##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 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
 (Exact name of registrant as specified in its charter)
 Delaware
    
    73-1268729(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 801 Travis Street, Suite 2100
Houston, Texas 77002
(713) 568-4725
 (Address and telephone number, including area code, of registrants principal executive offices)
 Securities registered pursuant to Section 12(b) of the Exchange Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per share
    
    Nasdaq Capital Market
 Securities registered pursuant to Section 12(g) of the Act:
  o þ
 o þ
 þ o
 þ
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ
  Number of shares of common stock outstanding as of March 10, 2009
    
    
    11,745,299
 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
    
    
    23ITEM 2.
    
    PROPERTIES
    
    
    23ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    23ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    23PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    24ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    25ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    26ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    33ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    33ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    58ITEM 9A(T).
    
    CONTROLS AND PROCEDURES
    
    
    58ITEM 9B.
    
    OTHER INFORMATION
    
    
    59PART 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 ACCOUNTANT FEES AND SERVICES
    
    
    60PART IVITEM 15.
    
    EXHIBITS
    
    
    61SIGNATURES
    
    
    64EX-21.1EX-31.1EX-31.2EX-32.1EX-32.2
  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:
 
    
    the level of utilization of our pipelines;
    
    availability and cost of capital;
    
    actions or inactions of third party operators for properties where we have an interest;
    
    the risks associated with oil and gas exploration;
    
    the level of production from oil and gas properties that we have interests in;
    
    gas and oil price volatility;
    
    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;
    
    regulatory developments; and
    
    general economic conditions.
 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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Recent Developments
     Pipeline Operations and Activities
  4




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Pipeline
    
    
    
    
    
    
    
    
    
    Miles of
    
    Capacity
    
    Storage
    
    Average ThroughputSegment
    
    Market
    
    Ownership
    
    Pipeline
    
    (MMcf/d)
    
    (Bbls)(1)
    
    (MMcf/d)2008
    
    2007
    
    2006BDPS
    
    Gulf of Mexico
    
    
    83.3
    %
    
    
    34
    
    
    
    160
    
    
    
    85,000
    
    
    
    22.6
    
    
    
    22.3
    
    
    
    17.3GA 350
    
    Gulf of Mexico
    
    
    83.3
    %
    
    
    13
    
    
    
    65
    
    
    
    
    
    
    
    23.8
    
    
    
    22.6
    
    
    
    9.1Omega(2)
    
    Gulf of Mexico
    
    
    83.3
    %
    
    
    18
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Storage facility connected in Freeport, Texas.(2)
    
    Inactive.  
    
    Blue Dolphin Pipeline System  The Blue Dolphin Pipeline System (the Blue Dolphin
System) 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 Blue Dolphin System.
The Blue Dolphin System 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.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.
 5




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Various fees are charged to producer/shippers for provision of transportation and onshore
facility services. 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. Unless otherwise stated, all
gas and liquids volumes transported are attributable to production from third party
producer/shippers.
 
    
    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. Unless otherwise stated, all gas and liquids volumes transported are attributable to
production from third party producer/shippers.
 
    
    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. In December
2008, drilling of an exploratory well in Galveston Area Block 321 was commenced near our Blue
Dolphin Pipeline System. We elected not to participate in this well. However, we maintained
a 0.5% overriding royalty interest in the well. In January 2009, it was concluded that the
well was successful and will be connected to our Blue Dolphin Pipeline System in second
quarter 2009.
 
    
    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. We own a
2.5% working interest in a single production zone in one well in this block. Production
commenced in late November 2007. The well is currently producing. However, it was down for
over four months due to damage to third party onshore facilities resulting from Hurricane Ike
in September 2008.
 
    
    High Island Block 37High Island Block 37 is located approximately 15 miles
south of Sabine Pass, offshore Texas, in an average water depth of approximately 36 feet. We
own an approximate 2.8% working interest in this lease that covers 5,760 acres. The lease is
operated by Seneca Resources Corporation and contains two wells. The A-2 well resumed
production in the first quarter of 2009 after being shut-in due to damage to third party
onshore facilities resulting from Hurricane Ike in
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September 2008. In early 2008, we elected
to participate in an exploratory well for a 2.8% working
interest. Drilling of the exploratory B-2 well commenced in mid-April 2008. The B-2 well was
determined to be non-commercial and was plugged and abandoned in the third quarter of 2008.
  Proved Oil and Gas Reserves
     7




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Proved Reserves  (1) (2)
 Present Valueof Future NetNet Oil
    
    
    Net Gas
    
    
    Cash InflowsReserves
    
    
    Reserves
    
    
    (Outflows) (1)(Mbbls)
    
    
    (MMcf)
    
    
    (in thousands)Proved ReservesGalveston Area Block 321
    
    
    0.3
    
    
    
    14
    
    
    
    81High Island Block 115
    
    
    0.4
    
    
    
    129
    
    
    
    383High Island Block 37
    
    
    0.1
    
    
    
    15
    
    
    
    46Total Proved Reserves
    
    
    0.8
    
    
    
    158
    
    
    $
    510Proved DevelopedGalveston Area Block 321
    
    
    0.3
    
    
    
    14
    
    
    
    81High Island Block 115
    
    
    0.4
    
    
    
    129
    
    
    
    383High Island Block 37
    
    
    0.1
    
    
    
    15
    
    
    
    46Total Proved Developed
    
    
    0.8
    
    
    
    158
    
    
    $
    510
 
 (1)
    
    The estimated present value of future net cash outflows from our proved
reserves has been determined by using prices of $44.60 per barrel of oil and
$5.26 per Mcf of gas, representing the December 31, 2008 prices for oil and gas
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, 2008, we reported no proved undeveloped reserves. Capital Expenditures for Proved Reserves
 Estimated Undiscounted Capital Expenditures  Associated with Plugging and Abandonment of Wells
 Years Ending December 31,2009
    
    2010
    
    2011
    
    2012
    
    2013Galveston Area Block 321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    High Island Block A-7
    
    
    
    
    
    
    265
    
    
    
    
    
    
    
    
    
    
    
    High Island Block 37
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    High Island Block 115
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
 8




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Production, Price and Cost Data
 Net Production, Price and Cost Data
 Years Ended December 31,2008
    
    2007
    
    2006Gas:Production (Mcf)
    
    
    44,700
    
    
    
    72,788
    
    
    
    312,146Revenue
    
    $
    526,522
    
    
    $
    476,224
    
    
    $
    2,131,415Average production per day (Mcf)(*)
    
    
    122.5
    
    
    
    199.4
    
    
    
    772.3Average sales price per Mcf
    
    $
    11.78
    
    
    $
    6.54
    
    
    $
    6.83Condensate:Production (Bbls)
    
    
    117
    
    
    
    177
    
    
    
    1,823Revenue
    
    $
    14,057
    
    
    $
    10,345
    
    
    $
    114,114Average production per day (Bbls)(*)
    
    
    0.3
    
    
    
    0.5
    
    
    
    5.0Average sales price per Bbl
    
    $
    120.25
    
    
    $
    58.45
    
    
    $
    62.60NGLs:Production (gallons)
    
    
    
    
    
    
    36,372
    
    
    
    137,139Revenue
    
    $
    
    
    
    $
    30,842
    
    
    $
    113,285Average production per day (gallons)(*)
    
    
    
    
    
    
    99.7
    
    
    
    375.7Average sales price per gallon
    
    $
    
    
    
    $
    0.85
    
    
    $
    0.83Production costs (**):Per Mcfe:
    
    $
    5.36
    
    
    $
    3.04
    
    
    $
    1.34
 
 (*)
    
    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. 2008 Drilling Activity
 Net Exploratory(1)2008
    
    2007Wells DrilledGulf of Mexico
Productive
    
    
    
    
    
    
    Dry
    
    
    1
    
    
    
    1
    
    
    
    
 
 (1)
    
    Gross interest reflects the total wells we participated in, regardless of
our ownership interest. 9




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Customers
  Oil and Gas
    
    PipelineSales
    
    Operations
    
    TotalYear 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
    
    
    $
    338,836Year Ended December 31, 2007:Apex Oil & Gas
    
    $
    
    
    
    $
    809,420
    
    
    $
    809,420W&T Offshore
    
    $
    
    
    
    $
    519,866
    
    
    $
    519,866Gryphon Exploration Co.
    
    $
    
    
    
    $
    341,406
    
    
    $
    341,406
 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.
   10




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Governmental Regulation
  Federal Regulation of Natural Gas Transportation.
   Federal Regulation of Oil Pipelines
 11




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Safety and Operational Regulations
 Federal Oil and Gas Leases
  Environmental Regulation
 12




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13




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Legislation and Rulemaking
   14




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Employees
  Environmental
  Executive Officers of the Registrant
  OfficerName
    
    Office
    
    Since
    
    AgeIvar Siem
    
    Chairman of the Board and Chief Executive Officer
    
    1989
    
    62Michael J. Jacobson
    
    President
    
    1990
    
    62Thomas W. Heath
    
    Executive Vice President and Secretary
    
    2007
    
    46T. Scott Howard
    
    Accounting Manager, Treasurer and Assistant Secretary
    
    2006
    
    37
 Ivar Siem
 Michael J. Jacobson
 15




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Thomas W. Heath
 T. Scott Howard
 Available Information
 http://www.blue-dolphin.com
 GLOSSARY OF CERTAIN OIL AND GAS TERMS
  Back-in After Payout Interest.
 Bbl.
 Bcf.
 Btu or British Thermal Unit.
 Condensate.
 Development Well.
 Exploratory Well.
 16




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Field.
 Leasehold Interest.
 Mbbls.
 Mcf.
 Mcfe.
 MMbtu.
 MMcf.
 MMcfe.
 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.
 17




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Reversionary Interest.
 Royalty Interest.
 Undivided Interest.
 Working interest.
 
 ITEM 1A. RISK FACTORS
 Risks Related to our Business
 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.
 We are primarily dependent on revenues from our pipeline systems and our working interests in three
oil and gas producing properties.
  18




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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.
  The geographic concentration of our assets may have a greater effect on us as compared to other
companies.
  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.
   19




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The global financial crisis may have impacts on our business and financial condition that we
currently cannot predict.
  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.
   20




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We cannot control the activities on properties we do not operate.
   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;
 21




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
    
    fires;
    
    pollution; and
    
    other environmental risks.
  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.
  22




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ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   23




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Price for Common Stock
   Quarter Ended
    
    High
    
    Low2008December 31, 2008
    
    $
    0.84
    
    
    $
    0.33September 30, 2008
    
    $
    2.09
    
    
    $
    0.83June 30, 2008
    
    $
    2.39
    
    
    $
    1.25March 31, 2008
    
    $
    1.94
    
    
    $
    1.232007December 31, 2007
    
    $
    3.15
    
    
    $
    1.21September 30, 2007
    
    $
    3.80
    
    
    $
    2.92June 30, 2007
    
    $
    4.01
    
    
    $
    2.97March 31, 2007
    
    $
    4.33
    
    
    $
    2.81
 Dividend Policy
   24




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ITEM 6. SELECTED FINANCIAL DATA
  Quarters EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    Total2008Revenue 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 income (loss)
    
    
    (525,374
    )
    
    
    (175,479
    )
    
    
    (442,737
    )
    
    
    (822,650
    )
    
    
    (1,966,240
    )Income (loss) per share:Basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.17
    )2007Revenue from operations:Pipeline operations
    
    $
    559,813
    
    
    
    531,762
    
    
    
    717,118
    
    
    
    685,713
    
    
    
    2,494,406Oil and gas sales
    
    
    295,183
    
    
    
    89,165
    
    
    
    68,470
    
    
    
    64,593
    
    
    
    517,411Total Revenue from operations
    
    
    854,996
    
    
    
    620,927
    
    
    
    785,588
    
    
    
    750,306
    
    
    
    3,011,817Cost of operations:Pipeline operating expenses
    
    
    516,171
    
    
    
    562,692
    
    
    
    349,293
    
    
    
    360,132
    
    
    
    1,788,288Lease operating expenses
    
    
    67,318
    
    
    
    90,464
    
    
    
    91,202
    
    
    
    (8,667
    )
    
    
    240,317Depletion, depreciation and amortization
    
    
    137,176
    
    
    
    152,203
    
    
    
    134,041
    
    
    
    131,284
    
    
    
    554,704General and administrative expenses
    
    
    483,362
    
    
    
    623,390
    
    
    
    439,877
    
    
    
    449,795
    
    
    
    1,996,424Stock Based compensation
    
    
    
    
    
    
    13,440
    
    
    
    40,320
    
    
    
    128,092
    
    
    
    181,852Accretion expense
    
    
    30,391
    
    
    
    30,391
    
    
    
    30,392
    
    
    
    29,210
    
    
    
    120,384Total cost of operations
    
    
    1,234,418
    
    
    
    1,472,580
    
    
    
    1,085,125
    
    
    
    1,089,846
    
    
    
    4,881,969Other income (expense),
including income tax expense
    
    
    60,234
    
    
    
    67,168
    
    
    
    61,389
    
    
    
    55,789
    
    
    
    244,580Net income (loss)
    
    
    (319,188
    )
    
    
    (784,485
    )
    
    
    (238,148
    )
    
    
    (283,751
    )
    
    
    (1,625,572
    )Income (loss) per share:Basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.14
    )
 25




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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  In September 2008, although we elected not to
participate in an exploratory well in Galveston Area Block 321, we maintained a 0.5%
overriding royalty interest in the exploratory well. Drilling of the well commenced in late
December 2008 and continued through early January 2009. The well was successfully completed
and we expect production to commence in the second quarter of 2009. Production will be
delivered through the Blue Dolphin Pipe Line System.
    
    High Island Block 115  During 2007, a well in High Island Block 115 that had
previously earned us a 2.5% working interest was re-entered and sidetracked successfully.
Production from the well commenced in late November 2007. The well resumed production in the
first quarter of 2009 after being shut-in, due to damage to third party onshore facilities
resulting from Hurricane Ike in September 2008.
    
    High Island Block 37  The A-2 well resumed production in the first quarter of
2009 after being shut-in due to damage to third party onshore facilities resulting from
Hurricane Ike in September 2008. In early 2008, we elected to participate in an exploratory
well in High Island Block 37 at our 2.8% working interest. Drilling of the exploratory B-2
well commenced in mid-April 2008. The B-2 well was determined to be non-commercial and was
plugged and abandoned in the third quarter of 2008.
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##### Table of Contents



Results of Operations
  2008 Compared to 2007
 Revenue from Pipeline Operations.
 Revenue from Oil and Gas Sales.
  Pipeline Operating Expenses .
 Lease Operating Expenses.
 27




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##### Table of Contents



Depletion, Depreciation and Amortization .
 Impairment of Oil and Gas Properties.
 General and Administrative Expenses, and Stock Based Compensation.
 Interest and Other Income.
 Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
 Revenue from Pipeline Operations.
 Revenue from Oil and Gas Sales.
 Pipeline Operating Expenses.
 Lease Operating Expenses.
 General and Administrative Expenses and Stock Based Compensation.
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##### Table of Contents



Depletion, Depreciation and Amortization.
 Other Income.
 Liquidity and Capital Resources
 Sources and Uses of Cash.
  For Year Ended December 31,(in millions)2008
    
    
    2007Cash Flow from OperationsLoss from operations
    
    
    ($0.7
    )
    
    
    ($0.7
    )Change in current assets and liabilities
    
    
    0.1
    
    
    
    0.5Total cash flow from operations
    
    
    ($0.6
    )
    
    
    ($0.2
    )Cash OutflowsCapital expenditures
    
    
    ($0.8
    )
    
    
    ($0.1
    )Total cash outflows
    
    
    ($0.8
    )
    
    
    ($0.1
    )Total change in cash flows
    
    
    ($1.4
    )
    
    
    ($0.3
    )
  Critical Accounting Policies
  29




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##### Table of Contents



Accounting for the Impairment or Disposal of Long-Lived Assets . Accounting for the Impairment or Disposal of
Long-Lived Assets
 Accounting for Asset Retirement Obligations
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 . Accounting for Uncertainty in Income Taxes  An Interpretation
of FASB Statement No. 109 Accounting for Income Taxes
  30




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##### Table of Contents



Fair Value Measurements. Fair Value Measurements Effective Date of FASB Statement
No. 157 ,
 Fair Value Option for Financial Assets and Financial Liabilities. The Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115
 Recently Issued Accounting Pronouncements and Accounting Developments
 Business Combinations Business Combinations Business Combinations
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##### Table of Contents



Non-controlling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51 . Non-controlling Interests in Consolidated
Financial Statements  An Amendment of ARB No. 51
 Hierarchy of Generally Accepted Accounting Principles. The Hierarchy of Generally Accepted Accounting Principles
 Revisions to the SECs Oil and Gas Reporting Disclosure Requirements.
 
    
    Oil and gas reserves must be reported using the average price over the prior 12 month
period, rather than year-end prices;
 
    
    Companies will be allowed to report, on an optional basis, probable and possible reserves;
 
    
    Non-traditional reserves, such as oil and gas extracted from coal and shales, will be
included in the definition of oil and gas producing activities;
 
    
    Companies will be permitted to use new technologies to determine proved reserves, as long
as those technologies have been demonstrated empirically to lead to reliable conclusions
with respect to reserve volumes;
 
    
    Companies will be required to disclose, in narrative form, additional details on their
proved undeveloped reserves (PUDs), including the total quantity of PUDs at year end, any
material changes to PUDs that occurred during the year, investments and progress made to
convert PUDs to developed oil and gas reserves and an explanation of the reasons why
material concentrations of PUDs in individual fields or countries have remained
undeveloped for five years or more after disclosure as PUDs;
 
    
    Companies will be required to report the qualifications and measures taken to assure the
independence
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##### Table of Contents



and objectivity of any business entity or employee primarily responsible for
preparing or auditing the reserves estimates.
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  Report of Independent Registered Public Accounting Firm
    
    
    34Consolidated Balance Sheets at December 31, 2008 and 2007
    
    
    35Consolidated Statements of Operations
Years Ended December 31, 2008 and 2007
    
    
    36Consolidated Statements of Stockholders Equity
Years Ended December 31, 2008 and 2007
    
    
    37Consolidated Statements of Cash Flows
Years Ended December 31, 2008 and 2007
    
    
    38Notes to Consolidated Financial Statements
    
    
    39
  33




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Report of Independent Registered Public Accounting Firm
 
    
 34




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
 December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,864,876
    
    
    $
    5,226,779Accounts receivable, net of allowance for doubtful accounts
    
    
    442,715
    
    
    
    693,977Prepaid expenses and other current assets
    
    
    436,242
    
    
    
    508,517Total current assets
    
    
    4,743,833
    
    
    
    6,429,273Property and equipment, at cost:Oil and gas properties (full-cost method)
    
    
    1,286,700
    
    
    
    751,175Pipelines
    
    
    4,659,686
    
    
    
    4,659,686Onshore separation and handling facilities
    
    
    1,919,402
    
    
    
    1,919,402Land
    
    
    860,275
    
    
    
    860,275Other property and equipment
    
    
    290,313
    
    
    
    279,4689,016,376
    
    
    
    8,470,006Less: Accumulated depletion, depreciation and amortization
    
    
    4,494,059
    
    
    
    3,966,087Total property and equipment, net
    
    
    4,522,317
    
    
    
    4,503,919Other assets
    
    
    9,463
    
    
    
    10,640Total assets
    
    $
    9,275,613
    
    
    $
    10,943,832LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    389,268
    
    
    $
    432,974Accrued expenses and other liabilities
    
    
    9,593
    
    
    
    109,628Asset retirement obligations  current portion
    
    
    
    
    
    
    262,187Other long-term liabilities  current portion
    
    
    25,996
    
    
    
    25,996Total current liabilities
    
    
    424,857
    
    
    
    830,785Long-term liabilities:Asset retirement obligations, net of current portion
    
    
    2,183,190
    
    
    
    1,831,520Other long-term liabilities, net of current portion
    
    
    25,996
    
    
    
    51,992Total long-term liabilities
    
    
    2,209,186
    
    
    
    1,883,512Total liabilities
    
    
    2,634,043
    
    
    
    2,714,297Commitments and contingenciesStockholders equity:Common stock ($.01 par value, 25,000,000 shares authorized,
11,691,243 and 11,610,363 shares issued and outstanding at
December 31, 2008 and 2007, respectively)
    
    
    116,912
    
    
    
    116,104Additional paid-in capital
    
    
    32,495,417
    
    
    
    32,117,950Accumulated deficit
    
    
    (25,970,759
    )
    
    
    (24,004,519
    )Total stockholders equity
    
    
    6,641,570
    
    
    
    8,229,535Total liabilities and stockholders equity
    
    $
    9,275,613
    
    
    $
    10,943,832
  35




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
 Years Ended December 31,2008
    
    
    2007Revenue from operations:Pipeline operations
    
    $
    2,448,831
    
    
    $
    2,494,406Oil and gas sales
    
    
    540,579
    
    
    
    517,411Total revenue from operations
    
    
    2,989,410
    
    
    
    3,011,817Cost of operations:Pipeline operating expenses
    
    
    1,722,642
    
    
    
    1,788,288Lease operating expenses
    
    
    243,450
    
    
    
    240,317Depletion, depreciation and amortizaton
    
    
    527,972
    
    
    
    554,704Impairment of oil and gas properties
    
    
    213,563
    
    
    
    General and administrative expenses
    
    
    1,953,496
    
    
    
    1,996,424Stock-based compensation
    
    
    298,275
    
    
    
    181,852Accretion expense
    
    
    108,020
    
    
    
    120,384Total cost of operations
    
    
    5,067,418
    
    
    
    4,881,969Loss from operations
    
    
    (2,078,008
    )
    
    
    (1,870,152
    )Other income (expense):Interest and other income
    
    
    120,069
    
    
    
    248,637Loss on disposal of assets
    
    
    (1,886
    )
    
    
    Total other income (expense)
    
    
    118,183
    
    
    
    248,637Loss before income taxes
    
    
    (1,959,825
    )
    
    
    (1,621,515
    )Income tax expense
    
    
    (6,415
    )
    
    
    (4,057
    )Net loss
    
    $
    (1,966,240
    )
    
    $
    (1,625,572
    )Loss per common share:Basic
    
    $
    (0.17
    )
    
    $
    (0.14
    )Diluted
    
    $
    (0.17
    )
    
    $
    (0.14
    )Weighted average number of common shares outstanding:Basic
    
    
    11,642,391
    
    
    
    11,568,311Diluted
    
    
    11,642,391
    
    
    
    11,568,311
  36




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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,
2006
    
    
    11,555,452
    
    
    $
    115,555
    
    
    $
    31,835,137
    
    
    $
    (22,378,947
    )
    
    $
    9,571,745Issuance under stock plans
    
    
    27,938
    
    
    
    279
    
    
    
    22,071
    
    
    
    
    
    
    
    22,350Common stock issued for
services
    
    
    26,973
    
    
    
    270
    
    
    
    78,890
    
    
    
    
    
    
    
    79,160Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    181,852
    
    
    
    
    
    
    
    181,852Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,625,572
    )
    
    
    (1,625,572
    )Balance at December 31,
2007
    
    
    11,610,363
    
    
    $
    116,104
    
    
    $
    32,117,950
    
    
    $
    (24,004,519
    )
    
    $
    8,229,535Issuance under stock plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common 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
    )
    
    $
    6,641,570
   37




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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 Years Ended December 31,2008
    
    
    2007OPERATING ACTIVITIESNet loss
    
    $
    (1,966,240
    )
    
    $
    (1,625,572
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depletion, depreciation and amortization
    
    
    527,972
    
    
    
    554,704Impairment of oil and gas properties
    
    
    213,563
    
    
    
    Accretion expense
    
    
    108,020
    
    
    
    120,384Stock-based compensation
    
    
    298,275
    
    
    
    181,852Common stock issued for services
    
    
    80,000
    
    
    
    79,160Bad debt expense
    
    
    26,699
    
    
    
    Loss on disposal of assets
    
    
    1,886
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    224,563
    
    
    
    480,342Prepaid expenses and other current assets
    
    
    73,452
    
    
    
    (159,991
    )Abandonment costs incurred
    
    
    (18,537
    )
    
    
    (76,290
    )Accounts payable, accrued expenses and other liabilities
    
    
    (169,737
    )
    
    
    262,245Net cash used in operating activities
    
    
    (600,084
    )
    
    
    (183,166
    )INVESTING ACTIVITIESExploration and development costs
    
    
    (749,088
    )
    
    
    Capital expenditures
    
    
    (12,731
    )
    
    
    (111,552
    )Net cash used in investing activities
    
    
    (761,819
    )
    
    
    (111,552
    )FINANCING ACTIVITIESProceeds from exercise of stock options
    
    
    
    
    
    
    22,350Net cash provided by financing activities
    
    
    
    
    
    
    22,350Decrease in cash and cash equivalents
    
    
    (1,361,903
    )
    
    
    (272,368
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    5,226,779
    
    
    
    5,499,147CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    3,864,876
    
    
    $
    5,226,779Non-cash activities:Change in estimate for asset retirement obligations and
related
fixed assets
    
    $
    
    
    
    $
    35,205
  38




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 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 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.ReclassificationsCertain reclassifications of prior year amounts have been made to conform to the current
year presentation.Cash EquivalentsCash equivalents include liquid investments with an original maturity of three months or
less. 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.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 2008, our
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 unamortized cost exceeded the present value of estimated future
net revenues and we recorded an impairment to our oil and gas properties of $213,563.
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 Statement of Financial Accounting Standards (SFAS) No. 144, 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.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, the Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, as amended, 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.SFAS No. 143 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, 2008 and 2007
(in thousands).
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##### Table of Contents



BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 
 Years Ended December 31,2008
    
    
    2007Beginning asset retirement obligations
    
    $
    2,094
    
    
    $
    2,014Liabilities incurred
    
    
    
    
    
    
    36Liabilities settled
    
    
    (19
    )
    
    
    (76
    )Accretion expense
    
    
    108
    
    
    
    120Ending asset retirement obligations
    
    $
    2,183
    
    
    $
    2,094
 Stock-Based Compensation
 Share-Based Payments Accounting for
Stock Issued to Employees
 Accounting for Stock-Based Compensation
 Recognition of Oil and Gas Revenue
  Recognition of Pipeline Transportation Revenue
  Allowance for Doubtful Accounts
  41




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
  Income Taxes
 Accounting for Income Taxes
 Earnings Per Share
 Earnings per
Share
  42




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
  Year EndedDecember 31,Basic and Diluted
    
    2008
    
    
    2007Net loss
    
    $
    (1,966,240
    )
    
    $
    (1,625,572
    )Weighted average number of shares of common
stock outstanding and potential dilutive shares
of common stock
    
    
    11,642,391
    
    
    
    11,568,311Per share amount
    
    $
    (0.17
    )
    
    $
    (0.14
    )
 Environmental
  Recently Adopted Accounting Pronouncements
 Fair Value Measurements. Fair Value
Measurements
 The Fair Value Option for Financial Assets and Financial Liabilities . The Fair Value Option for Financial Assets and Financial
Liabilities
 43




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 Recently Issued Accounting Pronouncements
 Business Combinations . Business
Combinations Business Combinations
 Non-controlling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51. Non-controlling Interests in
Consolidated Financial Statements  An Amendment of ARB No. 51
 Hierarchy of Generally Accepted Accounting Principles. The Hierarchy of Generally Accepted Accounting Principles
 (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.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 
 (3)
    
    Income TaxesIncome tax expense consisted of $6,415 and $4,057 and was related to state income tax for
the years ended 2008 and 2007, respectively.The income tax effects of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007 are presented
below:
 2008
    
    
    2007Deferred tax assets:Net operating loss and capital loss carryforwards
    
    $
    5,881,885
    
    
    $
    5,700,789AMT credit carryforward
    
    
    11,564
    
    
    
    11,564Basis differences in property and equipment
    
    
    314,192
    
    
    
    151,268Total deferred tax assets
    
    
    6,207,641
    
    
    
    5,863,981Less: valuation allowance
    
    
    (6,207,641
    )
    
    
    (5,863,981
    )Deferred tax assets, net
    
    $
    
    
    
    $
    
   Years Ended December 31,2008
    
    2007Expected tax rate
    
    
    (34.00
    %)
    
    
    (34.00
    %)Change in valuation allowance recognized
in earnings
    
    
    34.33
    %
    
    
    34.25
    %0.33
    %
    
    
    0.25
    %
  Accounting for Uncertainty in Income Taxes  An
Interpretation of FASB Statement No. 109 Accounting for Income Taxes
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 The evaluation of a tax position in accordance with FIN 48 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-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 FIN 48 have been applied to all of our material tax positions taken
through the date of adoption and through the fiscal year ended December 31, 2008. 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 prescribed by FIN 48. 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 guidance provided in SFAS
109, we have properly determined the impact of the newly-enacted legislation in the
determination of our reported state current and deferred income tax liability.(4)
    
    WarrantsAt December 31, 2008, the range of warrant prices for shares under warrants and the
weighted-average remaining contractual life was as follows:
 Warrants Outstanding, Fully Vested and Exercisable at December 31, 2008Weighted AverageRemainingContractual Life in
    
    Weighted AverageExercise Prices
    
    Number Outstanding
    
    Years
    
    Exercise Price$6.00 to $6.50
    
    
    16,440
    
    
    
    0.3
    
    
    $
    6.37
  46




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
  Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Warrants
    
    ExerciseWarrants
    
    Price
    
    Exercisable
    
    PriceOutstanding, December 31, 2006
    
    
    16,440
    
    
    $
    5.39
    
    
    
    16,440
    
    
    $
    5.39Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Outstanding, December 31, 2007
    
    
    16,440
    
    
    $
    5.88
    
    
    
    16,440
    
    
    $
    5.88Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Outstanding, December 31, 2008
    
    
    16,440
    
    
    $
    6.37
    
    
    
    16,440
    
    
    $
    6.37
 (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 from 650,000
shares to 1,200,000 shares after approval by our stockholders at the 2007 Annual Meeting of
Stockholders, which was held on May 30, 2007. As of December 31, 2008, we had 210,040
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.SFAS 123(R) states that 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.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
Staff Position FAS123(R)-3, Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards.Pursuant to SFAS 123(R), 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, 2008 and 2007.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 
 Years Ended December 31,2008
    
    2007Stock options granted
    
    
    75,000
    
    
    
    378,500Risk-free interest rate
    
    
    3.23
    %
    
    
    4.31 to 4.80
    %Expected term, in years
    
    
    6.00
    
    
    
    3.75 to 5.97Expected volatility
    
    
    90.70
    %
    
    
    81.67 to 92.40
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
     48




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 Year Ended December 31, 2008WeightedWeighted
    
    Average
    
    AggregateAverage
    
    Remaining
    
    IntrinsicShares
    
    Exercise Price
    
    Contractual Life
    
    ValueOptions outstanding at
December 31, 2006
    
    
    143,997
    
    
    $
    1.56Options granted
    
    
    378,500
    
    
    $
    2.93Options exercised
    
    
    (27,938
    )
    
    $
    0.80Options expired or cancelled
    
    
    (3,000
    )
    
    $
    6.00Options 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
    
    
    $
    2.43
    
    
    
    6.6
    
    
    $
    Options exercisable at
December 31, 2008
    
    
    271,559
    
    
    $
    2.35
    
    
    
    5.4
    
    
    $
    
  49




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 The following table summarizes additional information about stock options outstanding at
December 31, 2008:
 Options Outstanding
    
    Options ExercisableAverage
    
    
    
    
    
    
    
    
    
    WeightedRemaining
    
    
    
    
    
    
    
    
    
    AverageRange of Exercise
    
    Number
    
    Contractual Life
    
    Weighted Average
    
    Number
    
    ExercisePrices
    
    Outstanding
    
    (Years)
    
    Exercise Price
    
    Exercisable
    
    Price$0.35 to $0.80
    
    
    70,830
    
    
    
    4.3
    
    
    $
    0.44
    
    
    
    70,830
    
    
    $
    0.44$1.36 to $1.90
    
    
    98,429
    
    
    
    8.1
    
    
    $
    1.44
    
    
    
    23,429
    
    
    $
    1.71$2.81 to $2.99
    
    
    368,500
    
    
    
    7.0
    
    
    $
    2.91
    
    
    
    159,500
    
    
    $
    2.88$
    6.00
    
    
    
    17,800
    
    
    
    1.4
    
    
    $
    6.00
    
    
    
    17,800
    
    
    $
    6.00555,559
    
    
    
    
    
    
    
    
    
    
    
    271,559
 The following summarizes the net change in non-vested stock options for the years shown:
 WeightedAverageGrant DateShares
    
    
    Fair ValueNon-vested at December 31, 2006
    
    
    
    
    
    $
    0.00Granted
    
    
    378,500
    
    
    $
    2.06Canceled or expired
    
    
    
    
    
    $
    0.00Vested
    
    
    (28,500
    )
    
    $
    1.96Non-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
    
    
    $
    1.83
 As of December 31, 2008, there was $379,027 of unrecognized compensation cost related to
284,000 non-vested stock options granted under the existing stock incentive plan, the 2000
Plan. The weighted average period over which the unrecognized compensation cost will be
recognized is 14 months. Subsequent to year end, due to the departure of an officer, 75,000
options were forfeited. In subsequent periods, stock compensation expense will be net of
the associated expense for the forfeited options.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 (6)
    
    LeasesWe have various operating leases that extend through April 2017. Certain of these operating
leases are non-cancelable through May 2010. The following is a schedule of future minimum
lease payments under non-cancelable operating leases exceeding one year at December 31,
2008:
 FutureMinimumLeaseYears Ending December 31,
    
    Payments2009
    
    
    107,0512010
    
    
    172,646$
    279,697
 Rent expense on operating leases for the years indicated are as follows:
 LeaseYears Ended December 31,
    
    Expense2008
    
    $
    116,1172007
    
    $
    102,980
 (7)
    
    Commitments and ContingenciesWe are involved in various claims and legal actions arising in the ordinary course of
business. In our opinion, the ultimate disposition of these matters will not have a
material effect on our consolidated financial position, results of operations or cash flows.Pursuant to the terms of an employment agreement effective May 1, 2007, we are obligated to
pay a base salary of $175,000 per year for the three-year term of the agreement.
 (8)
    
    Business Segment InformationOur operations are conducted in two principal business segments: (i) pipeline transportation
services and (ii) oil and gas exploration and production. Our segments are managed jointly
mainly due to the size of the Company. Our management uses earnings before interest expense
and income taxes (EBIT) to assess the operating results and effectiveness of our business
segments, which consist of our consolidated businesses and investments. We believe EBIT is
useful to our investors because it allows them to evaluate our operating performance using
the same performance measure analyzed internally by our management. We define EBIT as net
income (loss) adjusted for (i) items that do not impact our income or loss from continuing
operations, such as the impact of accounting changes, (ii) income taxes and (iii) interest
expense (income). We exclude interest expense (income) and other expense or income not
pertaining to the operations of our segments from this measure so that investors may
evaluate our current operating results without regard to our financing methods or capital
structure. We understand that EBIT may not be comparable to measurements used by other
companies. Additionally, EBIT should be
considered in conjunction with net income and other performance measures such as operating
cash flows.Below is a reconciliation of our EBIT (by segment) for each of the two years ended:
 51




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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
    
    
    
    741,535EBIT
    
    $
    (1,357,611
    )
    
    $
    (371,286
    )
    
    $
    (349,112
    )
    
    $
    (2,078,008
    )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 & payable and recorded net assets. December 31, 2007SegmentOil and GasPipeline
    
    
    Exploration &
    
    
    Corporate &Transportation
    
    
    Production
    
    
    Other(1)
    
    
    TotalRevenues
    
    $
    2,494,406
    
    
    $
    517,411
    
    
    $
    
    
    
    $
    3,011,817Operation cost(2)
    
    
    3,300,130
    
    
    
    557,584
    
    
    
    469,551
    
    
    
    4,327,265Depletion, depreciation and
amortization
    
    
    413,342
    
    
    
    135,650
    
    
    
    5,712
    
    
    
    554,704EBIT
    
    $
    (1,219,066
    )
    
    $
    (175,823
    )
    
    $
    (475,263
    )
    
    $
    (1,870,152
    )Capital expenditures
    
    $
    106,842
    
    
    $
    
    
    
    $
    4,710
    
    
    $
    111,552Identifiable assets(3)
    
    $
    5,769,899
    
    
    $
    344,541
    
    
    $
    4,829,392
    
    
    $
    10,943,832
 
 (1)
    
    Includes unallocated G&A costs associated with corporate maintenance costs and
legal expenses. It also includes as identifiable assets corporate available cash of
$4.7 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 & payable and recorded net assets. 52




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 Our primary market area is the Texas and Louisiana Gulf Coast region of the United States.
We have a concentration of credit risk with customers in the energy industry. Our customers
may be similarly affected by changes in economic, regulatory or other factors. Trade
receivables are generally not collateralized; however, our customers historical and future
credit positions are thoroughly analyzed prior to extending credit. Revenues from major
customers exceeding 10% of revenues were as follows for the period indicated:
 Oil and Gas
    
    PipelineSales
    
    Operations
    
    TotalYear 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
    
    
    $
    338,836Year Ended December 31, 2007:Apex Oil & Gas
    
    $
    
    
    
    $
    809,420
    
    
    $
    809,420W&T Offshore
    
    $
    
    
    
    $
    519,866
    
    
    $
    519,866Gryphon Exploration Co.
    
    $
    
    
    
    $
    341,406
    
    
    $
    341,406
 (9)
    
    Supplemental Oil and Gas InformationThe following supplemental information regarding our oil and gas activities is presented
pursuant to the disclosure requirements promulgated by the Securities and Exchange
Commission and SFAS No. 69, Disclosures about Oil and Gas Producing Activities.Associated with our non-operating interest in High Island Block 37, we recognized gas and
oil sales revenues of approximately $250,000 and $300,000 in 2008 and 2007, respectively,
and lease operating expenses of approximately $127,000 and $32,000 in 2008 and 2007,
respectively. We have a working interest of approximately 2.8% in two producing wells in
the block. The A-2 well resumed production in the first quarter of 2009 after being shut-in
due to damage to third party onshore facilities resulting from Hurricane Ike in September
2008.Associated with our non-operated interest in High Island Block 115, we recognized gas and
oil sales revenues of approximately $290,000 and $30,000 in 2008 and 2007, respectively, and
lease operating expenses of approximately $116,000 and $8,000 in 2008 and 2007,
respectively. We have a working interest of 2.5% in one zone of a single well in the lease.
The well resumed production in the first quarter of 2009 after being shut-in due to damage
to third party onshore facilities resulting from Hurricane Ike in September 2008.
 Estimated Quantities of Proved Oil and Gas Reserves (unaudited)Set forth below is a summary of the changes in the estimated quantities of our crude oil and
condensate, and gas reserves for the periods indicated, as estimated by us at December 31,
2008 and 2007. All of our reserves are located within the United States of America. Proved
reserves cannot be measured exactly because the estimation of reserves involves numerous
judgmental determinations. Accordingly, reserve estimates must be continually revised as a
result of new information obtained from drilling and production history, new geological and
geophysical data and changes in economic conditions.
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 Proved reserves are estimated quantities of gas, crude oil, and condensate which geological
and engineering data demonstrate, with reasonable certainty, to be recoverable in future
years from known reservoirs under existing economic and operating conditions. Proved
developed reserves are proved reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods.
 Oil
    
    GasQuantity of Oil and Gas Reserves
    
    (Bbls)
    
    (Mcf)Total proved reserves at December 31, 2006:
    
    
    153
    
    
    
    108,047Revisions to previous estimates
    
    
    64
    
    
    
    (22,045
    )Extensions, discoveries, improved recovery and other additions
    
    
    806
    
    
    
    164,456Purchase of reserves in place
    
    
    
    
    
    
    Sales of reserves in place
    
    
    
    
    
    
    Production
    
    
    (177
    )
    
    
    (72,787
    )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
    
    
    
    158,218Proved developed reserves:December 31, 2008
    
    
    769
    
    
    
    158,218December 31, 2007
    
    
    846
    
    
    
    177,671Total proved reserves:December 31, 2008
    
    
    769
    
    
    
    158,218December 31, 2007
    
    
    846
    
    
    
    177,671
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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
 Capitalized Costs of Oil and Gas Producing Activities
  December 31,
    
    
    December 31,2008
    
    
    2007Unproved properties and prospect generation
costs not being amortized
    
    $
    
    
    
    $
    Proved properties being amortized
    
    
    1,286,700
    
    
    
    751,175Total capitalized costs
    
    
    1,286,700
    
    
    
    751,175Accumulated depreciation, depletion and amortization
    
    
    (776,467
    )
    
    
    (675,855
    )Net capitalized costs
    
    $
    510,233
    
    
    $
    75,320
 Costs Incurred in Oil and Gas Producing Activities
  Years Ended December 31,2008
    
    
    2007Costs incurred:Acquisition of proved properties
    
    $
    
    
    
    $
    Acquisition of unproved properties
    
    
    
    
    
    
    Exploration costs
    
    
    749,088
    
    
    
    Development costs
    
    
    
    
    
    
    Total costs incurred
    
    $
    749,088
    
    
    $
    
  55




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
 Results of Operations for Oil and Gas Producing Activities
  Years Ended December 31,2008
    
    
    2007Revenues from oil and gas producing activities
    
    $
    540,579
    
    
    $
    517,411Production costs
    
    
    (243,450
    )
    
    
    (240,317
    )Depreciation, depletion, and amortization
    
    
    (104,055
    )
    
    
    (135,650
    )Impairment of oil and gas properties
    
    
    (213,563
    )
    
    
    Pretax income from producing activities
    
    
    (20,489
    )
    
    
    141,444Income tax expense/estimated loss carryforward benefit
    
    
    324
    
    
    
    (354
    )Results of oil and gas producing activities (excluding
corporate overhead and interest costs)
    
    $
    (20,165
    )
    
    $
    141,090
 Standardized Measure of Discounted Future Net Cash Flows (unaudited)
  Years Ended December 31,2008
    
    
    2007Future cash inflows
    
    $
    866,600
    
    
    $
    1,342,000Future development costs
    
    
    
    
    
    
    (395,000
    )Future production costs
    
    
    (267,900
    )
    
    
    (129,000
    )Future income taxes
    
    
    
    
    
    
    (278,120
    )10% discount factor
    
    
    (88,500
    )
    
    
    (70,620
    )Standardized measure of discounted
future net cash inflows (outflows)
    
    $
    510,200
    
    
    $
    469,260
 
 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: (1) multiplying
estimated quantities of proved reserves to be produced during each year by year-end
prices and (2) deducting estimated expenditures to be incurred during each year to
develop and produce the proved reserves (based on year-end costs).  56




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BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES  Notes to Consolidated Financial Statements (Continued)
 Standardized Measure of Discounted Future Net Cash Flows
 Years Ended December 31,2008
    
    
    2007Sales and transfers, net of production costs
    
    $
    (297,129
    )
    
    $
    (277,094
    )Net change in sales and transfer prices, net of
production costs
    
    
    (377,061
    )
    
    
    16,380Extension, discoveries and improved recovery, net
of future production and development costs
    
    
    404,129
    
    
    
    987,094Development costs incurred during the period that
reduced future development costs
    
    
    18,500
    
    
    
    76,290Changes in estimated future development cost
    
    
    67,296
    
    
    
    (252
    )Revisions of quantity estimates
    
    
    (27,964
    )
    
    
    (132,353
    )Accretion of discount
    
    
    10,700
    
    
    
    8,900Net change in income taxes
    
    
    241,740
    
    
    
    (255,680
    )Change in production rates (timing) and other
    
    
    762
    
    
    
    (12,765
    )Net change
    
    $
    40,973
    
    
    $
    410,520
  
 57




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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 Controls over Financial Reporting
  58




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
   59




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##### Table of Contents



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
 Equity Compensation Plan Information
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   60




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS
 No.
    
    Description3.1
    (1)
    
    Amended and Restated Certificate of Incorporation of the Company.3.2
    (9)
    
    Amended and Restated Bylaws of the Company.4.1
    (2)
    
    Specimen Certificate of our Company common stock.4.3
    (7)
    
    Form of Promissory Note issued pursuant to the Note and Warrant Purchase
Agreement dated September 8, 2004.*
    
    
    10.1
    (3)
    
    Blue Dolphin Energy Company 2000 Stock Incentive Plan.*
    
    
    10.2
    (4)
    
    Amendment to the Blue Dolphin Energy Company 2000 Stock Incentive Plan.10.3
    (5)
    
    Second Amendment to the Blue Dolphin Energy Company 2000 Stock Incentive
Plan.10.4
    (6)
    
    Purchase and Sale Agreement by and between Blue Dolphin Pipe Line Company
and MCNIC, dated February 1, 2002.10.5
    (7)
    
    Sale of American Resources Offshore, Inc. Common Stock Agreement between
Blue Dolphin Exploration Co. and Ivar Siem, dated September 8, 2004.10.6
    (8)
    
    Purchase and Sale Agreement by and between Blue Dolphin Energy Company, WBI
Pipeline & Storage Group, Inc. and SemGas LP, dated October 29, 2004.10.7
    (10)
    
    Amendment to the Asset Purchase Agreement by and among MCNIC Offshore
Pipeline and Processing Company and Blue Dolphin Pipe Line Company dated
February 28, 2005.10.8
    (12)
    
    Placement Agency Agreement by and between Blue Dolphin Energy Company and
Starlight Investments, LLC dated May 27, 2005.10.9
    (13)
    
    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, 2006.14.2
    (11)
    
    Code of Ethics applicable to the Chairman, Chief Executive Officer and
Senior Financial Officer.**
    
    
    21.1
    
    
    List of Subsidiaries of the Company.**
    
    
    23.1
    
    
    Consent of UHY LLP.**
    
    
    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.
 
 *
    
    Management Compensation Plan.**
    
    Filed herewith. 61




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##### Table of Contents



No.
    
    Description**
    
    
    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.
 
 (1)
    
    Incorporated herein by reference to Exhibits filed in connection with the definitive Proxy
Statement of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
October 13, 2004 (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 Exhibits filed in connection with the Proxy Statement of
Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated May 18, 2000
(Commission File No. 000-15905).(4)
    
    Incorporated herein by reference to Exhibits 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 Exhibits filed in connection with the definitive Proxy
Statement of Blue Dolphin Energy Company under the Securities and Exchange Act of 1934, dated
April 27, 2007 (Commission File No. 000-15905).(6)
    
    Incorporated herein by reference to Exhibits filed in connection with Form 10-KSB of Blue
Dolphin Energy Company under the Securities and Exchange Act of 1934, dated July 23, 2002
(Commission File No. 000-15905).(7)
    
    Incorporated herein by reference to Exhibits 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 Exhibits filed in connection with Form 8-K of Blue
Dolphin Energy Company under the Securities and Exchange Act of 1934, dated December 6, 2004
(Commission File No. 000-15905).(9)
    
    Incorporated herein by reference to Exhibits 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 Exhibits filed in connection with Form 8-K of Blue
Dolphin Energy Company under the Securities and Exchange Act of 1934, dated March 2, 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).  63




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##### Table of Contents



SIGNATURES
  BLUE DOLPHIN ENERGY COMPANY
(Registrant)By:
    /s/ Ivar SiemIvar Siem(Chairman and CEO)Date: March 12, 2009  Signature
    
    Title
    
    Date/s/ Ivar Siem

Ivar Siem
    
    Chairman and CEO
(Principal Executive Officer)
    
    March 12, 2009/s/ T. Scott Howard

T. Scott Howard
    
    Accounting Manager, Treasurer
and Assistant Secretary
(Principal Accounting and
Financial Officer)
    
    March 12, 2009/s/ Laurence N. Benz

Laurence N. Benz
    
    Director
    
    March 12, 2009/s/ John N. Goodpasture

John N. Goodpasture
    
    Director
    
    March 12, 2009/s/ Harris A. Kaffie

Harris A. Kaffie
    
    Director
    
    March 12, 2009/s/ Erik Ostbye

Erik Ostbye
    
    Director
    
    March 12, 2009
 64