,300 sands. Once this commingled completion depletes, there are two upper zones up the hole
with booked reserves. We own a 0.5% overriding royalty interest in the well. The lease is
operated by Maritech Resources.
    
    High Island Block 115 The block contains one active well, the B-1 ST2 Well, which
has been shut-in since August 2009 due to production problems on our downstream production
handling platform, High Island Block 71. We are exploring options with the lease operator to
resolve the production handling issues. We own a 2.5% working interest in a single production
zone in the well. The lease is operated by Republic Petroleum.
    
    High Island Block 37  The block contains one active well, the A-2 Well, and one
inactive well, the B-1 Well. Production from the A-2 Well was restarted in February 2009,
after being shut-in as a result of Hurricane Ike. The B-1 Well is currently shut-in following
an unsuccessful workover in September 2009. We own an approximate 2.8% working interest in
this lease that covers 5,760 acres. The lease is operated by Hilcorp Energy Company.
  29




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##### Table of Contents



Results of Operations
  2009 Compared to 2008
 Revenue from Pipeline Operations.
 Revenue from Oil and Gas Sales.
  Pipeline Operating Expenses .
 Lease Operating Expenses.
 Impairment of Oil and Gas Properties.
 30




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##### Table of Contents



General and Administrative Expenses, and Stock Based Compensation.
 Interest and Other Income.
 Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008
 Revenue from Pipeline Operations.
 Revenue from Oil and Gas Sales.
 Pipeline Operating Expenses.
 Lease Operating Expenses.
 General and Administrative Expenses and Stock Based Compensation.
 Interest and Other Income, Including Income Tax.
 Liquidity and Capital Resources
 Sources and Uses of Cash.
  31




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##### Table of Contents



For Year Ended December 31,(in millions)2009
    
    
    2008Cash flow from operationsLoss from operations
    
    $
    (1.5
    )
    
    $
    (0.7
    )Change in current assets and liabilities
    
    
    0.4
    
    
    
    0.1Total cash flow from operations
    
    
    (1.1
    )
    
    
    (0.6
    )Cash outflowsCapital expenditures and advance of loan
receivable
    
    
    (1.5
    )
    
    
    (0.8
    )Payments on note payable
    
    
    (0.2
    )
    
    
    Total cash outflows
    
    
    (1.7
    )
    
    
    (0.8
    )Total change in cash flows
    
    $
    (2.8
    )
    
    $
    (1.4
    )
  Going Concern.
    Critical Accounting Policies
  32




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##### Table of Contents



Accounting for the Impairment or Disposal of Long-Lived Assets .
 Asset Retirement Obligations.
 Accounting for Uncertainty in Income Taxes .
  33




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##### Table of Contents



Fair Value Measurements.
 Fair Value Option for Financial Assets and Financial Liabilities.
 Recently Adopted Accounting Pronouncements
 Generally Accepted Accounting Principles.
 Recently Issued Accounting Pronouncements and Accounting Developments
 Fair Value Measurements.
 34




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##### Table of Contents



ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  Report of Independent Registered Public Accounting Firm
    
    
    36Consolidated Balance Sheets at December 31, 2009 and 2008
    
    
    37Consolidated Statements of Operations
Years Ended December 31, 2009 and 2008
    
    
    38Consolidated Statements of Stockholders Equity
Years Ended December 31, 2009 and 2008
    
    
    39Consolidated Statements of Cash Flows
Years Ended December 31, 2009 and 2008
    
    
    40Notes to Consolidated Financial Statements
    
    
    41
  35




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 36




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,016,483
    
    
    $
    3,864,876Accounts receivable, net of allowance for doubtful accounts
    
    
    428,124
    
    
    
    442,715Loan receivable, net of allowance for loan receivable
    
    
    
    
    
    
    Prepaid expenses and other current assets
    
    
    359,850
    
    
    
    436,242Total current assets
    
    
    1,804,457
    
    
    
    4,743,833Property and equipment, at cost:Oil and gas properties (full-cost method)
    
    
    1,086,733
    
    
    
    1,286,700Pipelines
    
    
    4,659,686
    
    
    
    4,659,686Onshore separation and handling facilities
    
    
    1,919,402
    
    
    
    1,919,402Land
    
    
    860,275
    
    
    
    860,275Other property and equipment
    
    
    302,813
    
    
    
    290,3138,828,909
    
    
    
    9,016,376Less: Accumulated depletion, depreciation and amortization
    
    
    5,011,401
    
    
    
    4,494,059Total property and equipment, net
    
    
    3,817,508
    
    
    
    4,522,317Other assets
    
    
    9,463
    
    
    
    9,463Total assets
    
    $
    5,631,428
    
    
    $
    9,275,613LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    372,275
    
    
    $
    389,268Note payable  insurance
    
    
    173,479
    
    
    
    Accrued expenses and other liabilities
    
    
    8,136
    
    
    
    9,593Other long-term liabilities  current portion
    
    
    25,996
    
    
    
    25,996Total current liabilities
    
    
    579,886
    
    
    
    424,857Long-term liabilities:Asset retirement obligations, net of current portion
    
    
    2,262,018
    
    
    
    2,183,190Other long-term liabilities, net of current portion
    
    
    
    
    
    
    25,996Total long-term liabilities
    
    
    2,262,018
    
    
    
    2,209,186Total liabilities
    
    
    2,841,904
    
    
    
    2,634,043Commitments and contingenciesStockholders equity:Common stock ($.01 par value, 100,000,000 shares authorized, 11,876,967 and
11,691,243 shares issued and outstanding at December 31, 2009 and 2008, respectively)
    
    
    118,770
    
    
    
    116,912Additional paid-in capital
    
    
    32,778,405
    
    
    
    32,495,417Accumulated deficit
    
    
    (30,107,651
    )
    
    
    (25,970,759
    )Total stockholders equity
    
    
    2,789,524
    
    
    
    6,641,570Total liabilities and stockholders equity
    
    $
    5,631,428
    
    
    $
    9,275,613
  37




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 Years Ended December 31,2009
    
    
    2008Revenue from operations:Pipeline operations
    
    $
    1,866,971
    
    
    $
    2,448,831Oil and gas sales
    
    
    125,977
    
    
    
    540,579Total revenue from operations
    
    
    1,992,948
    
    
    
    2,989,410Cost of operations:Pipeline operating expenses
    
    
    1,515,362
    
    
    
    1,722,642Lease operating expenses
    
    
    95,141
    
    
    
    243,450Depletion, depreciation and amortizaton
    
    
    517,342
    
    
    
    527,972Impairment of oil and gas properties
    
    
    203,110
    
    
    
    213,563Allowance for doubtful note receivable, net of consulting agreement
    
    
    1,500,000
    
    
    
    General and administrative expenses
    
    
    1,990,032
    
    
    
    1,953,496Stock-based compensation
    
    
    204,846
    
    
    
    298,275Accretion expense
    
    
    110,843
    
    
    
    108,020Total cost of operations
    
    
    6,136,676
    
    
    
    5,067,418Loss from operations
    
    
    (4,143,728
    )
    
    
    (2,078,008
    )Other income (expense):Interest and other income
    
    
    9,921
    
    
    
    120,069Loss on disposal of assets
    
    
    
    
    
    
    (1,886
    )Total other income (expense)
    
    
    9,921
    
    
    
    118,183Loss before income taxes
    
    
    (4,133,807
    )
    
    
    (1,959,825
    )Income tax expense
    
    
    (3,085
    )
    
    
    (6,415
    )Net loss
    
    $
    (4,136,892
    )
    
    $
    (1,966,240
    )Loss per common share:Basic
    
    $
    (0.35
    )
    
    $
    (0.17
    )Diluted
    
    $
    (0.35
    )
    
    $
    (0.17
    )Weighted average number of common shares outstanding:Basic
    
    
    11,785,747
    
    
    
    11,642,391Diluted
    
    
    11,785,747
    
    
    
    11,642,391
  38




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 
 Consolidated Statements of Stockholders Equity
 Common
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalStock
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance at December 31, 2007
    
    
    11,610,363
    
    
    $
    116,104
    
    
    $
    32,117,950
    
    
    $
    (24,004,519
    )
    
    $
    8,229,535Common stock issued for services
    
    
    80,880
    
    
    
    808
    
    
    
    79,192
    
    
    
    
    
    
    
    80,000Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    298,275
    
    
    
    
    
    
    
    298,275Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,966,240
    )
    
    
    (1,966,240
    )Balance at December 31, 2008
    
    
    11,691,243
    
    
    $
    116,912
    
    
    $
    32,495,417
    
    
    $
    (25,970,759
    )
    
    $
    6,641,570Common stock issued for services
    
    
    185,724
    
    
    
    1,858
    
    
    
    78,142
    
    
    
    
    
    
    
    80,000Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    204,846
    
    
    
    
    
    
    
    204,846Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,136,892
    )
    
    
    (4,136,892
    )Balance at December 31, 2009
    
    
    11,876,967
    
    
    $
    118,770
    
    
    $
    32,778,405
    
    
    $
    (30,107,651
    )
    
    $
    2,789,524
   39




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Years Ended December 31,2009
    
    
    2008OPERATING ACTIVITIESNet loss
    
    $
    (4,136,892
    )
    
    $
    (1,966,240
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depletion, depreciation and amortization
    
    
    517,342
    
    
    
    527,972Impairment of oil and gas properties
    
    
    203,110
    
    
    
    213,563Accretion expense
    
    
    110,843
    
    
    
    108,020Stock-based compensation
    
    
    204,846
    
    
    
    298,275Common stock issued for services
    
    
    80,000
    
    
    
    80,000Allowance for doubtful note receivable, net of consulting agreement
    
    
    1,500,000
    
    
    
    Bad debt expense
    
    
    
    
    
    
    26,699Loss on disposal of assets
    
    
    
    
    
    
    1,886Changes in operating assets and liabilities:Accounts receivable
    
    
    14,591
    
    
    
    224,563Prepaid expenses and other current assets
    
    
    450,013
    
    
    
    73,452Abandonment costs incurred
    
    
    (32,015
    )
    
    
    (18,537
    )Accounts payable, accrued expenses and other liabilities
    
    
    (44,446
    )
    
    
    (169,737
    )Net cash used in operating activities
    
    
    (1,132,608
    )
    
    
    (600,084
    )INVESTING ACTIVITIESAdvance of loan receivable, net of consulting agreement
    
    
    (1,500,000
    )
    
    
    Exploration and development costs
    
    
    (3,143
    )
    
    
    (749,088
    )Capital expenditures
    
    
    (12,500
    )
    
    
    (12,731
    )Net cash used in investing activities
    
    
    (1,515,643
    )
    
    
    (761,819
    )FINANCING ACTIVITIESPayments on notes payable
    
    
    (200,142
    )
    
    
    Net cash used in financing activities
    
    
    (200,142
    )
    
    
    Decrease in cash and cash equivalents
    
    
    (2,848,393
    )
    
    
    (1,361,903
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    3,864,876
    
    
    
    5,226,779CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    1,016,483
    
    
    $
    3,864,876Non-cash investing and financing activities:Financing of insurance premiums
    
    $
    373,621
    
    
    $
    Consulting agreement associated with loan receivable
    
    $
    500,000
    
    
    $
    
  40




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 (1)
    
    Organization and Significant Accounting PoliciesOrganizationBlue Dolphin Energy Company was incorporated in Delaware in January 1986 to engage in oil
and gas exploration, production and acquisition activities and oil and gas transportation
and marketing. We were formed pursuant to a reorganization effective June 9, 1986.Principles of ConsolidationOur consolidated financial statements include the accounts of our wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.Accounting EstimatesWe have made a number of estimates and assumptions relating to the reporting of consolidated
assets and liabilities and to the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America. This includes assessing the realization of the
note receivable, the estimated useful life of pipeline assets, valuation of stock-based
payments and reserve information, which affects the depletion calculation as well as the
full cost ceiling limitation. While we believe current estimates are reasonable and
appropriate, actual results could differ from those estimated.Going ConcernOur consolidated financial statements, which have been prepared in accordance with generally
accepted accounting principles (GAAP), contemplate that we will continue as a going
concern and do not contain any adjustments that might result if we were unable to continue
as a going concern. We incurred a net loss of $4,136,892 for the year ended December 31,
2009. As at December 31, 2009, we had an accumulated deficit of $30,107,651. We anticipate
that we will continue to incur substantial operating losses unless and until we are able to
achieve or sustain profitability or are otherwise able to secure external financing. Our
cash flow deficiencies raise substantial doubt as to our ability to continue as a going
concern. Existing and anticipated working capital needs, lower than anticipated revenues,
increased expenses or the inability to collect on an outstanding loan receivable could all
affect our ability to continue as a going concern.We intend to raise additional working capital through private placements, public offerings,
bank financing and/or advances from related parties or shareholder loans, as well as to
continue evaluating potential merger and/or acquisition opportunities.The continuation of our business is dependent upon obtaining such further financing. The
issuance of additional equity securities could result in a significant dilution in the
equity interests of current or future stockholders. Obtaining commercial loans, assuming
those loans would be available, will increase liabilities and future cash commitments.
There are no assurances that we will be able to obtain additional financing through private
placement, public offerings and/or bank financing necessary to support our working capital
requirements. We do not currently have any arrangements in place to raise any additional
funds.
 41




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Cash and Cash EquivalentsCash equivalents include liquid investments with an original maturity of three months or
less. We maintain cash and cash equivalent balances at one financial institution that is
insured by the Federal Deposit Insurance Corporation. Cash balances are maintained in
depository and overnight investment accounts with financial institutions which at times,
exceed insured limits. We monitor the financial condition of the financial institutions and
have experienced no losses associated with these accounts.In October 2008, the Federal Deposit Insurance Corporation increased its insurance from
$100,000 to $250,000 per depositor. The coverage increase, which is temporary, extends
through December 13, 2013. Additionally, coverage for non-interest bearing accounts, which
is temporary, is unlimited and extends through June 30, 2010.Oil and Gas PropertiesOil and gas properties are accounted for using the full-cost method of accounting, whereby
all costs associated with acquisition, exploration, and development of oil and gas
properties, including directly related internal costs, are capitalized on a cost center
basis. We utilize one cost center for all of our properties. Amortization of such costs and
estimated future development costs is determined using the unit-of-production method. Costs
directly associated with the acquisition and evaluation of unproved properties are excluded
from the amortization computation until it is determined whether or not proved reserves can
be assigned to the properties or impairment has occurred.Estimated proved oil and gas reserves are based upon reports prepared internally by us. The
net carrying value of oil and gas properties, less related deferred income taxes, is limited
to the lower of unamortized cost or the cost center ceiling, defined as the sum of the
present value (10% discount rate applied) of estimated future net revenues from proved
reserves, after giving effect to income taxes, and the lower of cost or estimated fair value
of unproved properties. In 2009, our unamortized cost exceeded the present value of
estimated future net revenues and we recorded an impairment to our oil and gas properties of
$203,110. Disposition of oil and gas properties are recorded as adjustments to capitalized
costs, with no gain or loss recognized unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves.We capitalize interest on expenditures made in connection with significant exploration and
development projects that are not subject to current amortization. Interest is capitalized
only for the period that activities are in progress to bring these projects to their
intended use. No interest has been capitalized for the years reflected herein.Pipelines and FacilitiesPipelines and facilities are recorded at cost. Depreciation is computed using the
straight-line method over estimated useful lives ranging from 10 to 22 years.In accordance with Financial Accounting Standards Board (FASB) standards on accounting for
the impairment or disposal of long-lived assets, assets are grouped and evaluated for
impairment based on the ability to identify separate cash flows generated therefrom.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Other Property and EquipmentDepreciation of furniture, fixtures and other equipment is computed using the straight-line
method over estimated useful lives ranging from 3 to 10 years.Asset Retirement ObligationsIn August 2001, FASB issued amended guidance on accounting for asset retirement obligations,
which addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or normal use of the asset.The guidance requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of fair value
can be made. The fair value of the liability is added to the carrying amount of the
associated asset and this additional carrying amount is depreciated over the life of
the asset. If the obligation is settled for other than the carrying amount of the
liability, a gain or loss on settlement is recognized.We have asset retirement obligations associated with the future abandonment of pipelines and
related facilities and offshore oil and gas properties. The following table summarizes our
asset retirement obligation transactions during the years ended December 31, 2009 and 2008
(in thousands).
 Years Ended December 31,2009
    
    
    2008Beginning asset retirement obligations
    
    $
    2,183
    
    
    $
    2,094Liabilities incurred
    
    
    
    
    
    
    Liabilities settled
    
    
    (32
    )
    
    
    (19
    )Accretion expense
    
    
    111
    
    
    
    108Ending asset retirement obligations
    
    $
    2,262
    
    
    $
    2,183
 Stock-Based CompensationStock-based compensation is recognized in our consolidated financial statements based on the
fair value, on the date of grant or modification, of the equity instrument awarded.
Stock-based compensation expense is recognized in the consolidated financial statements on a
straight-line basis over the vesting period for the entire award.Recognition of Oil and Gas RevenueSales from producing wells are recognized on the entitlement method of accounting which
defers recognition of sales when, and to the extent that, deliveries to customers exceed our
net revenue interest in production. Similarly, when deliveries are below our net revenue
interest in production, sales are recorded to reflect the full net revenue interest. Our
imbalance liability at December 31, 2009 was not material.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Recognition of Pipeline Transportation Revenue
 Revenues from our pipelines are derived from fee-based contracts and are typically based on
transportation fees per unit of volume transported multiplied by the volume delivered.
Revenue is recognized when volumes have been physically delivered for the customer through
the pipeline.Subsequent EventsIn May 2009, the FASB established general standards of accounting for and disclosures of
events that occur subsequent to the balance sheet date but before financial statements are
issued or available to be issued. The guidance is effective for interim and annual periods
ending after June 15, 2009. The adoption of this guidance did not have a material impact on
our consolidated financial statements. We evaluated all subsequent events through the
issuance date of our consolidated financial statements as of and for the 12 month period
ended December 31, 2009, and during this subsequent period no material subsequent events
occurred that would require recognition or disclosure in these consolidated financial
statements, except for the allowance for the loan receivable.Allowance for Doubtful AccountsAccounts receivable are customer obligations due under normal trade terms. The allowance
for doubtful accounts represents our estimate of the amount of probable credit losses
existing in our accounts receivable. We have a limited number of customers with
individually large amounts due at any given date. Any unanticipated change in any one of
these customers credit worthiness or other matters affecting the collectability of amounts
due from such customers could have a material effect on the results of operations in the
period in which such changes or events occur. The Company regularly reviews all aged
accounts receivables for collectability and establishes an allowance as necessary for
individual customer balances. As of December 31, 2009 and 2008, we had recorded an
allowance for doubtful accounts of $0 and $26,699, respectively, related to accounts
receivable.Income TaxesWe provide for income taxes using the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.We evaluate our tax positions in a two-step process. The first step is to determine whether
it is more likely than not that a tax position will be sustained upon examination. The
second step is a measurement process whereby a tax position that meets the
more-likely-than-not threshold is calculated to determine the amount of benefit to recognize
in the financial statements.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Earnings Per ShareWe apply the provisions of FASBs guidance on earnings per share. The guidance requires the
presentation of basic earnings per share (EPS) which excludes dilution and is computed by
dividing net income (loss) available to common stockholders by the weighted-average number
of shares of common stock outstanding for the period. The guidance requires dual
presentation of basic EPS and diluted EPS on the face of the consolidated statement of
operations and requires a reconciliation of the numerators and denominators of basic EPS and
diluted EPS. Diluted EPS is computed by dividing net income (loss) available to common
shareholders by the diluted weighted average number of common shares outstanding, which
includes the potential dilution that could occur if securities or other contracts to issue
common stock were converted to common stock that then shared in the earnings of the entity.Employee stock options and stock warrants outstanding were not included in the computation
of diluted earnings per share for the years ended December 31, 2009 and 2008, because their
assumed exercise and conversion would have an anti-dilutive effect on the computation of
diluted loss per share.The following table provides reconciliation between basic and diluted loss per share:
 Year EndedDecember 31,Basic and Diluted
    
    2009
    
    
    2008Net loss
    
    $
    (4,136,892
    )
    
    $
    (1,966,240
    )Weighted average number of shares of common
stock outstanding and potential dilutive shares
of common stock
    
    
    11,785,747
    
    
    
    11,642,391Per share amount
    
    $
    (0.35
    )
    
    $
    (0.17
    )
 EnvironmentalWe are subject to extensive federal, state and local environmental laws and regulations.
These laws, which are constantly changing, regulate the discharge of materials into the
environment and may require us to remove or mitigate the environmental effects of the
disposal or release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and that have no
future economic benefits are expensed. Liabilities for expenditures of a noncapital nature
are recorded when environmental assessment and/or remediation is probable, and the costs can
be reasonably estimated. Such liabilities are generally recorded at their undiscounted
amounts unless the amounts and timing of payments is fixed or reliably determinable.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Recently Adopted Accounting PronouncementsGenerally Accepted Accounting Principles.In June 2009, the FASB issued guidance that
established the Accounting Standards Codification as the sole source of authoritative GAAP.
We updated references to GAAP in our financial statements pursuant to the provisions of
FASBs guidance. The adoption of FASBs guidance did not impact our consolidated financial
position or results of operations.Recently Issued Accounting PronouncementsFair Value Measurements.In January 2010, the FASB issued guidance that requires reporting
entities to make new disclosures about recurring or nonrecurring fair-value measurements
including significant transfers into and out of Level 1 and Level 2 fair value measurements
and information on purchases, sales, issuances, and settlements on a gross basis in the
reconciliation of Level 3 fair value measurements. The guidance is effective for annual
reporting periods beginning after December 15, 2009, except for Level 3 reconciliation
disclosures that are effective for annual periods beginning after December 15, 2010. We do
not expect the adoption of this guidance to have a material impact on our consolidated
financial statements.
 (2)
    
    Fair Value of Financial InstrumentsThe carrying values of cash and cash equivalents, accounts receivable and accounts
payable, accrued liabilities and other current liabilities approximate fair value due to the
short-term maturities of these instruments.
 (3)
    
    Loan ReceivableOn July 31, 2009, we issued a $2.0 million non-interest bearing loan (the Loan) to
Lazarus Louisiana Refinery II, LLC (LLRII or the Borrower). The Loan, which was due on
January 31, 2010, is secured by (i) a first lien on property owned by Lazarus Environmental,
LLC (LEN), (ii) a second lien on property owned by LLRII and (iii) a guarantee from
Lazarus Energy Holdings, LLC (LEH). We agreed to forbear the loan receivable until June
11, 2010, provided the Borrower satisfies certain conditions set forth in the forbearance
agreement. Those certain conditions were not met, and on April 9, 2010, we called on the
full value of the Loan to be paid by April 13, 2010. As of the date of this report, the
Loan is in default and remains unpaid. Although management believes the Loan could be paid
in full at a date in the future, we reserved an allowance for the entire $2.0 million
balance of the Loan as of December 31, 2009, and expensed $1.5 million (net of $500,000 for
the consulting agreement).A $500,000 one year consulting agreement that commenced on July 1, 2009, was also associated
with the loan receivable. As of December 31, 2009, we reserved the remaining $250,000 of
deferred consulting revenue and reserved against the $250,000 of previously recognized
consulting revenue.
 (4)
    
    Income TaxesIncome tax expense consisted of $3,085 and $6,415 and was related to state income tax
for the years ended 2009 and 2008, respectively.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 The income tax effects of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented
below:
 2009
    
    
    2008Deferred tax assets:Net operating loss and capital loss carryforwards
    
    $
    7,029,596
    
    
    $
    5,881,885AMT credit carryforward
    
    
    11,564
    
    
    
    11,564Basis differences in property and equipment
    
    
    470,908
    
    
    
    314,192Total deferred tax assets
    
    
    7,512,068
    
    
    
    6,207,641Less: valuation allowance
    
    
    (7,512,068
    )
    
    
    (6,207,641
    )Deferred tax assets, net
    
    $
    
    
    
    $
    
 In assessing the recoverability of deferred tax assets, we determine whether it is more
likely than not that some portion or all of the deferred tax assets will be realized. A
full valuation allowance against our deferred tax asset was recognized at December 31, 2009
and 2008 due to our uncertainty as to the utilization of the deferred tax assets in the
foreseeable future. The net change in the total valuation allowance for the years ended
December 31, 2009 and 2008 was an increase of $1,304,427 and $343,660, respectively.Our effective tax rate applicable to continuing operations in 2009 and 2008 is as
follows:
 Years Ended December 31,2009
    
    
    2008Expected tax rate
    
    
    (34.00
    %)
    
    
    (34.00
    %)Change in valuation allowance recognized
in earnings
    
    
    34.07
    %
    
    
    34.33
    %0.07
    %
    
    
    0.33
    %
 For federal tax purposes, we have net operating loss carry-forwards (NOLs) of
approximately $20.7 million at December 31, 2009. These NOLs must be utilized prior to
their expiration, which will occur between 2011 and 2029.We adopted FASBs guidance on accounting for uncertainty in income taxes effective January
1, 2007. The guidance clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with FASBs guidance on accounting for
income taxes. The guidance also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The standard also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition.The evaluation of a tax position is a two-step process. The first step is a recognition
process whereby the enterprise determines whether it is more likely than not that a tax
position will be sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met
the more-likely-than-not recognition threshold, the enterprise should presume that the
position will be examined by the appropriate taxing authority that has full knowledge of all
relevant information. The second step is a measurement process whereby a tax position that
meets the more-likely-than-
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 not recognition threshold is calculated to determine the amount of benefit to recognize in
the financial statements. The tax position is measured at the largest amount of benefit
that is greater than 50% likely of being realized upon ultimate settlement.The provisions of the guidance on accounting for uncertainty in income taxes have been
applied to all of our material tax positions taken through the date of adoption and through
the fiscal year ended December 31, 2009. We have determined that all of our material tax
positions taken in our income tax returns and the positions we expect to take in our future
income tax filings meet the more likely-than-not recognition threshold. In addition, we
have determined that, based on our judgment, none of these tax positions meet the definition
of uncertain tax positions that are subject to the non-recognition criteria set forth in
the new pronouncement.In May 2006, the State of Texas enacted a new business tax that is imposed on gross revenues
to replace the States current franchise tax regime. Although the Texas margins tax (TMT)
is imposed on an entitys gross revenues rather than on its net income, certain aspects of
the tax make it similar to an income tax. In accordance with the FASB guidance, we have
properly determined the impact of the newly-enacted legislation in the determination of our
reported state current and deferred income tax liability.As part of the adoption of this guidance, the Company records income tax related interest
and penalties, if applicable, as a component of the provision for income tax expense.
However, there were no amounts recognized relating to interest and penalties in the
consolidated statements of operations for the years ended December 31, 2009 and 2008.
Furthermore, none of the Companys federal and state income tax returns are currently under
examination by the Internal Revenue Service (IRS) or state authorities, but fiscal years
2005 and later remain subject to examination by the IRS and the State of Texas. The Company
believes that it has no uncertain tax positions for both federal and state income taxes.
 (5)
    
    Stock OptionsEffective April 14, 2000, after approval by our stockholders, we adopted the 2000 Stock
Incentive Plan (the 2000 Plan). Under the 2000 Plan, we are able to make awards of
stock-based compensation. The number of shares of common stock reserved for grants of
incentive stock options (ISOs) and other stock-based awards was increased to 1,200,000
shares after approval by our stockholders during 2007. As of December 31, 2009, we had
341,040 shares of common stock remaining available for future grants. Options granted under
the 2000 Plan have contractual terms from six to ten years. The exercise price of ISOs
cannot be less than 100% of the fair market value of a share of our common stock determined
on the grant date. All ISO awards granted in previous years vested immediately, however,
200,000 ISOs granted in May 2007 and 75,000 ISOs granted in August 2008 have a three year
vesting period and 150,000 ISOs granted in October 2007 have a two year vesting period. An
additional 28,500 options were granted in October 2007 that vested immediately. Although
the 2000 Plan provides for the granting of other incentive awards, only ISOs and
non-statutory stock options have been issued under the 2000 Plan. The 2000 Plan is
administered by the Compensation Committee of our Board of Directors.A tax deduction is permitted for stock options exercised during the period, generally for
the excess of the price at which stock issued from exercise of the options are sold over the
exercise price of the options. Tax benefits are to be shown on the Statement of Cash Flows as financing cash
inflows. Any tax deductions we receive from the exercise of stock options for the
foreseeable future will be applied to the valuation allowance in determining our net
operating loss carry forward.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Additionally, we utilized the alternate transition method (simplified method) for
calculating the beginning balance in the pool of excess tax benefits in accordance with
FASBs guidance on transition election related to accounting for the tax effects of
share-based payment awards.We estimate the fair value of stock options granted on the date of grant using the
Black-Scholes-Merton option-pricing model. The following assumptions were used to determine
the fair value of stock options granted during the years ended December 31, 2009 and 2008.
There were no options granted during the year ended December 31, 2009.
 Year Ended December 31,2008Stock options granted
    
    
    75,000Risk-free interest rate
    
    
    3.23
    %Expected term, in years
    
    
    6.00Expected volatility
    
    
    90.70
    %Dividend yield
    
    
    0.00
    %
 Expected volatility used in the model is based on the historical volatility of our common
stock and is weighted 50% for the historical volatility over a past period equal to the
expected term and 50% for the historical volatility over the past two years prior to the
grant date. This weighting method was chosen to account for the significant changes in our
financial condition beginning approximately three years ago. These changes include the
decrease in our working capital, decreased pipeline throughput and the reduction and
ultimate elimination of our outstanding debt.The expected term of options granted used in the model represents the period of time that
options granted are expected to be outstanding. The method used to estimate the expected
term is the simplified method as allowed under the provisions of the SECs Staff
Accounting Bulletin No. 107. This number is calculated by taking the average of the sum of
the vesting period and the original contract term. The risk-free interest rate for periods
within the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the date of the grant. As we have not declared dividends on our common stock
since we became a public entity, no dividend yield was used. No forfeiture rate was assumed
due to the forfeiture history for this type of award. Actual value realized, if any, is
dependent on the future performance of our common stock and overall stock market conditions.
There is no assurance that the value realized by an optionee will be at or near the value
estimated by the Black-Scholes-Merton option-pricing model.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
  Year Ended December 31, 2009WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    ValueOptions outstanding at December 31, 2007
    
    
    491,559
    
    
    $
    2.61Options granted
    
    
    75,000
    
    
    $
    1.36Options exercised
    
    
    
    
    
    $
    0.00Options expired or cancelled
    
    
    (11,000
    )
    
    $
    3.10Options outstanding at December 31, 2008
    
    
    555,559
    
    
    $
    2.43Options granted
    
    
    
    
    
    $
    0.00Options exercised
    
    
    
    
    
    $
    0.00Options expired or cancelled
    
    
    (131,000
    )
    
    $
    2.13Options outstanding at December 31, 2009
    
    
    424,559
    
    
    $
    2.53
    
    
    
    5.4
    
    
    $
    Options exercisable at December 31, 2009
    
    
    356,559
    
    
    $
    2.44
    
    
    
    5.0
    
    
    $
    
  Options Outstanding
    

    
    Options ExercisableAverage
    
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    
    Weighted
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual Life
    
    
    Average
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    (Years)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Price$0.35 to $0.80
    
    
    70,830
    
    
    
    3.3
    
    
    $
    0.44
    
    
    
    70,830
    
    
    $
    0.44$1.36 to $1.90
    
    
    23,429
    
    
    
    2.1
    
    
    $
    1.71
    
    
    
    23,429
    
    
    $
    1.71$2.81 to $2.99
    
    
    318,500
    
    
    
    6.3
    
    
    $
    2.92
    
    
    
    250,500
    
    
    $
    2.90$6.00
    
    
    11,800
    
    
    
    0.4
    
    
    $
    6.00
    
    
    
    11,800
    
    
    $
    6.00424,559
    
    
    
    
    
    
    
    
    
    
    
    356,559
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BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
  WeightedAverageGrant DateShares
    
    
    Fair ValueNon-vested at December 31, 2007
    
    
    350,000
    
    
    $
    2.05Granted
    
    
    75,000
    
    
    $
    1.03Canceled or expired
    
    
    
    
    
    $
    0.00Vested
    
    
    (141,000
    )
    
    $
    2.00Non-vested at December 31, 2008
    
    
    284,000
    
    
    $
    1.83Granted
    
    
    
    
    
    $
    0.00Canceled or expired
    
    
    (100,000
    )
    
    $
    1.20Vested
    
    
    (116,000
    )
    
    $
    2.07Non-vested at December 31, 2009
    
    
    68,000
    
    
    $
    2.35
  (6) Leases
  Future Minimum LeaseYears Ending December 31,
    
    Payments2010
    
    172,646$
    172,646
  Years Ended December 31,
    
    Lease Expense2009
    
    $
    115,5572008
    
    $
    116,117
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BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 (7) Commitments and Contingencies
   (8) Business Segment Information
   December 31, 2009SegmentOil and GasPipeline
    
    
    Exploration &
    
    
    Corporate &Transportation
    
    
    Production
    
    
    Other(1)
    
    
    TotalRevenues
    
    $
    1,866,971
    
    
    $
    125,977
    
    
    $
    
    
    
    $
    1,992,948Operation cost(2)
    
    
    4,740,912
    
    
    
    307,692
    
    
    
    367,620
    
    
    
    5,416,224Depletion, depreciation
and amortization(4)
    
    
    420,171
    
    
    
    292,809
    
    
    
    7,472
    
    
    
    720,452EBIT
    
    $
    (3,294,112
    )
    
    $
    (474,524
    )
    
    $
    (375,092
    )
    
    $
    (4,143,728
    )Capital expenditures
    
    $
    12,500
    
    
    $
    
    
    
    $
    
    
    
    $
    12,500Identifiable assets(3)
    
    $
    4,634,238
    
    
    $
    267,713
    
    
    $
    729,477
    
    
    $
    5,631,428
 
 (1)
    
    Includes unallocated G&A costs associated with corporate maintenance costs and legal
expenses. It also includes as identifiable assets corporate available cash of $0.7
million.(2)
    
    Allocable G&A costs are allocated based on revenues.(3)
    
    Identifiable assets contain related legal obligations of each segment including
cash, accounts receivable and payable and recorded net assets.(4)
    
    Includes an impairment charge. 52




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BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 December 31, 2008SegmentOil and GasPipeline
    
    
    Exploration &
    
    
    Corporate &Transportation
    
    
    Production
    
    
    Other(1)
    
    
    TotalRevenues
    
    $
    2,448,831
    
    
    $
    540,579
    
    
    $
    
    
    
    $
    2,989,410Operation cost(2)
    
    
    3,389,058
    
    
    
    594,247
    
    
    
    342,578
    
    
    
    4,325,883Depletion, depreciation
and amortization
    
    
    417,384
    
    
    
    317,618
    
    
    
    6,534
    
    
    
    741,536EBIT
    
    $
    (1,357,611
    )
    
    $
    (371,286
    )
    
    $
    (349,112
    )
    
    $
    (2,078,009
    )Capital expenditures
    
    $
    1,033
    
    
    $
    749,088
    
    
    $
    11,698
    
    
    $
    761,819Identifiable assets(3)
    
    $
    5,073,147
    
    
    $
    560,221
    
    
    $
    3,642,245
    
    
    $
    9,275,613
 
 (1)
    
    Includes unallocated G&A costs associated with corporate maintenance costs and legal
expenses. It also includes as identifiable assets corporate available cash of $3.5
million.(2)
    
    Allocable G&A costs are allocated based on revenues.(3)
    
    Identifiable assets contain related legal obligations of each segment including
cash, accounts receivable and payable and recorded net assets.  Oil and Gas
    
    
    PipelineSales
    
    
    Operations
    
    
    TotalYear Ended December 31, 2009:Gryphon Exploration Co.
    
    $
    
    
    
    $
    379,828
    
    
    $
    379,828W&T Offshore
    
    $
    
    
    
    $
    332,396
    
    
    $
    332,396Helis Oil & Gas
    
    $
    
    
    
    $
    216,047
    
    
    $
    216,047Maritech Resources
    
    $
    
    
    
    $
    191,512
    
    
    $
    191,512Year Ended December 31, 2008:Arena Offshore
    
    $
    
    
    
    $
    513,634
    
    
    $
    513,634W&T Offshore
    
    $
    
    
    
    $
    488,083
    
    
    $
    488,083Gryphon Exploration Co.
    
    $
    
    
    
    $
    367,153
    
    
    $
    367,153Apex Oil & Gas
    
    $
    
    
    
    $
    338,836
    
    
    $
    338,836
  53




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##### Table of Contents



BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 (9) Supplemental Oil and Gas Information
     Estimated Quantities of Proved Oil and Gas Reserves (Unaudited)
 Modernization of Oil and Gas Reporting
   54




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BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Oil
    
    
    GasQuantity of Oil and Gas Reserves
    
    (Bbls)
    
    
    (Mcf)Total proved reserves at December 31, 2007
    
    
    846
    
    
    
    177,671Revisions to previous estimates
    
    
    (297
    )
    
    
    10,827Extensions, discoveries, improved recovery and other additions
    
    
    337
    
    
    
    14,440Purchase of reserves in place
    
    
    
    
    
    
    Sales of reserves in place
    
    
    
    
    
    
    Production
    
    
    (117
    )
    
    
    (44,720
    )Total proved reserves at December 31, 2008
    
    
    769
    
    
    
    158,218Revisions to previous estimates
    
    
    239
    
    
    
    3,162Extensions, discoveries, improved recovery and other additions
    
    
    
    
    
    
    Purchase of reserves in place
    
    
    
    
    
    
    Sales of reserves in place
    
    
    
    
    
    
    Production
    
    
    (250
    )
    
    
    (33,531
    )Total proved reserves at December 31, 2009
    
    
    758
    
    
    
    127,849Proved developed reserves:December 31, 2009
    
    
    758
    
    
    
    127,849December 31, 2008
    
    
    769
    
    
    
    158,218Total proved reserves:December 31, 2009
    
    
    758
    
    
    
    127,849December 31, 2008
    
    
    769
    
    
    
    158,218
  55




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##### Table of Contents



BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Capitalized Costs of Oil and Gas Producing Activities
 The following table sets forth the aggregate amounts of capitalized costs relating to our
oil and gas producing activities and the aggregate amount of related accumulated depletion,
depreciation, amortization as of:
 December 31,2009
    
    
    2008Unproved properties and prospect generation
costs not being amortized
    
    $
    
    
    
    $
    Proved properties being amortized
    
    
    1,086,733
    
    
    
    1,286,700Total capitalized costs
    
    
    1,086,733
    
    
    
    1,286,700Accumulated depreciation, depletion and amortization
    
    
    (868,041
    )
    
    
    (776,467
    )Net capitalized costs
    
    $
    218,692
    
    
    $
    510,233
 Costs Incurred in Oil and Gas Producing Activities
  Years Ended December 31,2009
    
    
    2008Costs incurred:Acquisition of proved properties
    
    $
    
    
    
    $
    Acquisition of unproved properties
    
    
    
    
    
    
    Exploration costs
    
    
    3,143
    
    
    
    749,088Development costs
    
    
    
    
    
    
    Total costs incurred
    
    $
    3,143
    
    
    $
    749,088
  56




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##### Table of Contents



BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Results of Operations for Oil and Gas Producing Activities
  Years Ended December 31,2009
    
    
    2008Revenues from oil and gas producing activities
    
    $
    125,977
    
    
    $
    540,579Production costs
    
    
    (95,141
    )
    
    
    (243,450
    )Depreciation, depletion, and amortization
    
    
    (89,699
    )
    
    
    (104,055
    )Impairment of oil and gas properties
    
    
    (203,110
    )
    
    
    (213,563
    )Pretax income from producing activities
    
    
    (261,973
    )
    
    
    (20,489
    )Income tax expense/estimated loss carryforward benefit
    
    
    4,139
    
    
    
    324Results of oil and gas producing activities (excluding
corporate overhead and interest costs)
    
    $
    (257,834
    )
    
    $
    (20,165
    )
 Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
  Years Ended December 31,2009
    
    
    2008Future cash inflows
    
    $
    529,376
    
    
    $
    866,563Future development costs
    
    
    
    
    
    
    Future production costs
    
    
    (164,100
    )
    
    
    (267,932
    )Future income taxes
    
    
    
    
    
    
    10% discount factor
    
    
    (28,980
    )
    
    
    (88,398
    )Standardized measure of discounted
future net cash inflows (outflows)
    
    $
    336,296
    
    
    $
    510,233
 
 Future net cash flows at each year end, as reported in the above schedule, were
determined by summing the estimated annual net cash flows computed by: (i) multiplying
estimated quantities of proved reserves to be produced during each year by year-end
prices and (ii) deducting estimated expenditures to be incurred during each year to
develop and produce the proved reserves (based on year-end costs).  57




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##### Table of Contents



BLUE
DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
 Notes to Consolidated Financial Statements (Continued)
 Standardized Measure of Discounted Future Net Cash Flows
 Years Ended December 31,2009
    
    
    2008Sales and transfers, net of production costs
    
    $
    (30,836
    )
    
    $
    (297,129
    )Net change in sales and transfer prices, net of
production costs
    
    
    (31,511
    )
    
    
    (377,061
    )Extension, discoveries and improved recovery, net
of future production and development costs
    
    
    
    
    
    
    404,129Development costs incurred during the period that
reduced future development costs
    
    
    (32,000
    )
    
    
    18,500Changes in estimated future development cost
    
    
    (29,461
    )
    
    
    67,296Revisions of quantity estimates
    
    
    (1,872
    )
    
    
    (27,964
    )Accretion of discount
    
    
    51,023
    
    
    
    10,700Net change in income taxes
    
    
    
    
    
    
    241,740Change in production rates (timing) and other
    
    
    (99,280
    )
    
    
    762Net change
    
    $
    (173,937
    )
    
    $
    40,973
  
 58




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 9A(T). CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Managements Annual Report on Internal Control over Financial Reporting
   Changes in Internal Control over Financial Reporting
  59




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
   60




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  Exhibits
 No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Company(1)3.2
    
    Amended and Restated By-Laws of the Company(9)4.1
    
    Specimen Stock Certificate (2)4.2
    
    Form of Promissory Note issued pursuant to the Note and Warrant Purchase
Agreement dated September 8, 2004 (7)4.3
    
    Promissory Note of Lazarus Louisiana Refinery II, LLC, payable to Blue Dolphin
Energy Company dated July 31, 2009 (15)10.1
    
    Blue Dolphin Energy Company 2000 Stock Incentive Plan (3)*10.2
    
    First Amendment to the Blue Dolphin Energy Company 2000 Stock Incentive Plan (4)*10.3
    
    Second Amendment to the Blue Dolphin Energy Company 2000 Stock Incentive Plan (5)10.4
    
    Purchase and Sale Agreement by and between Blue Dolphin Pipe Line Company and MCNIC,
dated February 1, 2002(6)10.5
    
    Sale of American Resources Offshore, Inc. Common Stock Agreement between Blue Dolphin
Exploration Co. and Ivar Siem, dated September 8, 2004 (7)10.6
    
    Purchase and Sale Agreement by and between Blue Dolphin Energy Company, WBI
Pipeline & Storage Group, Inc. and SemGas LP, dated October 29, 2004 (8)10.7
    
    Amendment to the Asset Purchase Agreement by and among MCNIC Offshore
Pipeline and Processing Company and Blue Dolphin Pipe Line Company dated February 28, 2005 (10)10.8
    
    Placement Agency Agreement by and between Blue Dolphin Energy Company and Starlight
Investments, LLC dated May 27, 2005 (12)10.9
    
    Form of Stock Purchase Agreement between Blue Dolphin Energy Company and Osler
Holdings Limited, Gilbo Invest AS, Spencer Energy AS, Spencer Finance Corp., Hudson Bay
Fund, LP, Don Fogel and SIBEX Capital Fund, Inc. dated March 8, 2006
(13)10.10
    
    Loan and Option Agreement by and among Lazarus Energy Holdings, LLC, Lazarus
Louisiana Refinery II, LLC, Lazarus Energy, LLC, Lazarus Environmental, LLC, and Blue
Dolphin Energy Company dated July 31, 2009 (14)14.1
    
    Code of Ethics applicable to the Chairman, Chief Executive Officer and Senior
Financial Officer (11)
 
 *
    
Management Compensation Plan.**
    
Filed herewith. 61




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##### Table of Contents



No.
    
    Description21.1
    
    List of Subsidiaries of the Company **23.1
    
    Consent of UHY LLP **23.2
    
    Consent of William J. Driscoll, Geologist **31.1
    
    Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 **31.2
    
    T. Scott Howard Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 **32.1
    
    Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 **32.2
    
    T. Scott Howard Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 **99.1
    
    Memo from William J. Driscoll, Geologist, regarding Estimated Prove Reserves and
Future Revenue **
 
 (1)
    
    Incorporated herein by reference to Exhibit 3.1 filed in connection with
the Form 8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934,
dated June 2, 2009 (Commission File No. 000-15905).(2)
    
    Incorporated herein by reference to exhibits filed in connection with Form 10-K
of Blue Dolphin Energy Company for the year ended December 31, 1989 under the Securities and
Exchange Act of 1934, dated March 30, 1990 (Commission File No. 000-15905).(3)
    
    Incorporated herein by reference to Appendix 1 filed in connection with the
Proxy Statement of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934,
dated April 20, 2000 (Commission File No. 000-15905).(4)
    
    Incorporated herein by reference to Appendix B filed in connection with the
definitive Proxy Statement of Blue Dolphin Energy Company under the Securities and Exchange
Act of 1934, dated April 16, 2003 (Commission File No. 000-15905).(5)
    
    Incorporated herein by reference to Appendix A filed in connection with the
definitive Proxy Statement of Blue Dolphin Energy Company under the Securities and Exchange
Act of 1934, dated April 27, 2006 (Commission File No. 000-15905).(6)
    
    Incorporated herein by reference to Exhibit 10.20 filed in connection with Form
10-KSB of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
March 23, 2003 (Commission File No. 000-15905).(7)
    
    Incorporated herein by reference to Exhibit 10.4 filed in connection with
Form 8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
September 14, 2004 (Commission File No. 000-15905).(8)
    
    Incorporated herein by reference to Exhibit 10.1 filed in connection with
Form 8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
November 3, 2004 (Commission File No. 000-15905).(9)
    
    Incorporated herein by reference to Exhibit 3.1 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
December 26, 2007 (Commission File No. 000-15905).(10)
    
    Incorporated herein by reference to Exhibit 10.1 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated March
3, 2005 (Commission File No. 000-15905).(11)
    
    Incorporated herein by reference to Exhibit 14.1 filed
in connection with Form 10-KSB of Blue Dolphin Energy Company for the year ended December 31,
2004 under the Securities Exchange Act of 1934, dated March 25, 2005 (Commission File No.
000-15905). *
    
Management Compensation Plan.**
    
Filed herewith. 62




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##### Table of Contents



(12)
    
    Incorporated herein by reference to Exhibit 10.9 filed in connection with Form
10-KSB of Blue Dolphin Energy Company for the year ended December 31, 2005 under the
Securities Exchange Act of 1934, dated March 30, 2006 (Commission File No. 000-15905).(13)
    
    Incorporated herein by reference to Exhibit 10.10 filed in connection with
Form 10-KSB of Blue Dolphin Energy Company for the year ended December 31, 2005 under the
Securities Exchange Act of 1934, dated March 30, 2006 (Commission File No. 000-15905).(14)
    
    Incorporated herein by reference to Exhibit 10.1 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities Exchange Act of 1934, dated August 6,
2009 (Commission File No. 000-15905).(15)
    
    Incorporated herein by reference to Exhibit 10.2 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities Exchange Act of 1934, dated August 6,
2009 (Commission File No. 000-15905).  63




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##### Table of Contents



SIGNATURES
  BLUE DOLPHIN ENERGY COMPANY
(Registrant)By:
    /s/ Ivar SiemIvar Siem(Chairman and CEO)Date: April 15, 2010  Signature
    
    Title
    
    Date/s/ Ivar Siem

Ivar Siem
    
    Chairman and CEO
(Principal Executive Officer)
    
    April 15, 2010/s/ T. Scott Howard

T. Scott Howard
    
    Treasurer and Assistant Secretary 
(Principal Financial and Accounting Officer)
    
    April 15, 2010/s/ Laurence N. Benz

Laurence N. Benz
    
    Director
    
    April 15, 2010/s/ John N. Goodpasture

John N. Goodpasture
    
    Director
    
    April 15, 2010/s/ Harris A. Kaffie

Harris A. Kaffie
    
    Director
    
    April 15, 2010/s/ Erik Ostbye

Erik Ostbye
    
    Director
    
    April 15, 2010
 64




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##### Table of Contents



Exhibit Index
 No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Company(1)3.2
    
    Amended and Restated By-Laws of the Company(9)4.1
    
    Specimen Stock Certificate (2)4.2
    
    Form of Promissory Note issued pursuant to the Note and Warrant Purchase
Agreement dated September 8, 2004 (7)4.3
    
    Promissory Note of Lazarus Louisiana Refinery II, LLC, payable to Blue Dolphin Energy
Company dated July 31, 2009 (15)10.1
    
    Blue Dolphin Energy Company 2000 Stock Incentive Plan (3) *10.2
    
    First Amendment to the Blue Dolphin Energy Company 2000 Stock Incentive Plan (4) *10.3
    
    Second Amendment to the Blue Dolphin Energy Company 2000 Stock Incentive Plan (5)10.4
    
    Purchase and Sale Agreement by and between Blue Dolphin Pipe Line Company and MCNIC,
dated February 1, 2002 (6)10.5
    
    Sale of American Resources Offshore, Inc. Common Stock Agreement between Blue Dolphin Exploration Co. and Ivar
Siem, dated September 8, 2004 (7)10.6
    
    Purchase and Sale Agreement by and between Blue Dolphin Energy Company, WBI
Pipeline & Storage Group, Inc. and SemGas LP, dated October 29, 2004 (8)10.7
    
    Amendment to the Asset Purchase Agreement by and among MCNIC Offshore
Pipeline and Processing Company and Blue Dolphin Pipe Line Company dated February 28, 2005
(10)10.8
    
    Placement Agency Agreement by and between Blue Dolphin Energy Company and Starlight Investments, LLC dated May
27, 2005 (12)10.9
    
    Form of Stock Purchase Agreement between Blue Dolphin Energy Company and Osler Holdings Limited, Gilbo Invest
AS, Spencer Energy AS, Spencer Finance Corp., Hudson Bay Fund, LP, Don Fogel and SIBEX Capital Fund, Inc. dated
March 8, 2006 (13)10.10
    
    Loan and Option Agreement by and among Lazarus Energy Holdings, LLC, Lazarus
Louisiana Refinery II, LLC, Lazarus Energy, LLC, Lazarus Environmental, LLC, and
Blue Dolphin Energy Company dated July 31, 2009 (14)14.1
    
    Code of Ethics applicable to the Chairman, Chief Executive Officer and Senior
Financial Officer (11)21.1
    
    List of Subsidiaries of the Company **23.1
    
    Consent of UHY LLP **23.2
    
    Consent of William J. Driscoll, Geologist **31.1
    
    Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 **31.2
    
    T. Scott Howard Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 **
 65




---



##### Table of Contents



No.
    
    Description32.1
    
    Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 **32.2
    
    T. Scott Howard Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 **99.1
    
    Memo from William J. Driscoll, Geologist, regarding Estimated Prove Reserves and
Future Revenue**
 
 (1)
    
    Incorporated herein by reference to Exhibit 3.1 filed in connection with
the Form 8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934,
dated June 2, 2009 (Commission File No. 000-15905).(2)
    
    Incorporated herein by reference to exhibits filed in connection with Form 10-K
of Blue Dolphin Energy Company for the year ended December 31, 1989 under the Securities and
Exchange Act of 1934, dated March 30, 1990 (Commission File No. 000-15905).(3)
    
    Incorporated herein by reference to Appendix 1 filed in connection with
the Proxy Statement of Blue Dolphin Energy Company under the Securities and Exchange Act of
1934, dated April 20, 2000 (Commission File No. 000-15905).(4)
    
    Incorporated herein by reference to Appendix B filed in connection with
the definitive Proxy Statement of Blue Dolphin Energy Company under the Securities and
Exchange Act of 1934, dated April 16, 2003 (Commission File No. 000-15905).(5)
    
    Incorporated herein by reference to Appendix A filed in connection with the
definitive Proxy Statement of Blue Dolphin Energy Company under the Securities and Exchange
Act of 1934, dated April 27, 2006 (Commission File No. 000-15905).(6)
    
    Incorporated herein by reference to Exhibit 10.20 filed in connection with Form
10-KSB of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
March 23, 2003 (Commission File No. 000-15905).(7)
    
    Incorporated herein by reference to Exhibit 10.4 filed in connection with
Form 8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
September 14, 2004 (Commission File No. 000-15905).(8)
    
    Incorporated herein by reference to Exhibit 10.1 filed in connection with
Form 8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
November 3, 2004 (Commission File No. 000-15905).(9)
    
    Incorporated herein by reference to Exhibit 3.1 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
December 26, 2007 (Commission File No. 000-15905).(10)
    
    Incorporated herein by reference to Exhibit 10.1 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated March
3, 2005 (Commission File No. 000-15905).(11)
    
    Incorporated herein by reference to Exhibit 14.1 filed in connection with Form
10-KSB of Blue Dolphin Energy Company for the year ended December 31, 2004 under the
Securities Exchange Act of 1934, dated March 25, 2005 (Commission File No. 000-15905).(12)
    
    Incorporated herein by reference to Exhibit 10.9 filed in connection with Form
10-KSB of Blue Dolphin Energy Company for the year ended December 31, 2005 under the
Securities Exchange Act of 1934, dated March 30, 2006 (Commission File No. 000-15905).(13)
    
    Incorporated herein by reference to Exhibit 10.10 filed in connection with
Form 10-KSB of Blue Dolphin Energy Company for the year ended December 31, 2005 under the
Securities Exchange Act of 1934, dated March 30, 2006 (Commission File No. 000-15905).(14)
    
    Incorporated herein by reference to Exhibit 10.1 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities Exchange Act of 1934, dated August 6,
2009 (Commission File No. 000-15905).(15)
    
    Incorporated herein by reference to Exhibit 10.2 filed in connection with Form
8-K of Blue Dolphin Energy Company under the Securities Exchange Act of 1934, dated August 6,
2009 (Commission File No. 000-15905). 66