UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A-1

        [X]   Annual Report Pursuant to Section 13 or 15(d) of the
                             Securities Act of 1934

                   For the fiscal year ended December 31, 1999

                                       or

        [ ]   Transition Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

              For the transition period from _________ to ________

                         Commission file Number: 0-15905

                           BLUE DOLPHIN ENERGY COMPANY
             (Exact name of registrant as specified in its charter)

           DELAWARE                                  73-1268729
   (State or other jurisdiction of       (I.R.S. Employer Identification No.)
    incorporation or organization)

                  801 Travis, Suite 2100, Houston, Texas      77002
                 (Address of principal executive office)   (Zip Code)

       Registrant's telephone number, including area code: (713) 227-7660

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock $.01 par value
                                (Title of Class)

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

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

         The aggregate market value (estimated solely for purposes of this
calculation) of the voting stock held by non-affiliates of the registrant as of
August 4, 2000, was approximately $15,955,822.

         As of August 4, 2000, there were outstanding 5,953,665 shares of Common
Stock, par value $.01 per share, of the registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

         The registrant's definitive proxy statement for the 2000 Annual Meeting
of Stockholders of the registrant (Sections entitled "Ownership of Securities of
the Company", "Election of Directors", "Executive Compensation" and
"Transactions With Related Persons"), filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference in Part III
of this report.

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                                     PART I

ITEM 1.  BUSINESS

      FORWARD LOOKING STATEMENTS. Certain of the statements included below,
including those regarding future financial performance or results or that are
not historical facts, are "forward-looking" statements as that term is defined
in the Section 21E of the Securities Exchange Act of 1934 , 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" or the "Company") cautions readers that any such
statements are not guarantees of future performance or events and such
statements involve risks, uncertainties and assumptions, including but not
limited to industry conditions, prices of crude oil and natural gas, regulatory
changes, general economic conditions, interest rates, competition, and other
factors discussed below. Should one or more of these risks or uncertainties
materialize or should the underlying assumptions prove incorrect, actual results
and outcomes may differ materially from those indicated in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company which attempt to advise
interested parties of the factors which affect the Company's business, including
the disclosures made under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this report, as well as the
Company's periodic reports on Forms 10-Q and 8-K filed with the Securities and
Exchange Commission.

                                   THE COMPANY

     The Company is engaged in the acquisition and exploration of oil and gas
properties, and the gathering, transportation and storage of natural gas and
condensate. The Company is actively pursuing midstream projects with long term
revenue potential, such as the Petroport offshore oil terminal and the Avoca
natural gas storage project. The Company's primary geographical focus areas are
the western and central coasts of the U.S. Gulf of Mexico. The Company was
incorporated in 1986 as the result of the corporate combination of ZIM Energy
Corporation , a Texas corporation founded in 1983, and Petra Resources, Inc., an
Oklahoma corporation formed in 1980 . The Company succeeded to the business,
properties and assets of ZIM Energy and Petra Resources. In June 1987, the
Company changed its name from ZIM Energy Corporation to Mustang Resources Corp.
In January 1990, the Company's name was changed to Blue Dolphin Energy Company.
In December 1999, the Company acquired a 75% ownership interest in American
Resources Offshore, Inc.American Resources.

     The Company is a holding company that conducts substantially all of its
operations through its subsidiaries. Substantially all of the Company's assets
consist of equity in its subsidiaries. The Company's subsidiaries are as
follows:

     o Blue Dolphin Exploration Company, a Delaware corporation;

     o American Resources, a majority owned subsidiary of Blue Dolphin
       Exploration

     o Blue Dolphin Pipe Line Company, a Delaware corporation;

     o Blue Dolphin Services Co., a Texas corporation;

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     o Black Marlin Energy Company, a Delaware corporation;

     o Black Marlin Pipeline Company, a Texas corporation and wholly owned
       subsidiary of Black Marlin Energy;

     o Buccaneer Pipe Line Co., a Texas corporation;

     o Mission Energy, Inc., a Delaware corporation;

     o New Avoca Gas Storage, LLC, a Texas Limiited liability company in which
       the Company owns a 25% interest; and

     o Petroport, Inc., a Delaware corporation.

     The principal executive office of the Company is located at 801 Travis,
Suite 2100, Houston, Texas, 77002, telephone number (713) 227-7660. American
Resources maintains a division office in New Orleans, Louisiana. Shore base
facilities are maintained in Freeport and Texas City, Texas serving Gulf of
Mexico operations. The Company has 25 full-time employees. The Company's Common
Stock is traded on the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") Small Cap Market under the trading symbol
"BDCO". The Company's home page address on the world wide web is
http://www.blue-dolphin.com.

                             BUSINESS AND PROPERTIES

     The Company conducts its business activities in two primary business
segments: (i) pipeline operations, which includes our developmental mid-stream
projects, and (ii) oil and gas exploration and production. The Company owns and
operates, through its subsidiaries, natural gas and condensate pipeline
gathering facilities. The Company's oil and gas exploration and production
activities include the exploration, acquisition, development, operation and,
when appropriate, disposition of oil and gas properties. The Company also
develops for sale to third parties, oil and gas exploration prospects in the
Gulf of Mexico. See Note 10 to Consolidated Financial Statements included in
Item 8 and incorporated herein by reference for information relating to
revenues, operating profit or loss and identifiable assets of the Company's
business segments. The Company is also in varying stages of development of the
Petroport offshore oil terminal project and the Avoca natural gas storage
project.

PIPELINE OPERATIONS AND ACTIVITIES

     The Company's pipeline assets are held and operations conducted by Blue
Dolphin Pipe Line Company, Mission Energy, Buccaneer Pipe Line and Black Marlin,
all wholly owned subsidiaries of the Company.

     PURCHASE AND SALE OF PIPELINE INTERESTS. On March 1, 1999, the Company
acquired Black Marlin Pipeline Company from Enron Pipeline Company ("Enron"),
for $5,404,270. In addition, Enron received an option to acquire a minimum of
25% and a maximum of 33-1/3% of the Black Marlin Pipeline System, if Black
Marlin Pipeline should become no longer subject to rate and tariff regulation by
the Federal Energy Regulatory Commission. This option will expire on the earlier
of the third anniversary of the date of notice that the Black Marlin Pipeline is
no longer subject to rate and tariff regulation or March 1, 2004. Black Marlin
Pipeline Company is the owner of the 75-mile Black Marlin Pipeline System, as
defined below. Effective as of March 1, 1999, the Company sold

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     o a one-sixth (1/6) undivided interest in the Company's Blue Dolphin
       Pipeline System, the Black Marlin Pipeline System and the Omega Pipeline
       to WBI Southern, Inc. ("WBI") for $3,712,000, and

     o a one-third (1/3) undivided interest in the Black Marlin Pipeline System
       to MCNIC Pipeline and Processing Company ("MCNIC") for $1,801,423.

     The Company used the proceeds from these transactions to finance its
acquisition of Black Marlin Pipeline Company. MCNIC owns a one-third (1/3)
interest in the Blue Dolphin Pipeline System and the Omega Pipeline. Neither WBI
nor MCNIC is an affiliate of the Company.

     BLUE DOLPHIN PIPELINE SYSTEM. The Company, through Blue Dolphin Pipe Line
Company, Mission Energy and Buccaneer Pipe Line, owns a 50% undivided interest
in the Blue Dolphin Pipeline System (the "Blue Dolphin System"). The Blue
Dolphin System includes the Blue Dolphin Pipeline, Buccaneer Pipeline, onshore
facilities for condensate and gas separation and dehydration, 85,000 Bblsof
above-ground tankage for storage of 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 shore
facilities, pipeline easements and rights-of-way are located.

     The Blue Dolphin System gathers and transports natural gas and condensate
from the Buccaneer Field and other offshore fields in the area to shore
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
Buccaneer Pipeline, an 8" condensate pipeline, transports condensate from the
storage tanks to the Company's barge loading terminal on the Intracoastal
Waterway near Freeport, Texas for sale to third parties.

     The Blue Dolphin Pipeline consists of two segments. The offshore segment
transports both natural gas and condensate and is comprised of approximately 36
miles of 20-inch pipeline from the Buccaneer Field platforms to shore and 4
miles to the shore facility at Freeport, Texas. Additionally, the offshore
segment includes 9 field gathering lines totalling approximately 55 miles,
connected to the main 20-inch line. This system's onshore segment consists of
approximately 2 miles of 16-inch pipeline for transportation of natural gas from
the shore facility to a sales point at a Freeport, Texas chemical plants'
complex and intrastate pipeline system tie-in.

     Various fees are charged to producer/shippers for provision of
transportation and shore facility services. Blue Dolphin System natural gas
throughput averaged approximately 21% of capacity during 1999. Current system
capacity is approximately 160 MMcf per day of gas and 7,000 Bbls per day of
condensate. During 1999, 99% of gas and condensate volumes transported were
attributable to production from third party producer/shippers. See Note 10 to
Consolidated Financial Statements included in Item 8 and incorporated herein by
reference.

     BLACK MARLIN PIPELINE SYSTEM. Black Marlin is the owner of the Black Marlin
Pipeline System (the "Black Marlin System"). The Black Marlin System includes
the Black Marlin Pipeline, onshore facilities for condensate and gas separation
and dehydration, 3,000 Bbls of above ground tankage for storage of condensate, a
truck loading facility for oil and condensate, and 5 acres of land in Galveston
County, Texas where the Black Marlin Pipeline comes ashore and on which are
located the pipeline system's shore facilities.

     Black Marlin is classified as a "natural gas company" pursuant to the
Natural Gas Act of 1938 and the Black Marlin Pipeline is classified as an
"interstate pipeline" pursuant to the Natural Gas Policy Act of 1978 and thus
subject to Federal Energy Regulatory Commission ("FERC") regulation.

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Gas and condensate from various producer/shippers in the High Island and
Galveston Areas of the Gulf of Mexico are gathered and transported through the
Black Marlin Pipeline to its shore facilities. After separation and dehydration,
gas is transported to an industrial end user or to either of two major
intrastate pipeline systems with further downstream tie-ins to other intrastate
and interstate pipeline systems and end users. Condensate is either delivered to
a liquids pipeline or transported by truck.

The Black Marlin Pipeline consists of two segments. The offshore segment
transports natural gas and condensate and is comprised of approximately 67 miles
of 16-inch pipeline from a High Island Block 136 platform, including an
extension from a platform in High Island Block A-6, to an interconnection in
High Island Block 137, across Galveston Bay to the onshore facilities at Texas
City, Texas. The offshore segment also includes approximately 7 miles of 8-inch
pipeline from a platform in High Island Block 199 to an interconnection with the
main line in High Island Block 171. The onshore segment consists of
approximately 2 miles of 16-inch pipeline from the shore facilities to an end
user and pipeline system tie-ins

     Various fees are charged to producer/shippers for provision of
transportation and shore facility services. Black Marlin System natural gas
throughput averaged approximately 28% of capacity during 1999. Current Black
Marlin System capacity is approximately 200 MMcf per day of gas and 1,500 Bbls.
per day of condensate. During 1999, all gas and condensate volumes were
attributable to production from third party producer/shippers.

     OTHER. The Company also holds a 50% undivided interest in the currently
inactive Omega Pipeline, MCNIC holds a one-third (1/3) interest and WBI holds a
one-sixth (1/6) interest. The Omega Pipeline originates in West Cameron Block
342 and extends to High Island, East Addition Block A-173, where it was
previously connected to the High Island Offshore System ("HIOS"). The line could
either be reconnected to HIOS, or a lateral pipeline could be constructed
connecting into the Black Marlin Pipeline approximately 14 miles to the west.
Reactivation of the Omega Pipeline will be dependent upon future drilling
activity in the vicinity and successfully attracting reserves to the system.

     The economic return to the Company on its pipeline system investments is
solely dependent upon the amounts of gas and condensate gathered and transported
through the pipeline systems. Competition for provision of gathering and
transportation services, similar to those provided by the Company, is intense in
the market areas served by the Company. See Competition, Markets and Regulation
- Competition below. Since contracts for provision of such services between the
Company and third party producer/shippers are generally for a specified time
period, there can be no assurance that current or future producer/shippers will
not subsequently tie-in to alternative transportation systems or that current
rates charged by the Company will be maintained in the future. The Company
actively markets gathering and transportation services to prospective third
party producer/shippers in the vicinity of its pipeline systems. Future
utilization of the pipelines and related facilities will depend upon the success
of drilling programs around the pipelines, and attraction, and retention, of
producer/shippers to the systems.

MIDSTREAM DEVELOPMENT PROJECTS

PETROPORT PROJECT

     The Company's investment in and development of an offshore crude oil
terminal is through Petroport.

     In October 1999, the Company announced that Equilon Enterprises, LLC (an
alliance of two major oil companies, Shell and Texaco), agreed to jointly
continue development of the Petroport deepwater port project with the Company.
The agreement provided that the parties would share

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mutually agreed upon third party costs of additional economic feasibility and
design studies for the purpose of determining whether to proceed with further
development efforts, including licensing and permitting of the facility. The
same agreement contemplated that the parties would enter into further
contractural arrangements in the event that Equilon chose to participate in the
substantial additional costs of proceeding with licensing of the facility, and
that Equilon would have no interest in the Petroport project if it did not. The
agreement contemplated that those additional contracts would address such
matters as the parties' respective ownership percentages of an entity to be
formed to develop, own and operate Petroport, the sharing of further development
costs and cash payments to the Company. Proposed, non-binding terms concerning
those matters were contained in the agreement but were subject to substantial
change depending upon, among other things, whether the Company or Equilon
determined to sell a portion of their respective interests in the project to
other participants. Although the Equilon agreement expired in December 1999,
Equilon and the Company have continued to share relatively minor development
expenses, although neither party is obligated to do so. Equilon has not advised
the Company as to whether it will proceed with licensing and further
documentation. Whether or not Equilon determines to participate further in the
development of Petroport, the Company intends to continue its efforts to attract
throughput commitments from prospective users and seek partners to participate
in the ownership and further costs of developing Petroport.

     Costs of the offshore terminal complex, the pipeline to shore, onshore
facilities and facility licensing are estimated to be $200.0 million. The
Company expects that its partner or partners in the Petroport project would be
responsible for all licensing and permitting costs, currently estimated to be
approximately $6.0 million. The Company plans to seek financing for the costs
associated with facility construction. (See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations").

     In March 1995, the Company acquired Petroport, L.C. The form of the
transaction was a merger of Petroport, L.C. into Petroport. Petroport holds
proprietary technology, represented by certain patents issued and or pending,
associated with the development and operation of a deepwater crude oil and
products port and offshore storage facility. The Petroport deepwater terminal
will receive crude oil and refined products offshore with deliveries to shore by
pipeline. Onshore the Petroport pipeline will connect with an existing onshore
storage and distribution network, accessing Texas Gulf coast and Mid-Continent
refining centers.

     As currently planned, the facility will be located 40 miles off the Texas
coast in approximately 115 feet of water. The terminal complex will consist of
two single point mooring buoys connected to a central pumping platform, with a
main export pipeline from the platform to shore facilities in the Freeport,
Texas area. At its onshore terminus, the main oil pipeline will access existing
onshore storage and a distribution network serving the greater Houston area
refiners and the NYMEX crude oil futures settlement hub at Cushing, Oklahoma.
The design capacity of the pipeline to shore will be in excess of 1.25 million
barrels per day.

     Petroport's future business environment is expected to be characterized by
a continuing significant demand by refiners for imports, with use of short haul
Caribbean Basin crudes as a major source of foreign crude. Petroport will offer
an alternative for receipt of large volumes of imported crude oil. The Company
believes Petroport's commercial success will be driven primarily by economies of
scale derived from use of larger, fully loaded tankers discharging short haul
Caribbean Basin cargoes into Petroport, and efficiencies gained by supertankers
discharging intermediate and long haul West African, North Sea, and Persian Gulf
crudes directly into Petroport versus current use of lightering operations.

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     Petroport will also be available to serve producers in the Gulf of Mexico .
It can serve as a major gathering hub and trunk line to shore, with crude
received from floating production storage and offloading systems serving
deepwater Gulf of Mexico producers.

AVOCA NATURAL GAS STORAGE PROJECT

      In November 1999 the Company and WBI Holdings, Inc. ("WBI Holdings")
formed New Avoca Gas Storage LLC ("New Avoca"), 25% owned and managed by the
Company and 75% owned by WBI Holdings, and acquired the Avoca gas storage
assets. The Company records its investment in New Avoca by using the equity
method of accounting.

      The Avoca natural gas salt cavern storage project was conceived as a 5 BCF
working gas facility located south of Rochester near the town of Avoca, New
York. Its design provides for 250 MMcf/d injection and 500 MMcf/d withdrawal
capacities into the Tennessee Gas Pipeline HC400 24" line.

     The original owner, Avoca Gas Storage, Inc., filed for bankruptcy on July
7, 1997. The assets were subsequently acquired out of bankruptcy by Northeastern
Gas Caverns ("Northeastern").

     New Avoca purchased the Avoca gas storage assets from Northeastern for
$400,000 plus a contingent payment of $500,000. The contingent payment will be
excused if Northeastern successfully settles its claim against certain parent
companies of Avoca Gas Storage. On June 28, 2000 the United States Bankruptcy
Court for the District of Delaware held a hearing to approve a settlement
agreement between Avoca Gas Storage, the Committee of Unsecured Creditors, and
an affiliate of Northeastern. The settlement of Northeastern's claim against
Avoca Gas Storage was expected to occur before May 2000 but has been extended to
October 2000. A contingent payment of $500,000, $125,000 net to the Company's
interest in New Avoca, was due to Northeastern on May 22, 2000. New Avoca made a
partial payment of $50,000 and extended the remaining $450,000 payment until
August 22, 2000. New Avoca and Northeastern have agreed to further extend this
payment until October 1, 2000, as consideration for the extension the amount of
the contingent payment was increased to $460,000. New Avoca's contingent payment
to Northeastern will be forgiven if Northeastern successfully settles its claims
against Avoca Gas Storage. There can be no assurance that Northeastern will
settle its claim against Avoca Gas Storage and New Avoca's contingent payment to
Northeastern will be forgiven.

      New Avoca may elect to liquidate its assets before Northeastern's claims
against Avoca Gas Storage are settled and repay, or satisfy, all accrued
obligations. If New Avoca liquidates, the first $440,000 of proceeds, if any,
would go to New Avoca, the next $500,000 would go to Northeastern, and any
remaining proceeds, subject to Northeastern settling its claims against Avoca
Gas Storage, to New Avoca.

     The existing Avoca physical facilities include:

     o 900+ acres of land

     o Pumps and pipeline for fresh water

     o Pump house containing 12 pumps (6,400 HP) for the solution mining
       operation

     o 5 cavern wells - 4,000' deep

     o 6 brine disposal wells - 9,000' deep

     o Storage building with valves, fittings, and miscellaneous parts

     o Electrical switch gear

     o Solution mining equipment

     o Compressor foundations

     o Electrical Sub-Station

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      The original owners of the Avoca gas storage assets encountered
difficulties associated with the rate at which the brine disposal wells accept
brine that is produced during construction of the gas storage caverns. New Avoca
believes it can achieve an acceptable rate that the brine disposal wells accept
brine. New Avoca recently completed a feasibility study and will conduct a test
on the brine disposal wells as soon as the necessary permits are received from
the New York State Department of Environmental Conservation. The test, and
evaluation of the test results, will take approximately one month to complete.
Based upon the results of the test, New Avoca will either go forward with
construction or liquidate the project. If liquidated, the Company believes that
it can recover its investment in this project. It is currently estimated that it
will take between 1 1/2 to 2 years to begin operations at partial capacity, with
3 to 4 years for the facility to operate at full capacity. The cost to begin
operations has not yet been determined.

OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES

     The Company's oil and gas assets are held, and operations conducted by,
Blue Dolphin Exploration and American Resources.

     The following is a description of the Company's major oil and gas
exploration and production assets and activities:

     AMERICAN RESOURCES . On December 2, 1999, Blue Dolphin Exploration acquired
a 75% ownership interest in American Resources by purchasing approximately 39.0
million shares of American Resources common stock. The purchase price for the
shares of American Resources' common stock was approximately $4.5 million.
Concurrently with the sale to Blue Dolphin Exploration , American Resources sold
an 80% interest in its Gulf of Mexico assets to Fidelity Oil Holdings, Inc. a
subsidiary of MDU Resources Group, Inc.. The proceeds received by American
Resources were used to retire certain indebtedness.

     American Resources' assets consist of an average 6% non-operated working
interest in eight producing properties and one proved undeveloped property along
with leasehold interests in 34 additional offshore tracts, all located in the
Gulf of Mexico offshore Louisiana and Texas. At closing, all significant
liabilities of American Resources were settled and substantially all stock
options and warrants were cancelled. The American Resources properties represent
36% of the discounted present value of estimated future net revenues from Proved
Reserves of the Company as of December 31, 1999. Sales of production from the
American Resources properties accounted for 52% of oil and gas sales revenues
and 10% of total revenues of the Company for the year ended December 31, 1999.

     American Resources sells substantially all of its current oil and gas
production through the operators of its properties. The price American Resources
is currently receiving is based on current market prices. Previously, forward
sales contracts were utilized for a significant portion of its gas production to
achieve more predictable cash flow and to reduce the effect of fluctuations in
gas prices.

      American Resources has established a preliminary budget of $1.4 million
for exploration and development of American Resources' oil and gas properties in
2000; however, this budget is subject to revision during the year to reflect
drilling results and new opportunities. American Resources will evaluate each of
the exploration and development opportunities and its available capital
resources to determine whether to participate, sell its interest or sell a
portion of its interest and use the proceeds to participate at a reduced
interest.

     THE BUCCANEER FIELD. The Buccaneer Field is comprised of interests in parts
of four lease blocks covering 14,660 acres located in the Gulf of Mexico
approximately 36 miles south of Freeport,

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Texas. Operation of the field is conducted from two platforms located in waters
averaging approximately 65 feet in depth.

     The Company owns a 100% working interest in the Buccaneer Field (81.33% net
revenue interest). The Buccaneer Field leasehold interests represent 64% of the
discounted present value of estimated future net revenues from Proved Reserves
of the Company as of December 31, 1999. Production from the Buccaneer Field
accounted for 48% of the total revenues from oil and gas sales of the Company
for the year ended December 31, 1999 and 100% for the years ended December 31,
1998 and 1997. See "Proved Oil and Gas Reserves" below. Buccaneer Field
condensate and natural gas production is delivered to the Blue Dolphin System.

     Natural gas produced from the Buccaneer Field is sold under a gas purchase
contract dated May 1, 1991. Currently, the contract has been extended through
September 2000 at a variable monthly market price. In December 1999, the Company
received a price of $2.04/MMBtu. Buccaneer Field gas sales represented 42% of
oil and gas sales revenues and 8% of total revenues of the Company for the year
ended December 31, 1999.

     Buccaneer Field condensate sales are based on the average monthly market
prices as reported by Koch Oil Company. Sale of condensate from the Buccaneer
Field represented 6% of oil and gas sales revenues and 1% of total revenues of
the Company for the year ended December 31, 1999.

     The Minerals Management Service of the U.S. Department of the Interior
("MMS") requires that security be provided for the estimated future abandonment
obligations associated with the Buccaneer Field. Blue Dolphin Exploration
provided the MMS surety bonds in the amount of $1,300,000. Additionally, Blue
Dolphin Exploration is required to make a $250,000 annual payment to a sinking
fund to cover its end of lease abandonment and site clearance obligations. Blue
Dolphin Exploration is required to make payments to the sinking fund until the
balance of the sinking fund is $2,400,000, unless changed by the MMS. The MMS
may periodically increase, or decrease, the amount of the sinking fund based
upon its estimate of Blue Dolphin Exploration's lease abandonment and site
clearance costs. In 1999, Blue Dolphin Exploration elected to remove an inactive
satellite platform in the Buccaneer Field to reduce its future lease abandonment
and site clearance costs. The Company's annual abandonment escrow fund payment
of $250,000 that was due in June 1999 was waived pursuant to a verbal agreement
with the MMS as a result of the removal of the inactive satellite platform. As
of December 31, 1999, the sinking fund totalled approximately $1,168,560. The
Company estimates the remaining life of its major Buccaneer Field facilities to
be in excess of ten years.

     In addition to conducting traditional oil and gas production operations for
itself, the Company operates and maintains oil and gas production facilities for
third party producers who also utilize the Blue Dolphin System for gathering and
transportation of their production. Currently, the Company has a contract with
Apache Corporation to provide operation and maintenance services. The Company's
contract with Apache Corporation expires at the earlier of the expiration of the
term of the federal oil and gas lease where the Company performs its services,
or November 2004. During 1999, approximately 11% of the Company's revenues were
attributable to its contract with Apache Corporation.

     OFFSHORE OIL AND GAS PROSPECT GENERATION ACTIVITIES. In August 1994, Blue
Dolphin Exploration initiated a program to develop oil and gas exploration
prospects in the Gulf of Mexico for sale to third parties. The program utilizes
3-D seismic data. The Company owns a non-exclusive license to 150 blocks of 3-D
seismic data covering 850,000 acres in the Western Gulf of Mexico and a
substantial inventory of close grid 2-D seismic data. In addition to recovering
prospect development costs, Blue Dolphin Exploration seeks to retain a
reversionary working interest in each drillable prospect.

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      In September 1997, the Company entered into an agreement with Fidelity
Oil, Western Production and Forcenergy (the "Participants"), whereby in exchange
for certain participation rights, the Participants partially funded the costs
associated with the Company's 1997/1998 offshore prospect generation program.
The Company is obligated to , among other things, devote its best efforts to
initiate, evaluate, document and present drilling prospects to the Participants.
In order to enhance the productivity of the prospect generation program, during
1998 the Company transitioned from the use of consulting geologists and
geophysicists to a 100% in house effort. This program was suspended in August
1998, as a result of the withdrawal of Forcenergy who filed for bankruptcy.

     In 1999 the Company placed a 50% interest in the program with Fidelity Oil,
whereby in exchange for certain participation rights, Fidelity Oil funds
$100,000 per month for the costs associated with the program. Program costs will
be reimbursed to the Company as prospects are developed and leases acquired. A
portion of the reimbursed costs will be paid to Fidelity Oil based on the level
of interest it retains in each prospect. The available 50% interest in the
generated prospects is for sale on an individual prospect basis. In April 2000,
the Company amended the agreement with Fidelity Oil in its prospect generation
program, whereby in exchange for certain participation rights of up to 100%,
Fidelity Oil will fund, on a monthly basis, an aggregate of up to $1,060,000 of
the costs associated with the program during 2000. As of July 31, 2000, Fidelity
had paid $639,000 of these costs. Fidelity Oil will also reimburse the Company
for the expenses it incurs acquiring seismic data. The available interests in
the prospect inventory are for sale on an individual prospect basis.

     The Company spent the first half of 1999 developing and marketing a
prospect inventory in preparation for the Western Gulf of Mexico Federal Lease
Sale held in August. Of the five prospects developed, one was sold in which the
Company retained a reversionary working interest. Partial interests were sold in
all of the pre-existing inventory of leased prospects. The Company is continuing
to market the remaining interests. The Company's leased prospect inventory
consists of prospects on the following offshore leases:

     o High Island Area Block A-8

     o Galveston Area Block 285

     o Galveston Area Block 295 (Buccaneer)

     o Mustang Island Area Block 817

     o Mustang Island Area Block 839

     The Company has reversionary interests in the following offshore leases:

     o High Island Area Block A-7

     o Galveston Area Block 297

     o Matagorda Island Area Block 713

     PROVED OIL AND GAS RESERVES. Estimates of proved reserves, future net
revenues, and discounted present value of future net revenues to the net
interest of the Company have been prepared as of December 31, 1999, by
Netherland Sewell & Associates, Inc. , Ryder Scott Company and the Company
(Buccaneer Field). Both Netherland Sewell & Associates, Inc. and Ryder Scott
Company are independent petroleum engineers.

     The following table summarizes the estimates of Proved Reserves, Proved
Developed Reserves (as hereinafter defined), future net revenues and the
discounted present value of future net revenues from Proved Reserves before
income taxes to the net interest of the Company in oil and gas properties as of
December 31, 1999, using the SEC Method (defined below).

                                       10
<PAGE>
                           PROVED RESERVES INFORMATION
                             AS OF DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                      NET OIL     NET GAS      FUTURE      DISCOUNTED
                                      RESERVES    RESERVES  NET REVENUES NET REVENUES(3)
                                        (MB)       (MMCF)      ($000)        ($000)
                                      ---------   --------- ------------ ---------------
<S>                                         <C>      <C>      <C>           <C>
Total Proved: (1)
      ARO (4) ......................        145      4,349    $ 7,714       $ 6,101
      Buccaneer Field ..............        187     30,993    $37,470       $10,925
                                        -------    -------    -------       -------

      TOTAL PROVED RESERVES ........        332     35,342    $45,184       $17,026
                                        =======    =======    =======       =======



Total Proved Developed Reserves: (2)
      ARO (4) ......................         95      2,531    $ 5,078       $ 4,155
      Buccaneer Field ..............        111     17,869    $25,726       $ 8,891
                                        -------    -------    -------       -------

      TOTAL PROVED DEVELOPED
        RESERVES ...................        206     20,400    $30,804       $13,046
                                        =======    =======    =======       =======
</TABLE>


MB = Thousand Barrels   MMCF = Million Cubic Feet

(1)  "Proved Reserves" means the estimated quantities of oil, natural gas 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 by primary
     producing mechanisms.

(2)  "Proved Developed Reserves" are those quantities of oil, natural gas and
     condensate which are expected to be recovered through existing wells with
     existing equipment and operating methods.

(3)  The estimated future net revenues before deductions for income taxes from
     the Company's Proved Reserves have been determined and discounted at a 10%
     annual rate in accordance with requirements for reporting oil and gas
     reserves pursuant to regulations promulgated by the United States
     Securities and Exchange Commission (the "SEC Method"). See estimated future
     net revenues after deductions for income taxes in Note 11 to Consolidated
     Financial Statements of Blue Dolphin Energy Company and Subsidiaries.

(4)  The Company acquired a 75% ownership interest in American Resources on
     December 2, 1999. The above reflects 100% of American Resources' reserves
     and future net revenues, 25% of discounted future net revenues associated
     with total Proved Reserves and total Proved Developed Reserves of the
     American Resources' properties is $1,525,252 and $1,038,750, respectively.

     The quantities of proved natural gas and crude oil reserves presented
include only those amounts which the Company reasonably expects to recover in
the future from known oil and gas reservoirs under existing economic and
operating conditions. Therefore, Proved Reserves are limited to those quantities
that are believed to be recoverable commercially at prices and costs, and under
regulatory practices and technology existing at the time of the estimate.
Accordingly, changes in

                                       11
<PAGE>
prices, costs, regulations, technology and other factors could significantly
affect the estimates of Proved Reserves and the discounted present value of
future net revenues attributable thereto.

     The reserves and future net revenues summarized above reflect capital
expenditures totaling $1,416,323, $570,139, $404,430, $178,350 and $43,300 in
the years ending December 31, 2000, 2001, 2002, 2003 and 2004, respectively.
Management will continue to evaluate its capital expenditure program based on,
among other things, demand and prices obtainable for the Company's production.
The availability of capital resources may affect the Company's timing for
further development of the Buccaneer Field, and there can be no assurance that
the timing of the development of such reserves will be as currently planned.

     The discounted present value of estimated future net revenues attributable
to Proved Reserves has been prepared in accordance with the SEC Method after
deduction of royalties and other third-party interests, lease operating
expenses, and estimated production, development, workover and recompletion
costs, but before deduction of income taxes, general and administrative costs,
debt service and depletion and amortization. Estimated future net revenues are
based on prices of oil and gas in effect at the end of the year without
escalation except to the extent contractually committed. Lease operating
expenses, and production and development costs, were estimated based on such
costs in effect at the end of the year, assuming the continuation of existing
economic conditions and without adjustment for inflation or other factors. The
present value of estimated future net revenues is computed by discounting future
net revenues at a rate of 10% per annum. Revenues from wells not currently
producing are included at the time they are expected to be placed into
production based upon estimates of future development; workover and recompletion
costs are included at the time they are expected to be incurred. Of the
Company's total Proved Developed Reserves, 8% of its estimated gas reserves and
29% of its estimated oil reserves were being produced at December 31, 1999.

     Estimates of production and future net revenues cannot be expected to
represent accurately the actual production or revenues that may be recognized
with respect to oil and gas properties or the actual present market value of
such properties. For further information concerning the Company's Proved
Reserves, changes in Proved Reserves, estimated future net revenues and costs
incurred in the Company's oil and gas activities and the discounted present
value of estimated future net revenues from the Company's Proved Reserves, see
Note 11 - Supplemental Oil and Gas Information to Consolidated Financial
Statements included in Item 8 and incorporated herein by reference.

     PRODUCTIVE WELLS AND ACREAGE. The following table sets forth the Company's
interest in productive wells and developed and undeveloped acreage as of
December 31, 1999.

<TABLE>
<CAPTION>
                                                  ACREAGE AND WELLS

                            PRODUCTIVE WELLS (1)                DEVELOPED            UNDEVELOPED
                   -------------------------------------    ------------------    ------------------
                         GROSS                 NET               ACRES (1)            ACRES (1)
                   ------------------    ---------------    ------------------    ------------------
                     OIL        GAS      OIL       GAS       GROSS       NET       GROSS       NET
                   -------    -------    ----    -------    -------    -------    -------    -------
<S>                     <C>        <C>   <C>        <C>      <C>         <C>      <C>          <C>
American
 Resources(2) .         17         10    0.73       0.61     45,497      2,820    149,205      8,971

Buccaneer Field          0          1       0          1      8,730      8,730      5,930      5,930


Other .........          0          0       0          0          0          0      5,760      1,728
                   -------    -------    ----    -------    -------    -------    -------    -------
                        17         11    0.73       1.61     54,227     11,550    160,895     16,629
                   =======    =======    ====    =======    =======    =======    =======    =======
</TABLE>

                                       12
<PAGE>
(1)    "Productive wells" are producing wells and wells capable of production,
       and include gas wells awaiting pipeline connections or necessary
       governmental certifications to commence deliveries and oil wells to be
       connected to production facilities. "Developed acres" include all acreage
       as to which proved reserves are attributed, whether or not currently
       producing, but exclude all producing acreage as to which the Company's
       interest is limited to royalty, overriding royalty, and other similar
       interests. "Undeveloped acres" are considered to be those acres on which
       wells have not been drilled or completed to a point that would permit the
       production of commercial quantities of oil and gas regardless of whether
       such acreage contains Proved Reserves. "Gross" as it applies to wells or
       acreage refers to the number of wells or acres in which a working
       interest is owned, while "net" applies to the sum of the fractional
       working interests in gross wells or acreage.

(2)    The Company acquired a 75% ownership interest in American Resources on
       December 2, 1999. The above reflects 100% of American Resources' acreage
       and wells.

      PRODUCTION, PRICE AND COST DATA. The following table sets forth the
approximate production volumes and revenues, average sales prices and costs
(after deduction of royalties and interests of others) with respect to crude
oil, condensate, and natural gas attributable to the interest of the Company for
each of the periods indicated:

                       NET PRODUCTION, PRICE AND COST DATA

                                         YEAR ENDED DECEMBER 31,
                                 -----------------------------------------
                                    1999           1998           1997
                                 -----------    -----------    -----------
Gas:
       Production (Mcf) .....        169,329        177,260        176,986
       Revenue ..............    $   393,125    $   391,913    $   393,444
       Average Mcf per Day ..          463.9          485.6          484.9
       Average Sales Price
        Per Mcf .............    $      2.32    $      2.21    $      2.22

Oil:
       Production (Bbls) ....          6,338          1,628          1,156
       Revenue ..............    $   151,974    $    20,840    $    21,636

       Average Bbls per day .           17.4            4.5            3.2
       Average Sales Price
          Per Bbl ...........    $     23.98    $     12.80    $     18.72

Production Costs (1):

       Per Equivalent Mcf(2):    $      4.14    $      3.30    $      4.16


(1)    Production costs, exclusive of workover costs, are costs incurred to
       operate and maintain wells and equipment and to pay production taxes.

(2)    Equivalent Mcf includes oil and condensate stated in terms of natural gas
       at the rate of one Bbl. of oil or condensate to six Mcf of natural gas.

                                       13
<PAGE>
     DRILLING ACTIVITY. There was no drilling activity during 1999. There were
two (.5 net) unsuccessful exploratory wells drilled in 1998, including one on a
prospect generated and sold to third parties by the Company. There was no
drilling activity during 1997.

     The Company maintains a professional staff capable of supervising and
coordinating the operation and administration of its oil and gas properties and
pipeline and other assets. From time to time, major maintenance and engineering
design and construction projects are contracted to third-party engineering and
service companies.

                       COMPETITION, MARKETS AND REGULATION

COMPETITION

     The oil and gas industry is highly competitive in all segments.
Increasingly vigorous competition occurs among oil, gas and other energy
sources, and between producers, transporters, and distributors of oil and gas.
Competition is particularly intense with respect to the acquisition of desirable
producing properties and the marketing of oil and gas production. There is also
competition for the acquisition of oil and gas leases suitable for exploration
and for the hiring of experienced personnel to manage and operate the Company's
assets. Several highly competitive alternative transportation and delivery
options exist for current and potential customers of the Company's traditional
gas and oil gathering and transportation business as well as for refiners,
shippers, marketers and producers of crude oil whom the Company's proposed
Petroport facility would serve. Gas storage customers who would use the proposed
Avoca Gas Storage system have alternatives, including depleted reservoir and
salt cavern storage. Competition also exists with other industries in supplying
the energy and fuel needs of consumers.

MARKETS

     The availability of a ready market for natural gas and oil, and the prices
of such natural gas and oil, depend upon a number of factors which are beyond
the control of the Company. These include, among other things, 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 lightering and transshipment and other means of transportation, the
availability and marketing of other competitive fuels, fluctuating and seasonal
demand for oil, 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, natural gas, refined products and alternative fuels.

     Accordingly, in view of the many uncertainties affecting the supply and
demand for crude oil, natural gas and refined petroleum products, it is not
possible to predict accurately the prices or marketability of the natural gas
and oil produced for sale or prices chargeable for transportation, terminaling
and storage services, which the Company provides or may provide in the future.

GOVERNMENTAL REGULATION

     The production, processing, marketing, and transportation of oil and
natural gas, and planned terminaling and storage of crude oil and natural gas
storage by the Company are subject to federal, state and local regulations which
can have a significant impact upon the Company's overall operations.

     FEDERAL REGULATION OF NATURAL GAS TRANSPORTAION. The transportation and
resale of natural gas in interstate commerce have been regulated by the Natural
Gas Act, the Natural Gas Policy Act and the rules and regulations promulgated by
FERC. In the past the federal government has regulated the

                                       14
<PAGE>
prices at which natural gas could be sold. In 1989, Congress enacted the Natural
Gas Wellhead Decontrol Act, which removed all remaining Natural Gas Act and
Natural Gas Policy Act price and non-price controls affecting producer sales of
natural gas, effective January 1, 1993. Congress could, however, reenact price
controls in the future.

     The price and terms for access to pipeline transportation is subject to
extensive federal regulation. In April 1992, the FERC issued Order No. 636,
beginning a series of related orders, which required interstate pipelines to
provide open-access transportation on a basis that is equal for all natural gas
suppliers. The FERC has stated that it intends Order No. 636 to foster increased
competition within all phases of the natural gas industry. Order No. 636 affects
how buyers and sellers gain access to the necessary transportation facilities
and how natural gas is sold in the marketplace. In 2000, the FERC issued Order
No. 637 which, among other things, will permit pipelines to file for
peak/off-peak and term differentiated rate structures and changed existing
regulations relating to scheduling procedures, capacity segmentation pipeline
imbalance processes and penalties and pipeline reporting requirements.

     The Company cannot predict whether the FERC's actions will achieve the goal
of increasing competition in the natural gas markets or how these, or future,
regulations will affect its operations or competitive position. However, the
Company does not believe that any action taken will affect it in any way that
materially differs from the way that such action affects the Company's
competitors.

     Of the natural gas pipelines owned by the Company, only the Black Marlin
Pipeline is subject to rules and regulations of the Natural Gas Act. As a
result, its gas transportation service and pricing service are subject to the
regulatory jurisdiction of the FERC The previous owner of the Black Marlin
Pipeline completed a FERC rate case which redetermined the rate the Company
charges for use of its pipeline. As a result of the completion of the FERC case,
the Company can expect a certain level of stability in the rates it charges.
However, there is a trend toward greater competition among gas pipelines subject
to the Natural Gas Act making it infeasible for regulated pipelines to rely upon
exclusive monopoly status. Additionally, requirements of the Gas Industry
Standards Board ("GISB") continue to evolve, and, along with Order No. 637
reporting and operational requirements, may impose additional obligations and
costs upon interstate pipelines subject to these requirements.

     All of the Company's pipelines located in federal offshore waters, whether
subject to Natural Gas Act jurisdiction or exempted as nonjurisdictional
gathering, are subject to the requirements of the Outer Continental Shelf Lands
Act ("OCSLA"). FERC has stated that nonjurisdictional gathering lines, as well
as interstate pipelines, are fully subject to the open access and
nondiscrimination requirements of OCSLA's Section 5, which generally authorizes
the FERC to insure that natural gas pipelines on the Outer Continental Shelf
will transport for non-owner shippers in a nondiscriminatory manner and will be
operated in accordance with certain pro-competitive principles. More recently,
the FERC has undertaken several investigations into the nature and extent of its
regulatory powers on the Outer Continental Shelf. It issued a policy statement
on Outer Continental Shelf pipelines reaffirming the requirement that all
pipelines provide nondiscriminatory service. Additionally, currently pending
complaints against nonjurisdictional gathering facilities under the OCSLA seek
more stringent FERC regulation of service and pricing.

     Further FERC initiatives concerning possibly diminished Natural Gas Act
regulation of pipelines on the OCS and/or broader regulation under the OCSLA are
under consideration. Since all of the Companies' offshore pipelines already
operate on the basis required under OCSLA, the Company does not anticipate
significant changes directly resulting from requirements concerning
nondiscriminatory open access transportation. Moreover, if an offshore
pipeline's throughput increases to the extent that the pipeline's capacity is
completely utilized, under OCSLA, the FERC may be petitioned to direct capacity
allocation on the pipeline. Accordingly, the Company cannot

                                       15
<PAGE>
predict how application of the OCSLA to the Companies' pipelines may ultimately
affect Company operations.

     Aside from the OCSLA requirements and federal safety and operational
regulations, regulation of natural gas gathering activities is primarily a
matter of state oversight. Regulation of gathering activities in Texas includes
various transportation, safety, environmental and non-discriminatory
purchase/transport requirements.

     FEDERAL REGULATION OF OIL PIPELINES. The Company's operation of the
Buccaneer Pipeline is subject to a variety of regulations promulgated by the
FERC and imposed on all oil pipelines pursuant to federal law. In particular,
the rates chargeable by the Company are subject to prior approval by the FERC,
as are operating conditions and related matters contained in the Company's
transportation tariffs which are on file with the FERC. In October 1993, the
FERC issued Order No. 561, which was intended to simplify oil pipeline
ratemaking, largely through use of a ceiling based on an indexing system.
Because Buccaneer Pipeline has not taken action to become subject to Order No.
561 or Order No. 572 concerning market-based rates for oil pipelines, the
Company cannot predict whether or how an indexed or market-based rate system
will affect the Buccaneer Pipeline's rates.

     SAFETY AND OPERATIONAL REGULATIONS. The operations of the Company are
generally subject to safety and operational regulations administered primarily
by the MMS, the U.S. Department of Transportation, the U.S. Coast Guard, the
FERC and/or various state agencies. Currently, the Company believes that it is
in compliance with the various safety and operational regulation that it is
subject to. However, as safety and operational regulations are frequently
changed, the Company is unable to predict the future effect changes in these
regulations will have on its operations, if any.

     REGULATION OF DEEPWATER PORTS: PERMITTING AND LICENSING. The ownership,
construction and operation of a deepwater crude oil terminal facility (a
"Deepwater Port"), such as the Company's proposed Petroport facility, must
conform to the requirements of a number of Federal, State and local laws. A
license from the Department of Transportation ("DOT") is required under the
Deepwater Port Act of 1974 ("DWPA"), as amended. Permits from the Environmental
Protection Agency and the Federal Communication Commission are required, as well
as permits from the U.S. Army Corps of Engineers and the State of Texas to
construct ancillary port facilities, such as pipelines and onshore facilities.

     The DWPA empowers the Secretary of Transportation to license and regulate
Deepwater Ports beyond the territorial sea of the United States. License
applications must include sufficient information to allow the Secretary of
Transportation to judge whether a Deepwater Port will comply with all technical,
environmental, and economic criteria. The application and licensing process
includes the preparation of an Environmental Impact Statement, development of
detailed operations procedures, submission of extensive financial and ownership
data and public hearings.

     The Company was a principal participant in the development and passage of
The Deepwater Port Modernization Act in 1996, successfully amending the DWPA.
The amendments to the Deepwater Port Act provide: (1) upon written request of an
applicant for a license, the Secretary may exempt the applicant from certain of
the informational filing requirements if the Secretary determines such
information is not necessary to facilitate his or her determination and such
exemption will not limit public review; (2) the facility is explicitly permitted
to receive domestic production from the United States Outer Continental Shelf;
(3) simplification and streamlining of the regulatory process to which the
facility would be subject during both the licensing process and when in
operation; and (4) elimination of various facility use restrictions. Once a
license is issued, the law states that it remains in effect unless suspended or
revoked by the Secretary of Transportation or is surrendered by the licensee.

                                       16
<PAGE>
     Regulations provide for extensive consultation among all interested Federal
agencies, any potentially affected coastal State, and the general public.
Adjacent coastal states are granted an effective veto power or reservation over
proposed Deepwater Ports. The Secretary of Transportation will not issue a
license without the approval of the governor of each adjacent coastal state.
Under the statute, if a Governor of an adjacent coastal state notifies the
Secretary of Transportation that a proposal is inconsistent with the state
programs relating to environmental protection, land and water use, and coastal
zone management, then the Secretary of Transportation shall grant the license on
the condition that the proposal is made consistent with such state programs. The
Secretary of Transportation will not issue a license without the approval of the
governor of each adjacent coastal state.

     In addition, the DWPA requires all Deepwater Ports, including related
storage facilities, be operated as common carriers. As a common carrier the
Company's proposed Petroport facility would be required to accept, transport or
convey all oil delivered, unless it is subject to "effective competition" from
alternative transportation systems.

     Given the nature and complexity of obtaining the necessary license and
permits, there can be no assurance that the Company will be issued a Deepwater
Port license and other necessary permits.

     FEDERAL OIL AND GAS LEASES. The Company's operations conducted on the
Buccaneer Field leases and any other Company operations conducted on federal OCS
oil and gas leases must be conducted in accordance with permits issued by the
MMS and are subject to a number of other regulatory restrictions similar to
those imposed by the states.

     With respect to any Company operations conducted on offshore federal
leases, including operations in the Buccaneer Field, liability may generally be
imposed under OCSLA for costs of clean-up and damages caused by pollution
resulting from such operations, other than damages caused by acts of war or the
negligence of third parties. Under certain circumstances, including but not
limited to conditions deemed a threat or harm to the environment, the MMS may
also require any Company operations on federal leases to be suspended or
terminated in the affected area. . Furthermore, the MMS generally requires that
offshore facilities be dismantled and removed within one year after production
ceases or the lease expires. However, on July 7, 2000, the MMS published
proposed rules under which offshore structures may be left in place, subject to
EPA approval. See "Oil and Gas Exploration and Production Activities - The
Buccaneer Field."

     ENVIRONMENTAL REGULATIONS. The Company may generally be liable for defined
clean-up costs to the U.S. Government, with respect to its operations on both
onshore and offshore properties, under the Federal Clean Water Act for each
incident of oil or hazardous substance pollution and under the Comprehensive
Environmental Response, Compensation and Liability Act of 1981, as amended
("Superfund"), for hazardous substance contamination. Such liability may be
unlimited in cases of gross negligence or willful misconduct, and there is no
limit on liability for environmental clean-up costs or damages with respect to
claims by the states or by private persons or entities. In addition, the
Environmental Protection Agency requires the Company to obtain permits to
authorize the discharge of pollutants into navigable waters. State and local
permits and/or approvals may also be needed with respect to wastewater
discharges and air pollutant emissions. Violations of environmental related
lease conditions or environmental permits can result in substantial civil and
criminal penalties as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or citizen prosecution.

     LEGISLATION AND RULEMAKING. In October 1996 the U.S. Congress enacted the
Coast Guard Authorization Act of 1996 (P.L. 104-324) which amended the Oil
Pollution Act of 1990 ("OPA `90") to establish requirements for evidence of
financial responsibility for certain offshore facilities, other than Deepwater
Ports. The amount required is $35.0 million for certain types of offshore
facilities located seaward of the seaward boundary of a state, including
properties used for oil transportation. The Company currently maintains this
statutory $35.0 million coverage.

                                       17
<PAGE>
     In August 1995, the DOT issued a Rulemaking under OPA '90, providing that
the Secretary of Transportation can set the liability limit and associated
Certificate of Financial Responsibility requirement for Deepwater Ports from
between $350.0 million and $50.0 million concurrent with the overall processing
of the DWP license application. Development of the liability limit would be
based upon engineering and environmental analysis provided during the licensing
process.

     Federal and state legislative rules and regulations are pending that, if
enacted, could significantly affect the oil and gas industry. It is impossible
to predict which of those federal and state proposals and rules, if any, will be
adopted and what effect, if any, they would have on the operations of the
Company.

     In addition, various federal, state and local laws and regulations covering
the discharge of materials into the environment, occupational health and safety
issues, or otherwise relating to the protection of public health and the
environment, may affect the Company's operations, expenses and costs. The trend
in such regulation has been to place more restrictions and limitations on
activities that may impact the general or work environment, such as emissions of
pollutants, generation and disposal of wastes, and use and handling of chemical
substances. It is not anticipated that, in response to such regulation, the
Company will be required in the near future to expend amounts that are material
relative to its total capital structure. However, it is possible that the costs
of compliance with environmental and health and safety laws and regulations will
continue to increase. Given the frequent changes made to environmental and
health and safety regulations and laws, the Company is unable to predict the
ultimate cost of compliance.

                      GLOSSARY OF CERTAIN OIL AND GAS TERMS

The following are abbreviations and definitions of certain terms commonly used
in the oil and gas industry.

     BBL.  One stock tank barrel, or 42 U.S. gallons liquid volume, used in
reference to oil or other liquid hydrocarbon.

     BCF.  One billion cubic feet of natural gas.

     BTU OR BRITISH THERMAL UNIT.  The quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.

     CONDENSATE.  Liquid hydrocarbons associated with the production of a
primarily natural gas reserve.

     DEVELOPMENT WELL. A well drilled into a proved natural gas or oil reservoir
to the depth of a stratigraphic horizon known to be productive.

     EXPLORATORY WELL. A well drilled to find and produce natural gas or oil
reserves that are not proved, to find a new reservoir in a field previously
found to be productive of natural gas or oil in another reservoir or to extend a
known reservoir.

     FIELD. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic level.

     LEASE BLOCK. Refers to several leases within close proximity of one
another.

     LEASEHOLD INTEREST.  The interest of a lessee under an oil and gas lease.

                                       18
<PAGE>
     MBBLS.   One thousand barrels of oil or other liquid hydrocarbons.

     MCF.  One thousand cubic feet of natural gas.

     MCFE.  One thousand cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.

     MMBTU.  One million British Thermal Units.

     MMCF.  One million cubic feet of natural gas.

     MMCFE.  One million cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.

     NET REVENUE INTEREST. A share of a working interest that is not required to
continue to, nor liable for, any portion of the expense of drilling and
completing the well.

     NONOPERATING WORKING INTEREST. A working interest, or a fraction of a
working interest, in a tract where the owner does have operating rights.

     OVERRIDING ROYALTY. An interest in oil and gas produced at the surface,
free of the expense of production and in addition to the usual royalty reserved
to the lessor in an oil and gas lease.

     PROSPECT. A specific geographic area which, based on supporting geological,
geophysical or other data and also preliminary economic analysis using
reasonably anticipated prices and costs, is deemed to have potential for the
discovery of oil and natural gas.

     PROVED DEVELOPED RESERVES. Those quantities of oil, natural gas and
condensate that can be expected to be recovered through existing wells with
existing equipment and operating methods.

     PROVED RESERVES. The estimated quantities of oil, natural gas and
condensate that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions by primary producing mechanisms.

     PROVED UNDERDEVELOPED RESERVES. Reserves that are expected to be recovered
from new wells on developed acreage where the subject reserves cannot be
recovered without drilling additional wells.

     REVERSIONARY INTEREST. A form of ownership interest in property that
reverts back to the transferor after expiration of an intervening income
interest.

     ROYALTY INTEREST. An interest in a natural gas and oil property entitling
the owner to a share of natural gas and oil production free of costs of
production.

     UNDIVIDED INTEREST. A form of ownership interest in which more than one
person concurrently owns an interest in the same oil and gas lease or pipeline.

     WORKING INTEREST. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and receive a
share of production.

ITEM 2.  PROPERTIES

     Information appearing in Item 1 describing the Company's properties under
the caption "Business and Properties" is incorporated herein by reference.

                                       19
<PAGE>
     The Company leases its executive offices in Houston, Texas, under an
operating lease expiring December 31, 2006. The Company also leases under an
operating lease, its division office in New Orleans, Louisiana. The lease has
been extended from April 30, 2000 to April 30, 2002. The Company's aggregate
annual lease payment obligations under these leases are $190,211.

ITEM 3.  LEGAL PROCEEDINGS

     On May 8, 2000, American Resources, a 75% owned subsidiary of the Company,
and its former Chief Financial Officer, were named in a lawsuit in the United
States District Court for the Southern District of Texas, Houston Division,
styled H&N GAS AND HOWARD ENERGY MARKETING, L.L.C. V. AMERICAN RESOURCES
OFFSHORE, INC. ET AL (Case No H-00-1371). The lawsuit alleges that H&N Gas and
American Resources entered into illegal and fraudulent natural gas purchase
option agreements that benefited American Resources at the expense of H&N Gas.
H&N Gas is seeking a claim against American Resources of $2.8 million plus
treble damages. American Resources intends to vigorously defend this claim.

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

     The Company did not submit any matter to a vote of security holders during
the quarter ended December 31, 1999.

                                     PART II

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

     The Company's Common Stock trades in the over-the-counter market and is
quoted on the NASDAQ Small Cap Market under the symbol "BDCO". As of August 4,
2000, there were an estimated 325 stockholders of record and the Company
estimates there are more than 1,000 beneficial owners of its Common Stock.
NASDAQ quotations reflect inter-dealer prices, without adjustment for retail
mark-ups, mark-downs or commissions and may not represent actual transactions.
The following table sets forth, for the periods indicated, the high and low
sales price for the common stock as reported on NASDAQ.

                                                           SALES
                                                      HIGH       LOW
                                                    --------   --------
              Quarter Ended March 31, 1998 .....    $   4.50   $   2.75
              Quarter Ended June 30, 1998 ......    $   3.69   $   3.13
              Quarter Ended September 30, 1998 .    $   3.56   $   2.44
              Quarter Ended December 31, 1998 ..    $   3.50   $   2.63
              Quarter Ended March 31, 1999 .....    $   4.69   $   3.13
              Quarter Ended June 30, 1999 ......    $   6.00   $   4.00
              Quarter Ended September 30, 1999 .    $   6.88   $   5.00
              Quarter Ended December 31, 1999 ..    $   7.94   $   5.75

     The Company currently intends to retain earnings for its capital needs and
expansion of its business and does not anticipate paying cash dividends on the
common stock in the foreseeable future. Furthermore, the Company is restricted,
pursuant to its loan agreement from paying dividends on the common stock if
there is an outstanding balance under the loan agreement. Future policy with
respect to dividends will be determined by the Board of Directors based upon the
Company's earnings and financial condition, capital requirements and other
considerations. The Company is a holding company that conducts substantially all
of its operations through its

                                       20
<PAGE>
subsidiaries. As a result, the Company's ability to pay dividends on the common
stock is dependent on the cash flow of its subsidiaries. The Company has not
declared or paid any dividends on the common stock since its incorporation.

     RECENT SALES OF UNREGISTERED SECURITIES During the year ended December 31,
1999, Directors, Officers and other employees exercised options to purchase
32,004 shares of common stock. The sale of shares was privately made to
Directors, Officers and other employees pursuant to the Company's 1985 and 1996
Stock Option Plans, at exercise prices between $2.7885 and $4.383 per share. The
Company relied on an exemption under Section 4(2) of the Securities Act of 1933
in effecting these transactions.

     In June 1999, the Company received $1,960,000 through a private placement
of 392,000 shares of its' common stock at $5.00 per share. The proceeds were
used to replenish working capital.

     In order to provide funding for the acquisition of American Resources in
December 1999, the Company arranged a private placement and conversion of
principal and accrued interest on promissory notes into common stock, $.01 par
value per share, of 701,820 shares and 314,898 shares, respectively. The shares
were issued at a price of $6.00 per share. Consideration for the common stock
sold consisted of approximately $4,210,919 cash and the surrender of
approximately $1,811,555 of the Company's promissory notes due December 31,
2000, along with accrued interest of $77,835 through December 1, 1999.

ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial data of the Company and its consolidated
subsidiaries is presented for the five fiscal years ended December 31, 1999.
Such information should be read with Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and the related Notes included elsewhere in
this report.
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                 -----------------------------------------------------------------------------------
                                      1999               1998               1997           1996            1995
                                 -----------------------------------------------------------------------------------

<S>                              <C>                <C>                <C>            <C>             <C>
Operating Revenues ...........   $  2,757,056       $  3,558,773       $  4,982,606   $  4,128,568    $  5,123,053

Income (loss) from
Continuing operations ........   ($ 2,086,511)      ($ 9,059,979)(4)   $    983,095   $     92,302    $  7,355,686(2)
Income (loss) from
  Continuing operations
  per Common Share(1)(3) .....   ($      0.43)      ($      2.02)      $        .22   ($       .06)   $       3.04

Weighted average number of
  Common Shares outstanding(3)      4,837,504          4,492,344          4,462,072      3,107,026       2,323,433

Income (loss) from continuing
  Operations per diluted
  Common Share (1)(3) ........   ($      0.43)      ($      2.02)      $        .22   ($       .06)   $       1.77

Weighted average number of
  Common Shares and dilutive
  Potential Common Shares
  Outstanding(3) .............      4,837,504          4,492,344          4,531,208      3,107,026       4,139,037

Net Income (loss) ............   ($ 2,086,511)(5)   ($ 9,059,979)(4)   $    983,095   $     92,302    $  7,355,686(2)

Working Capital ..............   $     93,231       $    310,543       $  1,856,333   $    917,113    $  1,207,640

Total Assets .................   $ 21,538,216       $ 14,867,216       $ 24,644,387   $ 23,428,426    $ 23,278,615

 Long-term debt ..............           --         $  2,060,600       $  2,060,600   $  2,060,600    $     10,000
</TABLE>

                                       21
<PAGE>
(1)  Income from continuing operations per Common Share and dilutive Common
     Share in 1999, 1998, 1997, 1996 and 1995 is based on the weighted average
     number of Common Shares outstanding.

(2)  Includes the gain on the sale of a one-third interest in the Blue Dolphin
     Pipeline System effective August 1, 1995.

(3)  The weighted average number of Common Shares and potential Common Shares
     outstanding for the years ended December 31, 1996 and 1995, have been
     restated to reflect the one-for-fifteen reverse stock split effected on
     December 8, 1997.

(4)  Includes a non-cash impairment of oil and gas properties effective December
     31, 1998.

(5)  Includes the gain on the sale of a one-sixth interest in the Blue Dolphin
     Pipeline System effective March 1, 1999, and a non-cash valuation allowance
     of its deferred tax assets.

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

     The following is a review of certain aspects of the financial condition and
results of operations of the Company and should be read in conjunction with the
Consolidated Financial Statements included in Item 8 and incorporated herein by
reference, and Item 1, Business and Properties.

FINANCIAL CONDITION:  LIQUIDITY AND CAPITAL RESOURCES

     The following table summarizes our financial position at December 31, 1999
and 1998 (amounts in thousands):

                                  DECEMBER 31, 1999  DECEMBER 31, 1998
                                  -----------------  -----------------
                                   AMOUNT      %      AMOUNT     %
                                   ------   ------    ------   ------
     Working Capital ...........       93     --         311        2
     Property and equipment, net   15,195       82     8,627       63
     Other noncurrent assets ...    3,317       18     4,718       35
                                   ------   ------    ------   ------

     Total .....................   18,604      100    13,656      100
                                   ======   ======    ======   ======

     Long-term debt ............     --       --       2,061       15
     Other long-term liabilities     --       --        --       --
     Minority Interest .........      958        5      --       --
     Shareholders' equity ......   17,646       95    11,595       85
                                   ------   ------    ------   ------

     Total .....................   18,604      100    13,656      100
                                   ======   ======    ======   ======


     The significant changes in our financial position from December 31, 1998 to
December 31, 1999 are the increase in property and equipment of $7.0 million and
the increase in stockholders' equity of $6.1 million. The increase in property
and equipment was due to the acquisition of the Black Marlin Pipeline Company
and American Resources. The increase in stockholders' equity was due to private
placements of common stock, offset in part by the Company's 1999 net loss of
$2.1 million.

     Historically, the Company has primarily relied on the proceeds from
financing activities to supplement its capital requirements. In 1999, the
Company financed its activities through a combination of private equity and debt
financing and sale of assets. The Company's future cash

                                       22
<PAGE>
flows are subject to a number of variables, including the level of production,
utilization of its pipeline systems, utilization of the Company's services by
third parties and commodity prices among others. The Company believes that it
will have sufficient cash flow from operations and private equity or debt
financing activities to meet its obligations and operating needs for the current
year. However, the Company cannot be assured that operations and other capital
resources will provide cash in sufficient amounts to maintain planned levels of
capital expenditures. The net cash provided by or used in our operating,
investing and financing activities is summarized below (amounts in thousands):

                                        YEARS ENDING DECEMBER 31
                                       ---------------------------
                                        1999      1998      1997
                                       ---------------------------
     Net cash provided by (used in):
         Operating activities ......   (1,087)      397     1,435
         Investing activities ......   (5,458)   (1,791)     (926)
         Financing activities ......    7,118       231        40
                                       ------    ------    ------
     Net increase (decrease) in cash      573    (1,163)      549
                                       ======    ======    ======


     The Company's cash flows from operating activities decreased $1.5 million
in 1999 from 1998, due primarily to a decline in oil and gas volumes transported
by the Blue Dolphin System. Cash flow from operating activities decreased by
$1.0 million in 1998 from 1997, also due primarily to a decline in oil and gas
volumes transported by the Blue Dolphin System. The Blue Dolphin System is
dependent upon drilling and development activity in its vicinity which have been
very limited during 1998 and 1999.

     Cash flow used in investing activities in 1999 primarily included capital
expenditures for the 50% ownership interest in the Black Marlin Pipeline of $2.7
million and the 75% ownership interest in American Resources of $4.5 million
(see Note 12 in Item 8. Financial Statements and Supplementing Data). Cash flow
used in investing activities in 1998 included the unreimbursed costs of the oil
and gas prospect generation program of $.7 million and development costs of
Petroport of $.8 million. Cash flow used in investing activities in 1997
primarily included plugging and abandonment costs of a well in the Buccaneer
Field of $.6 million and funds escrowed for future abandonment costs of $.4
million.

     Cash flow provided by financing activities in 1999 consisted of net
proceeds from a private placement of common stock of $6.2 million and debt of
$1.0 million. The Company expects to continue to seek external financing to meet
its liquidity requirements. Cash flow provided by funding activities in 1998 and
1997 were minimal.

      The Company entered into an agreement with Fidelity Oil to manage their
interest in the properties acquired from American Resources for $40,000 per
month. The agreement expires in December 2000 and provides for continuation
thereafter on a year to year basis unless terminated by either party.

       In order to provide funding for the acquisition of American Resources in
December 1999, the Company arranged a private placement and conversion of
principal and accrued interest on promissory notes into common stock, $.01 par
value per share, of 701,820 shares and 314,898 shares, respectively (See Notes 5
and 7 in Item 8, Financial Statements and Supplementary Data). The Company also
issued a $1,000,000 convertible promissory note to Harris A. Kaffie, a director
of the Company. The note originally due June 1, 2000, has been extended to March
31, 2001, bears interest at 10% per annum and can be converted into common stock
at $6.00 per share. The Company believes that if the $1,000,000 convertible
promissory note is not converted, the amount due will be refinanced.

                                       23
<PAGE>
     In June 1999, the Company received $1,960,000 through a private placement
of 392,000 shares of its common stock, $.01 par value per share, at $5.00 per
share. The proceeds were used to replenish working capital.

     The Company maintains a $10,000,000 reducing revolving credit facility with
Bank One, Texas, N.A. ("Loan Agreement"). The term of the Loan Agreement expires
on December 31, 2000, when the outstanding balance, if any, is due and payable.
The facility is available for the acquisition of oil and gas reserve based
assets and working capital. In January 2000, the Company paid the $80,000
outstanding balance under the Loan Agreement. At June 30, 2000 the Company did
not have an outstanding balance under the Loan Agreement and its borrowing
capacity under the Loan Agreement was adjusted to $0.

     The Loan Agreement includes certain restrictive covenants that are
applicable if any amounts are outstanding under the agreement, including
restrictions on the Company's ability to pay didvidends on its capital stock and
the maintenance of certain financial ratios. Among the various financial
covenants the Company must comply with, it must maintain (i) a total tangible
net worth of $10,250,000, (ii) a debt coverage ratio of not less than 1.2 to 1
calculated on a rolling four-quarter basis and (iii) a current ratio (as defined
in the Loan Agreement) of at least 1 to 1. The Company expects to renegotiate
the terms of the Loan Agreement including, but not limited to, the borrowing
capacity and restrictive covenants or enter into a credit agreement with another
financial institution. There can be no assurance that the Company will be able
to renegotiate the terms of the Loan Agreement or enter into a new credit
agreement with commercially reasonable terms.

     In July 2000, the Company executed an agreement to provide transportation
services for Vastar Resources in High Island Block A-5 offshore Texas in the
Gulf of Mexico. To accommodate this production, the Company has agreed to
construct a 3.4 mile 12" diameter pipeline from the production platform in High
Island A-5 to the Black Marlin Pipeline. The cost to construct the pipeline is
estimated to be $1.1 million net to the Company's interest. The pipeline is
expected to be completed in August 2000, with production from High Island Block
A-5 expected to commence in September 2000. The Company has conducted
preliminary negotiations with Bank One to finance this pipeline under the Loan
Agreement.

     On July 25, 2000, oil and gas production from the only producing well in
the Buccaneer Field ceased due to down-hole mechanical problems. The Company is
currently evaluating alternatives to reestablish production from this well and
the associated costs to do so. The Company has hired Ralph E. Davis Associates,
Petroleum Engineers, to assist with evaluating alternatives to reestablish
production in the field. If production is not reestablished or efforts to
reestablish production are not commenced within six months from the date of last
production, the Company's leasehold on the Buccaneer Field will terminate, which
would result in a significant non-cash impairment of oil and gas properties. As
of December 31, 1999, the carrying value of the Buccaneer Field was $5,761,398.

     In July 2000, the Company acquired a 83.3% ownership interest in an 8-inch,
12.78 mile pipeline from Walter Oil and Gas Corp. for approximately $224,077.
The pipeline extends from Galveston Area Block 350 to an interconnect to another
pipeline in Galveston Area Block 391, approximately 14 miles south of the
Company's Blue Dolphin Pipeline. The pipeline currently transports nominal
volumes of gas, but the Company believes it is well positioned to attract future
discoveries in the area.

     In June 1999, the Company removed an inactive satellite platform in the
Buccaneer Field at a cost of approximately $345,000. The Company's annual
abandonment escrow fund payment of $250,000 that was due in June 1999 was waived
pursuant to a verbal agreement with the MMS as a result of the removal of the
inactive satellite platform.

                                       24
<PAGE>
     The reserves and future net revenues presented in Item 1 "Business - Oil
and Gas Exploration and Production Activities," reflect capital expenditures
totalling $1,416,323, $570,139, $404,430, $178,350 and $43,300 in the years
ending December 31, 2000, 2001, 2002, 2003 and 2004, respectively. Management
will continue to evaluate its capital expenditure program based on, among other
things, field reservoir performance, availability and cost of drilling and
workover equipment, and demand and prices obtainable for the Company's
production, as well as availability of capital resources. There can be no
assurance that reserves will be developed as currently planned.

     In 1999 the Company placed a 50% interest in the prospect generation
program, whereby in exchange for certain participation rights, the participant
funds $100,000 per month for the costs associated with the program. Program
costs will be reimbursed to the Company as prospects are developed and leases
acquired. A portion of the reimbursed costs will be paid to the Company's
existing program participant based on the level of interest it retains in each
prospect. During 1999, the Company sold one prospect and retained a reversionary
interest in the prospect. The available interests in the prospect inventory are
for sale on an individual prospect basis. The Company believes that it will
reach a formal agreement with its existing program participant to continue
funding the prospect generation program through at least December 2000. A well
is currently being drilled on a prospect the Company previously sold in which it
has retained a reversionary interest. The Company had previously entered into a
multi-year 3-D seismic data acquisition and licensing agreement, whereby a
minimum of $1,500,000 was committed over a 5 year period that ended July 31,
1999 to acquire 3-D seismic data. The final commitment under the agreement,
$450,000, was paid in July 1999.

     In November 1999, the Company and WBI Holdings formed New Avoca, 25% owned
and managed by the Company and 75% owned by WBI, and acquired the Avoca gas
storage assets for $400,000 ($100,000 net to the Company's interest) from
Northeastern (see Item 1 "Business - Avoca Natural Gas Storage Project").
Additionally, a contingent payment of $500,000 ($125,000 net to the Company's
interest) is due to Northeastern on May 22, 2000, but has been extended to
August 22, 2000. The contingent payment will be excused if Northeastern
successfully settles a claim associated with the Avoca Gas Storage, Inc. (the
original owner of the Avoca gas storage assets) bankruptcy proceedings. A
pending settlement of the claim is expected to be completed in September 2000.
New Avoca and Northeastern have agreed to further extend this payment until
October 1, 2000, as consideration for the extension the contingent payment of
$450,000 was increased to $460,000. New Avoca can elect to liquidate the project
before or after August 22, 2000. If liquidated, after settling all accrued
obligations, the first $440,000 of proceeds, if any, goes to New Avoca, the next
$500,000 goes to Northeastern and anything over $940,000, subject to
Northeastern successfully settling its claim in the Avoca Gas Storage, Inc.
bankruptcy proceedings, goes to New Avoca. New Avoca is currently evaluating
whether or not to go forward with construction of the project or to liquidate
the project (see "Avoca Natural Gas Storage Project" in Item 1. Business). It is
currently estimated that the Company's share of costs associated with these
activities for 2000 will be $300,000. The Company's share of construction costs,
should New Avoca decide to go forward with the project, and the timing of such
costs have not been determined.

     In general, the Company believes that it has, or can obtain, adequate
capital resources and liquidity to continue to finance and otherwise meet its
anticipated business requirements. The availability or cost of capital resources
may, however, adversely affect the Company's timing for major pipeline
expansions, further development of the Buccaneer Field, growth in oil and gas
prospect generation activities and the Petroport and Avoca projects.

RESULTS OF OPERATIONS

     For the year ended December 31, 1999 ("1999"), the Company reported a net
loss of $2,086,511, compared to net loss of $9,059,979 reported for the year
ended December 31, 1998

                                       25
<PAGE>
("1998"), representing an improvement of $6,973,468. The improvement is
primarily due to a non-cash impairment of oil and gas properties recorded at
December 31, 1998 of $8,952,785, net of income tax benefit, offset in part by a
non-cash valuation allowance on its deferred tax assets of $1,858,608 recorded
at December 31, 1999.

     For the year ended December 31, 1998 ("1998"), the Company reported a net
loss of $9,059,979, compared to net income of $983,095 reported for the year
ended December 31, 1997 ("1997"), representing a decrease of $10,043,074. The
decrease is primarily due to the non-cash impairment of oil and gas properties
recorded at December 31, 1998 of $8,952,785, net of income tax benefit.

1999 COMPARED TO 1998

     REVENUE FROM PIPELINE OPERATIONS. Pipeline system revenues decreased by
$913,228 or 33% in 1999 to $1,875,716 from 1998. The decrease was due to a
decline in gas and oil volumes transported by the Blue Dolphin System of
approximately $1,424,749, and the sale of a one-sixth interest in the Blue
Dolphin System in March 1999, eliminating revenues of $189,623, offset in part
by the acquisition of the Black Marlin System, providing revenues of $701,144.

     REVENUE FROM OIL AND GAS SALES AND OPERATING FEES. Oil and gas sales and
operating fees increased by $111,511 or 15% in 1999 to $881,340 from 1998. The
acquisition of American Resources in December 1999 provided revenues of
$307,195, partially offset by a reduction in Buccaneer Field revenues of
$195,684 or 25%. Although commodity prices in general increased during 1999, gas
sales from the Buccaneer Field were based on a fixed price of $2.08 per MMBtu
through September 1999. Since October 1999, the price received for Buccaneer
Field gas production has been a current monthly market price.

     PIPELINE OPERATING EXPENSES. Pipeline operating expenses increased $218,946
or 25% to $1,102,998 from 1998. The increase was due to the acquisition of the
Black Marlin System in March 1999, with expenses of $393,696 in 1999, offset in
part by the sale of a one-sixth interest in the Blue Dolphin System in March
1999, eliminating expenses of $108,205, and cost reductions from continuing
operations of $66,545.

     LEASE OPERATING EXPENSES. Lease operating expenses increased by $254,450 or
30% in 1999 to $1,100,549 from 1998. The increase was due primarily to costs of
approximately $187,738 associated with repairs made to the offshore Buccaneer
Field platforms in 1999 and approximately $66,712 associated with the American
Resources properties that were acquired in December 1999.

     DEPLETION, DEPRECIATION AND AMORIZATION ("DD&A"). DD&A expense increased by
$194,304 or 48% in 1999 to $595,286 from 1998. The increase was due to the
acquisition of the Black Marlin System in March 1999, resulting in depreciation
of approximately $199,017, and American Resources in December 1999, resulting in
depletion of approximately $124,562. These increases were partially offset by a
reduction in depletion due to lower production volumes from the Buccaneer Field
of approximately $92,475, and the sale of a one-sixth interest in the Blue
Dolphin System in March 1999, resulting in a $36,800 reduction in depreciation.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $595,067 or 41% to $2,061,805 from 1998. The increase was primarily
due to increased personnel costs associated with the Company's asset
acquisitions during 1999. The Company expects to maintain this higher level of
general and administrative expenses.

     GAIN ON SALE OF ASSETS. In March 1999, the Company reported a gain on the
sale of a one-sixth interest in the Blue Dolphin System of approximately
$2,052,920.

                                       26
<PAGE>
     INCOME TAX EXPENSE. In 1999 the Company recorded a valuation allowance of
its deferred tax assets in accordance with SFAS No. 109 Accounting for Income
Taxes, whereby the deferred tax asset of $2,103,052 was reduced to $244,444,
resulting in an increase in income tax expense of $1,858,608.

1998 COMPARED TO 1997

     REVENUE FROM PIPELINE OPERATIONS. Pipeline system revenues decreased by
$1,373,649 or 33% in 1998 to $2,788,944 from 1997. The decrease was due to a
decrease in oil transportation revenues of $1,120,457, primarily due to the loss
of a producer/shipper in October 1997.

     REVENUE FROM OIL AND GAS SALES AND OPERATING FEES. Revenues from oil and
gas sales and operating fees for 1998 decreased $50,184 or 6% to $769,829 from
1997. The reduction in oil and gas sales is attributable to normal production
declines from the Company's Buccaneer Field.

     INTEREST AND OTHER INCOME. Other income for 1998 decreased $157,432 or 40%
to $105,994 from 1997. The reduction in other income is due to a refund of prior
years franchise taxes of $152,370 received in 1997.

     LEASE OPERATING EXPENSES. Lease operating expenses for 1998 decreased by
$29,472 to $846,099 from 1997 due in part to repairs and modifications to the
Buccaneer Field production platforms and facilities of approximately $68,000
incurred in 1997.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expense
increased by $108,967 or 8% in 1998 from 1997 principally due to an increase in
personnel costs and consulting fees of approximately $95,472, associated with
potential asset acquisitions.

     IMPAIRMENT OF OIL AND GAS PROPERTIES. At December 31, 1998, the Company
recorded a non-cash impairment charge of $12,011,544, reflecting the write down
of its oil and gas properties and certain exploration activity costs. The
non-cash asset impairment charge was a result of the application of Statement of
Financial Accounting Standards No. 121 (SFAS No. 121), which requires that
long-lived assets and certain identifiable intangibles held and used by the
Company be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
non-cash impairment of oil and gas properties resulted from a 15% decrease in
the price of gas and a 35% decrease in the price of oil used to value the
Company's reserves from the prior period, as well as changes to the Company's
development plans, whereby development of the Buccaneer Field reserves have been
delayed.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      Statement of Financial Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), was issued by the Financial
Accounting Standards Board in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. In July 1999, SFAS NO. 137, "Deferral of the
Effective Date of SFAS No. 133," was issued and delays the effective date for
one year, to fiscal years beginning after June 15, 2000. The Company is
evaluating the impact of the provisions of SFAS No. 133.

      In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5
requires that costs of start-up activities be charged to expense as incurred and
broadly defines such costs. The Company has capitalized certain costs incurred
in

                                       27
<PAGE>
connection with a new business segment, and SOP 98-5 requires that such costs be
charged to results of operations upon its adoption. The Company adopted the
requirements of SOP 98-5 as of January 1, 1999 resulting in a cumulative effect
of a change in an accounting principle of $80,334, net of income tax benefit of
$41,480.

YEAR 2000 ISSUE

       The Company's computer software was made Year 2000 compliant prior to the
end of 1999; and, therefore, the business, results of operations and financial
condition of the Company were not affected by the millennium change.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risk, including adverse changes in
commodity prices and interest rates as discussed below.

     COMMODITY PRICE RISK- The Company produces and sells natural gas, crude
oil, and natural gas liquids. As a result, the Company's financial results can
be significantly affected if these commodity prices fluctuate widely in response
to changing market forces. Except as discussed below, the Company has not used
derivative products in the past to manage commodity price risk.

     INTEREST RATE RISK: The Company's exposure to changes in interest rates
primarily results from its short-term and long-term debt with floating interest
rates. Since the Company does not have an outstanding balance under the Loan
Agreement a 10% change in the interest rate on the credit facility would not
effect interest expense.

     DERIVATIVES: In October 1999, American Resources sold call options for 5
MMBtu's per day of gas at a call price of $3.25 per MMBtu to H & N Gas. The call
options expire in September 2000. In exchange for establishing a ceiling of
$3.25 per MMBtu over the option term, Amrican Resources received an average
option premium of approximately $0.12 per MMBtu on the volumes contracted for
under the call option agreement. Fidelity Oil agreed to assume 80%, or 4 MMBtu's
per day, of any liability from these options. The call options are settled each
month. The months of October 1999 through May 2000 expired with no liability to
American Resources. The liability from the June 2000 option was $147,900, of
which Fidelity Oil reimbursed American Resources $118,320. For the months of
July and August 2000, the settlement amounts were $222,580 and $79,515,
respectively, of which Fidelity Oil has reimbursed American Resources $178,064
and $63,612, respectively.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Index to Financial Statements:                                    PAGE
                                                                           ----

         Independent Auditors' Report...............................        29

         Consolidated Balance Sheets, at December 31, 1999 and 1998.        31

         Consolidated Statements of Operations, for the years
              ended December 31, 1999, 1998, and 1997...............        33

         Consolidated Statements of Stockholders' Equity, for the
              years ended December 31, 1999, 1998, and 1997.........        34

         Consolidated Statements of Cash Flows, for the years
              ended December 31, 1999, 1998, and 1997...............        35

         Notes to Consolidated Financial Statements.................        37

                                       28
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Blue Dolphin Energy Company:

We have audited the accompanying consolidated balance sheets of Blue Dolphin
Energy Company and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the consolidated
financial statements of American Resources Offshore, Inc., a 75 percent owned
subsidiary, which statements reflect total assets constituting 6 percent and
total revenues constituting 11 percent in 1999 of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for American Resources Offshore, Inc., is based solely on the report of the
other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Blue Dolphin Energy Company and
subsidiaries as of December 31, 1999 and 1998, and the results of its their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.


                                                 /s/  KPMG LLP


Houston, Texas
March 28, 2000

                                       29
<PAGE>
                          Independent Auditors' Report


The Board of Directors and Shareholders
American Resources Offshore, Inc.


We have audited the accompanying consolidated balance sheets of American
Resources Offshore, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Resources
Offshore, Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

                                                       /s/ Ernst & Young LLP

New Orleans, Louisiana
March 10, 2000

                                       30
<PAGE>
                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1999 and 1998


                      ASSETS                         1999          1998
                      ------                     -----------   -----------

Current assets:
    Cash and cash equivalents ................   $ 1,166,730       593,509
    Trade accounts receivable ................     1,542,328       771,268
    Prepaid expenses and other assets ........       318,139       157,588
                                                 -----------   -----------
           Total current assets ..............     3,027,197     1,522,365
                                                 -----------   -----------

Property and equipment, at cost:
    Oil and gas properties, including $950,813
    and $227,286 of unproved leasehold cost at
    December 31, 1999 and 1998, respectively
    (full-cost method) .......................    26,474,957    21,210,806
    Onshore separation and handling facilities     1,583,610     2,106,189
    Land .....................................       930,500     1,133,333
    Pipelines ................................     3,653,397     1,320,063
    Other property and equipment .............       431,294       343,220
                                                 -----------   -----------
                                                  33,073,758    26,113,611
    Less accumulated depletion, depreciation,
     amortization and impairment .............    17,879,183    17,486,651
                                                 -----------   -----------
                                                  15,194,575     8,626,960

Deferred federal income tax ..................       244,444     2,010,060
Acquisition and development costs - Petroport      1,741,823     1,576,391
Escrow fund ..................................     1,168,564     1,107,573
Other assets .................................       161,613        23,867
                                                 -----------   -----------
                                                 $21,538,216    14,867,216
                                                 ===========   ===========

See accompanying notes to consolidated financial statements.

                                                                   (Continued)
                                       31
<PAGE>
                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS, CONTINUED

                           December 31, 1999 and 1998


<TABLE>
<CAPTION>
       LIABILITIES AND STOCKHOLDERS' EQUITY                    1999            1998
       ------------------------------------                ------------    ------------

<S>                                                        <C>                  <C>
Current liabilities:
    Trade accounts payable and accrued expenses ........   $  1,347,944         892,190
    Current portion of long term debt ..................        319,045         200,000
    Note payable - related party .......................      1,000,000
    Accrued expenses and other liabilities .............        266,977         119,632
                                                           ------------    ------------
           Total current liabilities ...................      2,933,966       1,211,822
                                                           ------------    ------------
Long-term debt .........................................           --         2,060,600
                                                           ------------    ------------
           Total long-term liabilities .................           --         2,060,600
                                                           ------------    ------------
Minority interest ......................................        958,521            --
                                                           ------------    ------------

Stockholders' equity:
    Common stock, $.01 par value, 10,000,000 shares
     authorized at December 31, 1999 and 1998, 5,950,879
     shares issued and outstanding at December 31,
     1999; 4,504,627 shares issued and outstanding
     at December 31, 1998 ..............................         59,509          45,046
    Additional paid-in capital .........................     25,823,817      17,700,833
    Accumulated (deficit) ..............................     (8,237,597)     (6,151,085)
                                                           ------------    ------------
           Total stockholders' equity ..................     17,645,729      11,594,794

                                                           $ 21,538,216      14,867,216
                                                           ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       32
<PAGE>
                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                 1999          1998           1997
                                                             -----------    -----------    -----------
<S>                                                          <C>              <C>            <C>
Revenue from operations:
   Pipeline operations ...................................   $ 1,875,716      2,788,944      4,162,593
   Oil and gas sales .....................................       567,103        412,753        415,081
   Operating fees ........................................       314,237        357,076        404,932
                                                             -----------    -----------    -----------
          Revenue from operations ........................     2,757,056      3,558,773      4,982,606
                                                             -----------    -----------    -----------
Cost of operations:
   Pipeline operating expenses ...........................     1,102,998        884,052        891,157
   Lease operating expenses ..............................     1,100,549        846,099        875,571
   Impairment of oil and gas properties ..................          --       12,011,544           --
   Depletion, depreciation and amortization ..............       595,286        400,982        372,252
   General and administrative expenses ...................     2,061,805      1,466,738      1,357,771
                                                             -----------    -----------    -----------
          Cost of operations .............................     4,860,638     15,609,415      3,496,751
                                                             -----------    -----------    -----------
          Income (loss) from operations ..................    (2,103,582)   (12,050,642)     1,485,855

Other income (expense):
   Interest expense ......................................      (238,322)      (215,141)      (218,955)
   Gain on sale of assets ................................     2,052,920           --             --
   Interest and other income .............................        80,722        105,994        262,426
                                                             -----------    -----------    -----------
          Income (loss) before income taxes ..............      (208,262)   (12,159,789)     1,529,326

Minority interest ........................................          (882)          --             --

Income tax benefit (expense) .............................    (1,797,033)     3,099,810       (546,231)
                                                             -----------    -----------    -----------
          Income (loss) before cumulative effect of a
           change in an accounting principle .............    (2,006,177)    (9,059,979)       983,095

Change in accounting principal (net of $41,480 income tax)       (80,334)          --             --
                                                             -----------    -----------    -----------

          Net income (loss) ..............................   $(2,086,511)    (9,059,979)       983,095
                                                             ===========    ===========    ===========
Earnings per common share-basic
    Income before accounting change ......................   $     (0.41)         (2.02)          0.22
    Cumulative effect of a change in accounting principle          (0.02)          --             --
                                                             -----------    -----------    -----------
    Net income ...........................................   $     (0.43)         (2.02)          0.22
                                                             ===========    ===========    ===========
Earnings per common share-diluted
    Income before accounting change ......................   $     (0.41)         (2.02)          0.22
    Cumulative effect of a change in accounting principle          (0.02)          --             --
                                                             -----------    -----------    -----------
    Net income ...........................................   $     (0.43)         (2.02)          0.22
                                                             ===========    ===========    ===========

Weighted average number of common shares
   outstanding and dilutive potential common shares:
   Basic .................................................     4,837,504      4,492,344      4,462,072
                                                             ===========    ===========    ===========
   Diluted ...............................................     4,837,504      4,492,344      4,531,208
                                                             ===========    ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       33
<PAGE>
                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 1999, 1998, and 1997


<TABLE>
<CAPTION>
                                                            ADDITIONAL                      TOTAL
                                               COMMON         PAID-IN      ACCUMULATED   STOCKHOLDERS'
                                                STOCK         CAPITAL       (DEFICIT)       EQUITY
                                             -----------    -----------    -----------   ------------

<S>                                          <C>             <C>             <C>           <C>
Balance at December 31, 1996 .............   $    44,513     17,630,265      1,925,799     19,600,577
                                             -----------    -----------    -----------    -----------
    Exercise of 51,340 stock options .....           513        159,574           --          160,087
    Cancellation of 10,768 shares of stock          (108)      (110,324)          --         (110,432)
    Other ................................          --          (10,000)          --          (10,000)
    Net income ...........................          --             --          983,095        983,095
                                             -----------    -----------    -----------    -----------
Balance at December 31, 1997 .............        44,918     17,669,515      2,908,894     20,623,327
                                             -----------    -----------    -----------    -----------
    Exercise of 12,780 stock options .....           128         35,509           --           35,637
    Other ................................          --           (4,191)          --           (4,191)
    Net loss .............................          --             --       (9,059,979)    (9,059,979)
                                             -----------    -----------    -----------    -----------
Balance at December 31, 1998 .............        45,046     17,700,833     (6,151,085)    11,594,794
                                             -----------    -----------    -----------    -----------
    Exercise of 32,004 stock options .....           320        115,073           --          115,393
    Cancellation of 14,470 shares of stock          (145)       (85,010)          --          (85,155)
    Issuance of  shares to 401K plan .....           200         59,800           --           60,000
    Private placements ...................        10,939      6,159,980           --        6,170,919
    Notes and accrued interest
              tendered for stock .........         3,149      1,886,241           --        1,889,390
    Other ................................          --          (13,100)            (1)       (13,101)
    Net loss .............................          --             --       (2,086,511)    (2,086,511)
                                             -----------    -----------    -----------    -----------
Balance at December 31, 1999 .............   $    59,509     25,823,817     (8,237,597)    17,645,729
                                             ===========    ===========    ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       34
<PAGE>
                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 1999, 1998, and 1997

<TABLE>
<CAPTION>

                                                                   1999            1998            1997
                                                               ------------    ------------    ------------

<S>                                                            <C>               <C>                <C>
Operating activities:
      Net income (loss) ....................................   $ (2,086,511)     (9,059,979)        983,095
      Adjustments to reconcile net income to net cash
       provided by operating activities:
         Depletion, depreciation and amortization ..........        595,286         400,982         372,252
         Minority interest .................................            882            --              --
         Deferred income taxes .............................      1,765,616      (3,113,980)        469,965
         Change in accounting principle ....................        121,814            --              --
         Gain on sale of property and equipment ............     (2,052,910)           --              --
         Impairment of oil and gas properties ..............           --        12,011,544            --
         Changes in operating assets and liabilities:
           (Increase) decrease in trade accounts receivable        (771,060)         90,472        (117,457)
           (Increase) decrease in prepaid
              expenses and other assets ....................       (298,298)        (62,750)          3,962
           (Decrease) increase in trade accounts payable,
              accrued interest and other liabilities .......      1,638,573         130,282        (276,754)
                                                               ------------    ------------    ------------
                 Net cash provided by (used in)
                  operating activities .....................     (1,086,608)        396,571       1,435,063
                                                               ------------    ------------    ------------
Investing activities:
      Oil and gas prospect generation costs ................     (1,268,098)       (737,868)       (500,460)
      Reimbursement of oil and gas prospect generation costs      1,292,125
      Proceeds from sales of oil and gas prospect leases ...           --              --         1,018,289
      Exploration and development costs ....................           --          (100,051)           --
      Purchases of property and equipment ..................    (10,290,563)       (354,821)       (299,551)
      Net proceeds from sale of assets .....................      5,513,423            --              --
      Development costs - Petroport ........................       (299,426)       (822,086)       (185,641)
      Reduction of escrowed abandonment fund ...............           --           593,830            --
      Abandonment of oil and gas properties ................       (344,698)           --          (570,115)
      Funds escrowed for abandonment costs .................        (60,991)       (369,806)       (388,269)
                                                               ------------    ------------    ------------
                 Net cash used in
                   investing activities ....................     (5,458,228)     (1,790,802)       (925,747)
                                                               ------------    ------------    ------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       35
<PAGE>
                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years ended December 31, 1999, 1998, and 1997

<TABLE>
<CAPTION>
                                                                      1999          1998           1997
                                                                  -----------    -----------    -----------
<S>                                                                 <C>              <C>             <C>
Financing activities:
      Proceeds from borrowings, Bank ..........................       200,000        200,000           --
      Proceeds from borrowings, Director ......................     1,000,000
      Payments on borrowings, Bank ............................      (330,000)          --             --
      Net proceeds from private placement .....................     6,170,919
      Net proceeds from the exercise of stock and stock options        77,138         31,446         39,655
                                                                  -----------    -----------    -----------
                 Net cash provided by
                   financing activities .......................     7,118,057        231,446         39,655
                                                                  -----------    -----------    -----------
                 Increase (decrease) in cash ..................       573,221     (1,162,785)       548,971

Cash and cash equivalents at beginning of year ................       593,509      1,756,294      1,207,323
                                                                  -----------    -----------    -----------
Cash and cash equivalents at end of year ......................   $ 1,166,730        593,509      1,756,294
                                                                  ===========    ===========    ===========
Supplementary cash flow information:
      Interest paid ...........................................   $   326,819        214,926        113,000
                                                                  ===========    ===========    ===========
      Income taxes (received) paid ............................   $    12,620        (93,264)        70,881
                                                                  ===========    ===========    ===========
</TABLE>

NON-CASH TRANSACTIONS:

During 1999, holders of $1,811,555 of notes payable along with accrued interst
of $77,835 converted the notes payable into 314,898 shares of Common Stock.


See accompanying notes to consolidated financial statements.

                                       36
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      December 31, 1999, 1998 and 1997


  (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

      ORGANIZATION

      Blue Dolphin Energy Company (the 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. It
      was formed pursuant to a reorganization effective June 9, 1986.

      PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements of the Company include the accounts
      of its wholly-owned subsidiaries and majority owned subsidiary (ARO). All
      significant intercompany balances and transactions have been eliminated in
      consolidation.

      ACCOUNTING ESTIMATES

      Management has made a number of estimates and assumptions relating to the
      reporting of assets and liabilities and to the disclosure of contingent
      assets and liabilities including reserve information which affects the
      depletion calculation as well as the computation of the full cost ceiling
      limitation to prepare these financial statements in conformity with
      generally accepted accounting principles. Actual results could differ from
      those estimates.

      CASH EQUIVALENTS

      Cash equivalents include liquid investments with an original maturity of
      three months or less.

      OIL AND GAS PROPERTIES

      Oil 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 country-by-country cost center basis.
      Due to the difference in the expected life of the reserves of the
      properties, the Company uses two separate cost centers, one for its
      Buccaneer Field property and one for its ARO properties. Amortization of
      such costs and estimated future development costs is determined using the
      unit-of-production method. Provision for the estimated costs of offshore
      platform and well abandonment, net of salvage value, is computed on the
      units of production method and is included in depletion, depreciation and
      amortization. Costs directly associated with the acquisition and
      evaluation of unproved properties are excluded from the amortization
      computation

                                       37
                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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 of independent petroleum engineers (ARO
      properties) and the Company's in-house reserve engineers (Buccaneer
      property). 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. 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.

      At December 31, 1998, the Company recorded an impairment charge on oil and
      gas properties and certain exploration activity costs of $12,011,544,
      thereby adjusting the net carrying value of oil and gas properties to the
      cost center ceiling as described above. The impairment resulted from lower
      oil and gas prices and changes to the Company's development plans, whereby
      development of oil and gas properties have been deferred. Included in oil
      and gas properties at December 31, 1999 and 1998 are $145,101 and
      $198,486, respectively in expenditures directly associated with generation
      of additional oil and gas prospects, net of reimbursements.

      At December 31, 1999, oil and gas properties included $950,813 of unproved
      leasehold costs that are not being amortized. These costs will begin to be
      amortized when they are evaluated and proved reserves are discovered,
      impairment is indicated or when the lease term expires. Unproved leasehold
      costs consist of interests in state and federal leases located in the Gulf
      of Mexico. The leases have primary terms of 5 years. Development of these
      leases is dependent upon the other owners of the leases to initiate a plan
      of development.

      The Company capitalizes 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 periods reflected herein.

                                       38

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      PIPELINES AND FACILITIES

      Pipelines and facilities are recorded at cost. Depreciation is computed
      using the straight-line method over estimated useful lives of 10-25 years.
      Provision for the estimated cost of pipeline and facilities abandonment,
      net of salvage value, is computed on a straight line basis over the
      estimated useful life of such assets and is included in depletion,
      depreciation and amortization.

      The Company in 1995 adopted Statement of Financial Accounting Standards
      (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
      LONG-LIVED ASSETS TO BE DISPOSED OF, with no impact to the Company's
      consolidated financial statements. Assets are grouped and evaluated based
      on the ability to identify separate cash flows generated therefrom.

      OTHER PROPERTY AND EQUIPMENT

      Depreciation of furniture, fixtures and other equipment, including assets
      held under capital leases, is computed using the straight-line method over
      estimated useful lives of 2-5 years.

      ABANDONMENT

      A provision for the abandonment, dismantlement and site remediation of
      offshore production platforms and existing wells is made using the
      unit-of-production method applied to estimates based on current costs. A
      provision for pipeline and pipeline facilities abandonment costs is also
      provided using the straight-line method over the estimated useful lives of
      the pipeline and pipeline facilities. These provisions are included in
      accumulated depletion, depreciation and amortization, and accrued
      abandonment costs, respectively, and are undiscounted. Aggregate
      abandonment liability is estimated to be approximately $3,960,000 at
      December 31, 1999 and 1998.

      STOCK-BASED COMPENSATION

      The Company applies SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
      which allows a company to adopt a fair value based method of accounting
      for a stock-based employee compensation plan or to continue to use the
      intrinsic value based method of accounting prescribed by Accounting
      Principles Board Opinion No.

                                       39

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company has chosen to
      continue to account for stock-based compensation under the intrinsic value
      method and provides the pro forma effects of the fair value method as
      required.

      RECOGNITION OF CRUDE OIL AND NATURAL GAS REVENUE

       Sales 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 the Company's net revenue interest in
      production. Similarly, when deliveries are below the Company's net revenue
      interest in production, sales are recorded to reflect the full net revenue
      interest. The Company's imbalance liability at December 31, 1999 and 1998
      was not material.

      RECOGNITION OF PIPELINE TRANSPORTATION REVENUE

      Revenue from the transportation of gas, condensate and crude oil is
      recognized on the accrual basis as products are transported.

      OPERATION OF OIL AND GAS PROPERTIES

      The Company operates, for a monthly fee, oil and gas properties in which
      it does not own an interest. Revenues and costs from these activities are
      included in operating fees and lease operating expenses, respectively.
      Operating fees received related to properties in which the Company owns an
      interest are netted against the appropriate costs in the Statement of
      Operations.


      INCOME TAXES

      The Company provides for income taxes using the asset and liability method
      pursuant to SFAS No. 109, ACCOUNTING FOR INCOME TAXES (Statement 109).
      Under the asset and liability method of Statement 109, 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 carryforwards. 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.

                                       40

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      EARNINGS PER SHARE

      The Company follows SFAS No. 128 (Statement 128), EARNINGS PER Share, for
      computing and presenting earnings per share and requires, among other
      things, dual presentation of basic and diluted earnings per share on the
      face of the statement of operations.

      The following table provides a reconciliation between basic and diluted
      earnings (loss) per share:

                                                 WEIGHTED
                                                 AVERAGE
                                               COMMON SHARES
                                                OUTSTANDING
                                               AND DILUTIVE     PER
                                    NET          POTENTIAL     SHARE
                                   INCOME      COMMON SHARES   AMOUNT
                                 -----------   -------------   ------
Year ended December 31, 1999
    Basic (loss) per share ...   $(2,086,511)     4,837,504   $(0.43)
                                 -----------    -----------   ------

    Diluted (loss) per share .   $(2,086,511)     4,837,504   $(0.43)
                                 ===========    ===========   ======


Year ended December 31, 1998
    Basic (loss) per share ...   $(9,059,979)     4,492,344   $(2.02)
                                 -----------    -----------   ------

    Diluted (loss) per share .   $(9,059,979)     4,492,344   $(2.02)
                                 ===========    ===========   ======


Year ended December 31, 1997
    Basic earnings per share .   $   983,095      4,462,072   $ 0.22
    Effect of dilutive stock
      Options ................          --           69,136    --
                                 -----------    -----------   ------
    Diluted earnings per share   $   983,095      4,531,208   $ 0.22
                                 ===========    ===========   ======

                                       41

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      The weighted average number of Common Shares and potential Common Shares
      outstanding for the year ended December 31, 1997 reflects the
      one-for-fifteen reverse stock split effected on December 8, 1997.

      The employee stock options at December 31, 1999 and 1998, were not
      included in the computation of diluted earnings per share because the
      effect of their assumed exercise and conversion would have an antidilutive
      effect on the computation of diluted loss per share.

      The following unaudited pro forma information for the years ended December
      31, 1999 and 1998, presents a summary of consolidated results of
      operations as if the acquisition of the 75% ownership interest in ARO made
      in 1999 had occurred on January 1, 1998 with pro forma adjustments to give
      effect to depreciation and certain other adjustments together with related
      income tax effects:

                                                     YEAR ENDED
                                                    DECEMBER 31,
                                                1999            1998
                                           -----------------------------

      Revenues ...........................   $ 5,725,592    $ 8,570,915

      Net Earnings .......................   $(2,257,689)   $(8,330,407)

      Basic and diluted earnings per share   $     (0.47)   $     (1.85)

      The above pro forma information is not necessarily indicative of the
      results of operations as they would have been had the acquisition been
      effected on January 1, 1998.

      ENVIRONMENTAL

      The Company is 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 the
      Company 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

                                       42

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      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 amount and timing of payments is fixed or reliably determinable.


      COSTS OF START-UP ACTIVITIES

      In April 1998, the Accounting Standards Executive Committee of the
      American Institute of Certified Public Accountants issued Statement of
      Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5").
      SOP 98-5 requires that costs of start-up activities be charged to expense
      as incurred and broadly defines such costs. The Company deferred certain
      costs incurred in connection with a new business segment, and SOP 98-5
      requires that such deferred costs be charged to results of operations upon
      its adoption. The Company adopted the requirements of SOP 98-5 on January
      1, 1999. The cumulative effect of the change in accounting principle for
      the adoption of SOP 98-5 resulted in a charge to results of operations in
      the financial statements for the year ended December 31, 1999 of $80,334,
      net of $41,480 of income taxes.

      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      Statement of Financial  Accounting  Standards No. 133,  Accounting for
      Derivative  Instruments  and Hedging  Activities  (SFAS No. 133),  was
      issued  by the  Financial  Accounting  Standards  Board in June  1998.
      SFAS No. 133 standardizes  the accounting for derivative  instruments,
      including   certain   derivative   instruments   embedded   in   other
      contracts.  In July 1999,  SFAS NO. 137,  "Deferral  of the  Effective
      Date of SFAS NO.  133," was issued and delays the  effective  date for
      one  year,  to  fiscal  years  beginning  after  June  15,  2000.  The
      Company believes that adoption of this financial  accounting  standard
      will  not  have a  material  effect  on  its  financial  condition  or
      results of operations.


  (2) FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying values of cash and cash equivalents, receivables and accounts
      payable

                                       43

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      approximate fair value due to the short-term maturities of these
      instruments. The carrying value of the notes payable approximates fair
      value at December 31, 1999 and 1998.

    (3)  INCOME TAXES

      Income tax expense for 1999, 1998 and 1997 consists of:

                              1999           1998           1997
                           -----------    -----------    -----------
      Current:
        Federal ........   $      --             --           25,466
        State ..........          --           14,170         50,800
      Deferred - Federal     1,797,033     (3,113,980)       469,965
                           -----------    -----------    -----------

                           $ 1,797,033     (3,099,810)       546,231
                           ===========    ===========    ===========

      The income tax effects of temporary differences that give rise to
      significant portions of the deferred tax assets and deferred tax
      liabilities at December 31, 1999 and 1998 are presented below.

                                                     1999            1998
                                                 ------------    ------------
      Deferred tax assets:
         Accrued abandonment costs ...........   $    136,354    $     84,541
      Net operating loss carryforwards .......      9,800,517       2,685,789
         Alternative minimum tax credit ......        244,444         244,444
         Basis differences in property and
              equipment ......................      1,425,746          29,295
                                                 ------------    ------------

           Total gross deferred tax assets ...     11,607,061       3,044,069
      Deferred tax liabilities:
            State tax ........................        (34,009)        (34,009)
                                                 ------------    ------------
            Total gross deferred tax liability        (34,009)        (34,009)
                                                 ------------    ------------
            Net deferred tax asset (liability)     11,573,052       3,010,060

            Less valuation allowance .........    (11,328,608)     (1,000,000)
                                                 ------------    ------------

            Deferred tax asset (liability) ...   $    244,444    $  2,010,060
                                                 ============    ============

                                       44

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      In 1999, the Company acquired ARO, which had deferred tax assets of
      approximately $8.5 million made up of basis differences in oil and gas
      properties and net operating losses. A full valuation allowance has been
      recorded to reduce the corresponding deferred assets, since it is more
      likely than not that they will not be realized, due to the limitation of
      the use of the net operating loss carryforwards resulting from the
      ownership change in December 1999.

      In assessing the realizability of deferred tax assets, the Company applies
      SFAS No. 109 to determine whether it is more likely than not that some
      portion or all of the deferred tax assets will not be realized. As a
      result, the Company recorded a valuation allowance at December 31, 1999 to
      reduce the deferred tax asset to $244,444.

      The Company's effective tax rate applicable to continuing operations in
      1999, 1998 and 1997 differs from the expected tax rate of 34% due to the
      following:

                                                        1999     1998     1997
                                                        ----     ----     ----
           Expected tax rate ........................    (34%)    (34%)     34%
           State taxes, net of federal benefit ......   --       --          1%
           Expenses not deductible for tax purposes .      2%    --          1%
           Increase in valuation allowance recognized
               in earnings ..........................    893%       8%    --
           Other ....................................      2%    --       --
                                                        ----     ----     ----
                                                         863%     (26%)     36%
                                                        ====     ====     ====

      For federal tax purposes, the company had a net operating loss
      carryforward ("NOL") of approximately $28.8 million and $7.9 million for
      the years ended December 31, 1999 and 1998. These NOLs must be utilized
      prior to their expiration, which is between 2000 and 2018. Of the $28.8
      million of NOLs for the year ended December 31, 1999, $21.0 million
      relates to ARO.

      The Company has an alternative minimum tax credit carry forward of
      $244,444 that does not expire and may be applied to reduce regular tax to
      an amount not less than the alternative minimum tax payable in any one
      year.

                                       45

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  (4) LONG-TERM DEBT

      The Company maintains a reducing revolving credit facility (Loan
      Agreement) with Bank One, Texas, N.A. (Bank One), in an amount of
      $10,000,000. At December 31, 1999, the borrowing base under the Loan
      Agreement was $80,000 and reduced to $0 in January 2000. The Company paid
      off the $80,000 balance of the credit facility in January 2000. The
      borrowing base is redetermined semi-annually. On the first day of each
      month interest is due and payable on the outstanding loan balance at the
      rate of 1.25% above Bank One's prime rate of interest. Borrowings under
      the Loan Agreement are secured by first liens on the Buccaneer Field, the
      Blue Dolphin Pipeline, the Buccaneer Pipeline, the Freeport, Texas
      acreage, the Shore Facilities and the Black Marlin Pipeline. The maturity
      date under the Loan Agreement is December 31, 2000.

      The Loan Agreement includes certain restrictive covenants, including a
      restriction of the payment of dividends on capital stock and the
      maintenance of certain financial coverage ratios. The Company was in
      compliance with these covenants at December 31, 1999.

      In December 1996, the Company issued $2,050,600 in promissory notes to the
      holders of the Preferred Stock as full payment of the cumulative preferred
      stock dividends. The promissory notes are unsecured and bear interest at
      the rate of 10.25% per annum. Interest only is payable semi-annually with
      the principal due on December 31, 2000. The Company may prepay all or a
      portion of the principal at any time prior to maturity with no penalty. On
      December 1, 1999, the holders of promissory notes totaling $1,811,555
      tendered their promissory notes, along with accrued interest of $77,835
      for common stock pursuant to the Company's private placement of shares.
      Additionally, the Company retired $20,634 principal amount of promissory
      notes in January 2000.



      Long-term debt at December 31, 1999 and 1998 is as follows:

                                       46

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                           DECEMBER 31,
                                                      -----------------------
                                                         1999         1998
                                                      ----------   ----------
      Note payable - related party, interest at
        10% per annum, principal due
        June 1, 2000, convertible into
        common stock at $6.60 per share ...........   $1,000,000         --

      $10,000,000 bank credit facility,
        $80,000 borrowing base, interest
        payable monthly at prime rate
        (8. 5% at December 31, 1999)
        plus 1.25%. Borrowing availability
        and reducing base amount are
        redetermined semiannually .................       80,000   $  210,000

      Notes payable, interest at
        10.25% per annum payable
        semi-annually, principal due
        December 31, 2000  ........................      239,045    2,050,600
                                                      ----------   ----------
                                                       1,319,045    2,260,600
      Less current maturities, including note
        payable-related party .....................    1,319,045      200,000
                                                      ----------   ----------

                                                      $     --     $2,060,600
                                                      ==========   ==========

    (5) STOCKHOLDERS' EQUITY

      In June 1999, the Company received $1,960,000 through a private placement
      of 392,000 shares of its' common stock, $.01 par value per share, at $5.00
      per share. The proceeds were used to replenish working capital previously
      used for planned investments in longer term, high potential projects and
      for general working capital.

      In order to provide funding for the acquisition of ARO in December 1999,
      the Company arranged a private placement and conversion of principal and
      accrued interest on promissory notes into common stock, $.01 par value per
      share, of 701,820 shares and 314,898 shares, respectively and a $1,000,000
      convertible promissory

                                       47

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      note, see notes 4 and 7. The shares were issued at a price of $6.00 per
      share. Consideration for the common stock sold consisted of approximately
      $4,210,919 cash and the surrender of approximately $1,811,555 of the
      Company's promissory notes due December 31, 2000, along with accrued
      interest of $77,835 through December 1, 1999.


  (6) STOCK OPTIONS

      The Company adopted a new stock option plan in 1996 (the Plan). The stock
      subject to the options and other provisions of the Plan are shares of the
      Company's Common Stock, $.01 par value (the Stock). The total amount of
      the Stock with respect to which options may be granted shall not exceed in
      the aggregate 10% of the number of issued and outstanding shares of Common
      Stock of the Company. The stock options become exercisable from time to
      time in part or as a whole, as the Compensation Committee (the Committee),
      appointed by the Board of Directors, or the Board of Directors in their
      discretion may provide. However, the Committee shall not grant options
      which may become exercisable in any one calendar year to purchase more
      than one-third of the maximum amount granted. All options expire five
      years after the date of grant. The price of options granted may not be
      less than eighty-five percent of the fair market value of the Stock on the
      date the option is granted. Optionees must continue their association with
      the Company for six months after exercising the options, or the underlying
      stock reverts to the Company. All shares issued for options exercised in
      the current year are restricted at December 31, 1999. The Company's
      previous stock option plan, with terms and conditions essentially the same
      as those of the Plan, expired in 1995.

      At December 31, 1999 the Company has reserved a total of 519,229 shares of
      Common Stock for issuance under the above mentioned stock option plans, of
      which 85,324 shares relate to options granted prior to 1996, under the
      previous stock option plan. The outstanding stock options granted to key
      employees, officers and directors, for the purchase of shares of the
      Company's Common Stock, are as follows:

                                       48

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                    EXERCISE
                                                 PRICE PER SHARE
                                                 ---------------
                                       SHARES     FROM      TO
                                      --------    -----   -----

         Balance, December 31, 1997    196,016    2.391   4.383
                                      ========    =====   =====

            Expired ...............    (32,005)   4.383   2.789
            Exercised .............    (12,780)   2.789   2.789
                                      --------    -----   -----
         Balance, December 31, 1998    151,231    2.789   4.383
                                      ========    =====   =====
            Granted ...............     72,100    3.125   5.000
            Expired ...............    (14,223)   4.383   2.789
            Exercised .............    (32,004)   2.789   4.383
                                      --------    -----   -----
         Balance, December 31, 1999    177,104    2.789   5.000
                                      ========    =====   =====

      The weighted average exercise price per share was $3.606 and $2.789 in
      1999 and 1998, respectively.

      As of December 31, 1999, options for 81,478 shares of stock were
      immediately exercisable. There were 72,100 options granted in 1999.
      Pursuant to the requirements of FASB No. 123, the weighted average fair
      market value of options granted during 1999 and 1997 are $1.57 and $2.66,
      respectively. The weighted average closing bid prices for the Company's
      stock at the date the options were granted during 1999 and 1997 are $3.34
      and $4.50, respectively. The fair market value pursuant to FASB No. 123 of
      each option granted is estimated on the date of grant using the
      Black-Scholes options-pricing model. The model assumed expected volatility
      of 61% and 80% and risk-free interest rates of 3.75% for grants in 1999
      and 1997, and an expected life of 3 years. As the Company has not declared
      dividends since it became a public entity, no dividend yield was used.
      Actual value realized, if any, is dependent on the future performance of
      the Company's Common Stock and overall stock market conditions. There is
      no assurance the value realized by an optionee will be at or near the
      value estimated by the Black-Scholes model.

      As discussed in Note 1, no compensation expense has been recorded in 1999,
      1998, and 1997 for stock options granted. Had compensation cost for the
      Company's stock

                                       49

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      option plans been determined based on the fair market value at the grant
      dates for awards made after December 31, 1996 under those plans, the
      Company's net income (loss) and earnings (loss) per share would have been
      reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                  -------------------------------------------------------
                                                      1999                   1998                 1997
                                                  -----------            -----------           ----------
<S>                                               <C>                    <C>                   <C>
      Net income (loss)         As reported       $(2,086,511)           $(9,059,979)          $  983,095
                                Pro forma          (2,190,033)            (9,172,801)             801,555
      Basic earnings (loss)     As reported             (0.43)                 (2.02)                0.22
          per share             Pro forma               (0.45)                 (2.04)                0.18
      Diluted earnings          As reported             (0.43)                 (2.02)                0.22
         (loss) per share       Pro forma               (0.45)                 (2.04)                0.18
</TABLE>

      Outstanding options at December 31, 1999 expire between August 18, 2000
      and January 14, 2004.

      Under the provisions of SFAS No. 123, the pro forma disclosures above
      include only the effects of stock options granted by the Company
      subsequent to December 31, 1994. During this initial phase-in period, the
      pro forma disclosures as required by SFAS No. 123 are not representative
      of the effects on reported net income for future years as options vest
      over several years and additional awards are generally made each year and
      there is a risk of forfeiture.

  (7) RELATED PARTY TRANSACTIONS

      Related party transactions which are not disclosed elsewhere in these
      consolidated financial statements are discussed in the following
      paragraph.

      In June 1999, the Company received $1,960,000 through a private placement
      of 392,000 shares of its' common stock, $.01 par value per share, at $5.00
      per share. A director of the Company participated in the private
      placement, purchasing 100,000 shares.

      In order to provide funding for the acquisition of ARO in December 1999,
      the Company arranged a private placement and conversion of principal and
      accrued interest on

                                       50

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      promissory notes into common stock, $.01 par value per share, of 701,820
      shares and 314,898 shares, respectively. The shares were issued at a price
      of $6.00 per share. Consideration for the common stock sold consisted of
      approximately $4,210,919 cash and the surrender of approximately
      $1,811,555 of the Company's promissory notes due December 31, 2000, along
      with accrued interest of $77,835 through December 1, 1999. Three directors
      of the Company participated in this private placement; one director paid
      $100,002 for 16,667 shares and tendered a note in the amount of $95,761
      plus accrued interest of $4,114 and cash $325 for 16,700 shares, another
      director tendered a note in the amount of $179,921 plus accrued interest
      of $7,730 and cash $149 for 31,300 shares and a third director tendered a
      note in the amount of $26,769 plus accrued interest of $1,150 and cash
      $281 for 4,700 shares.

      On December 1, 1999, the Company issued a $1,000,000 promissory note to a
      director of the Company. The note is due June 1, 2000 bears interest at
      10% per annum, and is convertible into common stock at $6.00 per share.

      In 1992, the Company entered into a contract with a company, in which a
      director of the Company is a principal, for business development
      consulting services. The Company paid $71,250 and $90,000 under the
      contract in 1998 and 1997, respectively. The contract was terminated
      October 15, 1998.

  (8) LEASES

      The Company has various noncancelable operating leases which continue
      through 2006.

      The following is a schedule of future minimum lease payments required
      under noncancelable operating leases at December 31, 1999:

                YEARS ENDING
                DECEMBER 31,
                ------------
                        2000                      $  190,211
                        2001                         198,548
                        2002                         186,498
                        2003                         185,521
                        2004                         195,617
                  Thereafter                         391,234
                                                  ----------
                                                  $1,347,629

                                       51

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      Rental expense under operating leases for the years indicated are as
      follows:


                YEARS ENDING
                DECEMBER 31,
                ------------
                   1999                           $  136,310
                   1998                              119,490
                   1997                              222,838


(9)   COMMITMENTS AND CONTINGENCIES

      In 1993, the United States Department of the Interior, Minerals Management
      Service (MMS) required the Company's wholly-owned subsidiary, Blue Dolphin
      Exploration Company (BDEX), to provide additional security to ensure it
      could meet the future abandonment and site clearance obligations
      associated with the Buccaneer Field. In February 1994, BDEX and the MMS
      agreed on the form of such security and the amount of the future
      obligations.

      As additional security for the future Buccaneer Field abandonment and site
      clearance obligations, in February 1994, BDEX provided the MMS with a
      $700,000 supplemental surety bond. In October 1996, BDEX provided the MMS
      with an additional $600,000 supplemental surety bond. The Company's annual
      abandonment escrow fund payment of $250,000 that was due in June 1999 was
      not made as a result of the removal of the inactive satellite platform in
      1999 at a cost of approximately $345,000.

      Additionally, a sinking fund was established in 1994 wherein $250,000
      annually will be set aside until a total of approximately $2,400,000 has
      been accumulated to meet end of lease abandonment and site clearance
      obligations. The Company estimates the remaining useful life of its major
      Buccaneer Field facilities to be in excess of ten years.

      In November 1999, the Company and WBI Holdings, Inc. formed New Avoca, 25%
      owned and managed by the Company and 75% owned by WBI, and acquired the
      Avoca gas storage assets for $400,000 ($100,000 net to the Company's
      interest) from Northeastern (see Item 1 "Business - Avoca Natural Gas
      Storage Project").

                                       52

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      Additionally, a contingent payment of $500,000 ($125,000 net to the
      Company's interest) was due to Northeastern on May 22, 2000 and was
      extended to August 22, 2000. New Avoca and Northeastern have agreed to
      further extend this payment until October 1, 2000, in consideration the
      contingent payment of $450,000 shall be increased to $460,000. The
      contingent payment will be excused if Northeastern successfully settles a
      claim it has in the Avoca Gas Storage, Inc. (the original owner of the
      Avoca gas storage assets) bankruptcy proceedings. A pending settlement of
      the claim is expected to be completed in September 2000. New Avoca can
      elect to liquidate the project before or after August 22, 2000.

      The Company is involved in various claims and legal actions arising in the
      ordinary course of business. In the opinion of management, the ultimate
      disposition of these matters will not have a material effect on the
      Company's financial position, results of operations or cash flows.


 (10) BUSINESS SEGMENT INFORMATION

      The Company's income producing operations are conducted in two principal
      business segments: oil and gas exploration and production, and pipeline
      operations, which includes midstream projects. Intersegment revenues
      consist of transportation, general processing and storage fees charged by
      certain subsidiaries to another for natural gas and crude oil transported
      through the Blue Dolphin Pipeline System. The intercompany revenues and
      expenses are eliminated in consolidation. Information concerning these
      segments for the years ended December 31, 1999, 1998, and 1997 is as
      follow:

                                       53

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                 OPERATING                     DEPLETION,
                                                 INTERSEGMENT     INCOME      IDENTIFIABLE  DEPRECIATION AND
                                    REVENUES       REVENUES      (LOSS)(1)       ASSETS      AMORTIZATION(2)
                                   -----------   ------------   ------------  ------------  ---------------
<S>                                  <C>               <C>         <C>           <C>             <C>
Year ended December 31, 1999:
      Oil and gas exploration,
          production and
          operating fees .......   $   887,340          6,000      (892,032)    12,816,861       212,441
      Pipeline operations ......     1,889,837         14,121      (551,339)     7,735,149       345,600
      Other ....................       (20,121)                    (660,211)       986,206        37,245
                                   -----------                  -----------    -----------   -----------
      Consolidated .............     2,757,056           --      (2,103,582)    21,538,216       595,286
      Other  income ............                                  1,895,320
                                                                -----------
      Loss before income taxes .                                   (208,262)

Year ended December 31, 1998:
      Oil and gas exploration,
            production and
            operating fees .....   $   777,829          8,000   (12,448,875)     6,869,682       179,384
      Pipeline operations ......     2,818,921         29,976       739,610      5,912,550       193,086
      Other ....................       (37,976)                    (341,377)     2,084,984        28,512
                                   -----------                  -----------    -----------   -----------
      Consolidated .............     3,558,774           --     (12,050,642)    14,867,216       400,982
      Other expense ............                                   (109,147)
                                                                -----------
      Loss before income taxes .                                (12,159,789)

Year ended December 31, 1997:
      Oil and gas exploration,
            production and
            operating fees .....   $   828,013          8,000      (384,459)    15,868,782       174,988
      Pipeline operations ......     4,192,343         29,750     2,308,995      9,048,897       169,873
      Other ....................       (37,750)                    (458,681)        26,708        27,391
                                   -----------                  -----------    -----------   -----------
      Consolidated .............     4,982,606           --       1,485,855     24,644,387       372,252
      Other income .............                                     43,471
                                                                -----------
      Income before income taxes                                  1,529,326

</TABLE>

(1)        Consolidated income from operations includes $602,845, $564,584 and
           $373,040 in unallocated general and administrative expenses, and
           unallocated depletion, depreciation and amortization of $37,245,
           $28,512 and $27,391 for the years ended December 31, 1999, 1998 and
           1997, respectively.

                                       54

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      (2)  Pipeline depletion, depreciation and amortization includes a
           provision for pipeline abandonment of $20,840, $26,340 and $26,340,
           for the years ended December 31, 1999, 1998 and 1997 respectfully.
           Oil and gas depletion, depreciation and amortization includes a
           provision for abandonment costs of platforms and wells of $17,656,
           $30,378 and $28,466 for the years ended December 31, 1999, 1998 and
           1997, respectively.

      See the supplemental disclosures for oil and gas producing activities for
      discussion of capitalized costs incurred for oil and gas production
      operations. Capital expenditures of $3,028,216 were incurred for pipeline
      operations for the year ended December 31, 1999. Capitalized expenditures
      of $299,426 were incurred for mid stream projects for the year ended
      December 31, 1999.

      The Company's primary market area is the Texas Gulf Coast region of the
      United States. The Company has a concentration of credit risk with
      customers in the energy and petro chemical industries. The Company's
      customers may be similarly affected by changes in economic, regulatory or
      other factors. Trade receivables are generally not collateralized;
      however, the Company's customers' historical and future credit positions
      are thoroughly analyzed prior to extending credit. Revenues from major
      customers exceeding 10% of segment revenues were as follows for the
      periods indicated:

                                       55

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                      OIL AND GAS
                                       SALES AND      PIPELINE
                                    OPERATING FEES   OPERATIONS     TOTAL
                                    --------------   ----------   ---------
      Year ended December 31, 1999:
        Apache Corporation ........   $ 295,525         723,437   1,018,962
        The Dow Chemical Company ..     227,778          22,512     250,290

      Year ended December 31, 1998:
        Apache Corporation ........   $ 333,787       1,504,375   1,838,162
        The Dow Chemical Company ..     391,913          46,119     438,032
        Burlington Resources ......        --           429,186     429,186

      Year ended December 31, 1997:
        Apache Corporation ........   $ 359,376       1,466,621   1,825,997
        The Coastal Corporation ...      39,905       1,111,885   1,151,790
        Burlington Resources ......        --           642,492     642,492
        The Dow Chemical Company ..     393,443         114,381     507,824

(11)  SUPPLEMENTAL OIL AND GAS INFORMATION - UNAUDITED

      The following supplemental information regarding the oil and gas
      activities of the Company is presented pursuant to the disclosure
      requirements promulgated by the Securities and Exchange Commission (SEC)
      and SFAS No. 69 DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
      (Statement 69).

      At December 31, 1999, the Buccaneer Field accounted for 64% of the
      Company's discounted future net cash flows from proved reserves.

      The timing and amount of estimated future development costs may
      significantly increase or decrease the Company's total proved and proved
      developed reserve volumes, the Standardized Measure of Discounted Future
      Net Cash Flows, and the components and changes therein.

      ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

      Set forth below is a summary of the changes in the estimated quantities of
      the Company's crude oil and condensate, and natural gas reserves for the
      periods

                                       56

                                                                     (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      indicated, as estimated by the Company (Buccaneer Field), Netherland
      Sewell & Associates Inc. (ARO) and Ryder Scott Company (ARO). All of the
      Company's reserves are located within the United States. 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.

      Proved reserves are estimated quantities of natural 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
      method.

                                                        OIL             GAS
      QUANTITY OF OIL AND GAS RESERVES                 (BBLS)          (MCF)
      --------------------------------               -----------    -----------
        Total proved reserves at December 31, 1995       202,166     33,097,136
                                                     -----------    -----------
        Revisions to previous estimates ..........        (6,477)      (201,823)
        Production ...............................        (1,887)      (180,269)
                                                     -----------    -----------
        Total proved reserves at December 31, 1996       193,802     32,715,044
                                                     -----------    -----------
        Revisions to previous estimates ..........        (8,500)    (1,125,504)
        Production ...............................        (1,156)      (176,986)
                                                     -----------    -----------
        Total proved reserves at December 31, 1997       184,146      1,412,554
                                                     ===========    ===========
        Revisions to previous estimates ..........         6,743        (40,387)
        Production ...............................        (1,628)      (177,260)
                                                     -----------    -----------
        Total proved reserves at December 31, 1998       189,261     31,194,907
                                                     ===========    ===========
        Acquisitions .............................       150,012      4,419,130
        Revisions to previous estimates ..........          (637)      (102,873)
        Production ...............................        (6,338)      (169,329)
                                                     -----------    -----------
      Total proved reserves at December 31, 1999 .       332,298     35,341,835
                                                     ===========    ===========

                                       57
                                                                (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      Proved developed reserves:

          December 31, 1999 ......................       205,525     20,400,120
          December 31, 1998 ......................       113,183     18,070,961
          December 31, 1997 ......................       108,068     18,288,608


      CAPITALIZED COSTS OF OIL AND GAS PRODUCING ACTIVITIES

      The following table sets forth the aggregate amounts of capitalized costs
      relating to the Company's oil and gas producing activities and the
      aggregate amount of related accumulated depletion, depreciation and
      amortization as of the dates indicated:

                                                           DECEMBER 31,
                                                   ----------------------------
                                                       1999            1998
                                                   ------------    ------------
       Unproved properties and prospect generation
         costs not being amortized ............... $    950,813         227,286

       Proved properties being amortized .........   24,905,021      20,983,520
       Less accumulated depletion, depreciation,
         amortization and impairment .............  (16,129,385)    (15,957,436)
                                                   ------------    ------------
              Net capitalized costs .............. $  9,726,449       5,253,370
                                                   ============    ============

      At December 31, 1998 the Company recorded an impairment charge on its oil
      and gas properties and certain exploration activity costs of $12,011,544,
      resulting from lower oil and gas prices and changes to its development
      plans, whereby development of oil and gas properties have been deferred.

      COSTS INCURRED IN OIL AND
      GAS PRODUCING ACTIVITIES

      The following table reflects the costs incurred in oil and gas property
      acquisition, exploration and development activities during the periods
      indicated:

                                       58
                                                                (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                    DECEMBER 31,
                                       ------------------------------------
                                          1999         1998         1997
                                       ----------   ----------   ----------
        Property acquisition costs .   $4,538,939         --        471,861
        Exploration costs ..........         --        277,501         --
        Development costs ..........         --           --         23,685
                                       ----------   ----------   ----------
                                       $4,538,939      277,501      495,546
                                       ==========   ==========   ==========
           Depletion expense per Mcf
                 equivalent produced   $     0.57         1.03         0.95
                                       ==========   ==========   ==========


      STANDARDIZED MEASURE OF DISCOUNTED
      FUTURE NET CASH FLOWS

      The following table reflects the Standardized Measure of Discounted Future
      Net Cash Flows relating to the Company's interest in proved oil and gas
      reserves as of:

                                                         DECEMBER 31,
                                                 ----------------------------
                                                     1999            1998
                                                 ------------    ------------
         Future cash inflows .................   $ 84,435,405      60,296,555
         Future development costs ............    (12,317,244)     (9,782,601)
         Future production costs .............    (26,935,544)    (25,093,865)
                                                 ------------    ------------
         Future net cash inflows
            before income taxes ..............     45,182,617      25,420,089
         Future income taxes .................       (887,386)       (213,271)
                                                 ------------    ------------
         Future net cash flows ...............     44,295,231      25,206,818
         10% discount factor .................    (28,156,875)    (19,235,787)
                                                 ------------    ------------
            Standardized measure of discounted
               future net cash inflow ........   $ 16,138,356       5,971,031
                                                 ============    ============

      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 current prices (at December 31, 1999, such prices were
      $24.66 per barrel of oil

                                       59
                                                                (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      and $2.16 per Mcf of gas) and (2) deducting estimated expenditures to be
      incurred during each year to develop and produce the proved reserves
      (based on current costs). The price the Company uses to value its oil is
      higher than year-end posted market prices. This is due to the premium the
      Company receives over posted market prices, primarily from the Buccaneer
      Field, due to location and quality differentials. The Buccaneer Field
      produces high gravity oil.

      Income taxes were computed by applying year-end statutory rates to pretax
      net cash flows, reduced by the tax basis of the properties and available
      net operating loss carryforwards. The annual future net cash flows were
      discounted, using a prescribed 10% rate, and summed to determine the
      standardized measure of discounted future net cash flow.

      The Company cautions readers that the standardized measure information
      which places a value on proved reserves is not indicative of either fair
      market value or present value of future cash flows. Other logical
      assumptions could have been used for this computation which would likely
      have resulted in significantly different amounts. Such information is
      disclosed solely in accordance with Statement 69 and the requirements
      promulgated by the SEC to provide readers with a common base for use in
      preparing their own estimates of future cash flows and for comparing
      reserves among companies. Management of the Company does not rely on these
      computations when making investment and operating decisions.


                                       60
                                                                (Continued)
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Principal changes in the STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS attributable to the Company's proved oil and gas reserves for the periods
indicated are as follows:
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                      --------------------------------------------
                                                          1999            1998            1997
                                                      ------------    ------------    ------------
<S>                                                   <C>                  <C>             <C>
      Sales and transfers, net of production costs*   $    555,450         433,346         489,564
      Acquisitions of reserves ....................      4,897,819            --              --
      Net change in estimated future development
        costs .....................................     (1,579,537)         18,918         165,389
      Net change in income taxes ..................       (674,115)      5,322,055         267,388
      Revisions in previous quantity estimates ....        (86,430)             34        (996,557)
      Net changes in sales and transfer prices,
        net of production costs ...................      8,752,455     (10,944,737)       (548,223)
      Accretion of discount .......................        618,430       2,277,393       2,432,226
      Change in production rates (timing)
        and other .................................     (2,316,747)     (7,835,514)     (3,090,710)
                                                      ------------    ------------    ------------
            Net change ............................   $ 10,167,325     (10,728,505)     (1,280,923)
                                                      ============    ============    ============
</TABLE>

         *18% of the Company's estimated proved oil reserves and 5% of its
         estimated proved gas reserves were being produced at December 31, 1999.

 (12) ACQUISITIONS

      BLACK MARLIN PIPELINE SYSTEM. On March 1, 1999 the Company acquired 10% of
the stock of Black Marlin Pipeline Company from Enron Pipeline Company
("Enron"), for $5,404,270 cash. In addition, Enron received an option to acquire
a minimum of 25% and a maximum of 33-1/3% of the Black Marlin Pipeline System,
if Black Marlin Pipeline should become no longer subject to rate and tariff
regulation by the Federal Energy Regulatory Commission. This option will expire
on the earlier of the third anniversary of notice that the Black Marlin Pipeline
is no longer subject to rate and tariff regulation or March 1, 2004. Black
Marlin Pipeline Company is the owner of the Black Marlin Pipeline System. The
Black Marlin Pipeline System includes the Black Marlin Pipeline, onshore
facilities for condensate and gas separation and dehydration, 3,000 Bbls of
above ground tankage for storage of condensate, a truck loading facility for oil
and condensate, and 5 acres of land in

                                       61
<PAGE>
                BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Galveston County, Texas where the Black Marlin Pipeline comes ashore and on
which are located the pipeline system's shore facilities. The Black Marlin
Pipeline consists of two segments. The offshore segment transports natural gas
and condensate and is comprised of approximately 67 miles of 16-inch pipeline
from a High Island Block 136 platform, including an extension from a platform in
High Island Block A-6, to an interconnection in High Island Block 137, across
Galveston Bay to the onshore facilities at Texas City, Texas. The offshore
segment also includes approximately 7 miles of 8-inch pipeline from a platform
in High Island Block 199 to an interconnection with the main line in High Island
Block 171. The onshore segment consists of approximately 2 miles of 16-inch
pipeline from the shore facilities to an end user and pipeline system tie-ins.
This acquisition was funded by selling a one-sixth (1/6) undivided interest in
the Company's Blue Dolphin Pipeline System, the Black Marlin Pipeline System and
the Omega Pipeline to WBI Southern, Inc. ("WBI") for $3,712,000 and selling a
one-third (1/3) undivided interest in the Black Marlin Pipeline System to MCNIC
Pipeline and Processing Company ("MCNIC") for $1,801,423. These sales were
completed effective March 1, 1999. In addition, conditional consideration may be
received from WBI up to a maximum of $500,000 during the four-year period ending
February 28, 2003, if pre-tax cash flow exceeds certain targets. For the annual
period ended February 29, 2000, pre-tax cash flow was below the target level,
thus no conditional consideration was received by the Company. MCNIC owns a
one-third (1/3) undivided interest in the Blue Dolphin Pipeline System and the
Omega Pipeline. WBI and MCNIC are both independent third parties to the Company.

      AMERICAN RESOURCES OFFSHORE, INC. On December 2, 1999, BDEX acquired a 75%
ownership interest in ARO. The purchase price for the ARO shares was
approximately $4.5 million. Concurrently with the sale to BDEX, ARO sold an 80%
interest in its Gulf of Mexico assets to Fidelity Oil Holdings, Inc. a
subsidiary of MDU Resources Group, Inc. ("MDU") and an independent third party
to the Company. The proceeds received by ARO were used to retire certain
indebtedness.

      ARO's assets consist of an average 6% non-operated working interest in
eight producing properties and one proved undeveloped property along with
leasehold interests in 34 additional offshore tracts, all located in the Gulf of
Mexico offshore Louisiana and Texas. At closing, all significant liabilities of
ARO were settled and substantially all stock options and warrants were
eliminated.

                                       62
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement relating to its 2000 annual meeting of
stockholders filed with the SEC on April 20, 2000.

ITEM 11. EXECUTIVE COMPENSATION

         The information required by Item 11 is incorporated by reference to the
Company's definitive proxy statement relating to its 2000 annual meeting of
stockholders filed with the SEC on April 20, 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by Item 12 is incorporated by reference to the
Company's definitive proxy statement relating to its 2000 annual meeting of
stockholders filed with the SEC on April 20, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 13 is incorporated by reference to the
Company's definitive proxy statement relating to its 2000 annual meeting of
stockholders filed with the SEC on April 20, 2000.

PART IV

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

         (a)  1.   Financial Statements

              The following financial statements and the Reports of Independent
Public Accountants are filed as a part of this report on the pages indicated:

                                                                           PAGE
                                                                           ----
              Consolidated Balance Sheets, at December 31, 1999
                and 1998..............................................      31

              Consolidated Statements of Operations, for the
                years ended December 31, 1999, 1998, and 1997.........      33

              Consolidated Statements of Stockholders' Equity, for the
                years ended December 31, 1999, 1998, and 1997.........      34

              Consolidated Statements of Cash Flows, for the
                years ended December 31, 1999, 1998, and 1997.........      35

              Notes to Consolidated Financial Statements.................   37

                                       63
<PAGE>
      (a)   2.    Exhibits

    NO.            DESCRIPTION
   ----            -----------
    3.1  (1)  Certificate of Incorporation of the Company.

    3.2  (2)  Certificate of Correction to the Certificate of
              Incorporation of the Company dated June 30, 1987.

    3.3  (2)  Certificate of Amendment to the Certificate of Incorporation
              of the Company dated June 30, 1987.

    3.4  (2)  Certificate of Amendment to the Certificate of Incorporation
              of the Company dated December 11, 1989.

    3.5  (2)  Certificate of Amendment to the Certificate of Incorporation
              of the Company dated December 14, 1989.

    3.6  (2)  Bylaws of the Company.

    3.7  (6)  Certificate of Amendment to the Certificate of Incorporation
              of the Company dated December 8, 1997.

    4.1  (2)  Specimen Certificate of Blue Dolphin Energy Company Common
              Stock.

*  10.1  (1)  Blue Dolphin Energy Company 1985 Employee Stock Option Plan.

*  10.2  (4)  Blue Dolphin  Energy  Company 1996  Employee  Stock Option Plan.

   10.4  (3)  Loan Agreement by and among Blue Dolphin Energy Company,
              Blue Dolphin Pipe Line Company, Buccaneer Pipe Line Co.,
              Mission Energy, Inc. dba MEI Mission Energy, Inc., Ivory
              Production Co., Blue Dolphin Services Co., and Bank One,
              Texas, N. A., dated January 14, 1994.

   10.6  (4)  First Amendment to Loan Agreement dated January 14, 1994 by
              and among Blue Dolphin Energy Company, Blue Dolphin Pipe Line
              Company, Buccaneer Pipe Line Co., Mission Energy, Inc. d/b/a MEI
              Mission Energy, Inc., Ivory Production Co., Blue Dolphin Services
              Co., and Bank One, Texas, N.A., dated February 7, 1995.

   10.7  (4)  Second Amendment to Loan Agreement dated January 14, 1994 by
              and among Blue Dolphin Energy Company, Blue Dolphin Pipe Line
              Company, Buccaneer Pipe Line Co., Mission Energy, Inc. d/b/a MEI
              Mission Energy, Inc., Blue Dolphin Exploration Company, previously
              known as Ivory Production Co., Blue Dolphin Services Co., and Bank
              One, Texas, N. A., dated December 22, 1995.

   10.8  (5)  Third Amendment to Loan Agreement dated January 14, 1994 by and
              among Blue Dolphin Energy Company, Blue Dolphin Pipe Line Company,
              Buccaneer Pipe Line Co., Mission Energy, Inc. d/b/a MEI Mission
              Energy, Inc., Blue Dolphin Exploration Company, previously known
              as Ivory Production Co., Blue Dolphin Services Co., and Bank One,
              Texas, N. A., dated November 5, 1996.

   10.9       Fourth Amendment to Loan Agreement dated January 14, 1994 by and
              among Blue Dolphin Energy Company, Blue Dolphin Pipe Line Company,
              Buccaneer Pipe Line Co., Mission Energy, Inc. d/b/a MEI Mission
              Energy, Inc., Blue Dolphin Exploration Company, previously known
              as Ivory Production Co., Blue Dolphin Services Co., and Bank One,
              Texas, N. A., dated August 18, 1998.

   10.10      Fifth Amendment to Loan Agreement dated January 14, 1994 by and
              among Blue Dolphin Energy Company, Blue Dolphin Pipe Line Company,
              Buccaneer Pipe

                                       64
<PAGE>
              Line Co., Mission Energy, Inc. d/b/a MEI Mission Energy, Inc.,
              Blue Dolphin Exploration Company, previously known as Ivory
              Production Co., Blue Dolphin Services Co., and Bank One, Texas, N.
              A., dated December 17, 1999.

   10.11      Sixth Amendment to Loan Agreement dated January 14, 1994 by and
              among Blue Dolphin Energy Company, Blue Dolphin Pipe Line Company,
              Buccaneer Pipe Line Co., Mission Energy, Inc. d/b/a MEI Mission
              Energy, Inc., Blue Dolphin Exploration Company, previously known
              as Ivory Production Co., Blue Dolphin Services Co., and Bank One,
              Texas, N. A., dated January 12, 2000.

   10.12 (7)  Asset Purchase Agreement between WBI Southern, Inc., Blue Dolphin
              Pipeline Company, Buccaneer Pipe Line Co. and Mission Energy, Inc.

   10.13 (7)  Purchase and Sale Agreement between Enron Pipeline Company, Black
              Marlin Energy Company and Blue Dolphin Energy Company.

   10.14 (7)  Asset Purchase Agreement between WBI Southern, Inc.,
              Black Marlin Pipeline Company and Black Marlin Energy
              Company.

   10.15 (7)  Asset Purchase Agreement between MCNIC Offshore Pipeline
              & Processing Company,  Black Marlin Pipeline Company and
              Black Marlin Energy Company.

   10.16 (8)  Investment Agreement, as amended, by and between American
              Resources Offshore, Inc. and Blue Dolphin Exploration Company.

   10.17      Management Services Agreement by and between Fidelity Oil
              Holdings, Inc. and Blue Dolphin Exploration Company.

   21.1**     List of Subsidiaries of the Company.
   23.1**     Consent of Netherland, Sewell & Associates, Inc., independent
              petroleum engineers and geologists.

   23.2**     Consent of Ryder Scott Company, independent petroleum engineers.

   27.1**     Financial Data Schedule.
___________________________

(1) Incorporated herein by reference to Exhibits filed in connection with
    Registration Statement on Form S-4 of ZIM Energy Corp. filed under the
    Securities Act of 1933 (Commission File No. 33-5559).

(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 Form
    10-K of Blue Dolphin Energy Company for the year ended December 31, 1993
    under the Securities and Exchange Act of 1934, dated March 30, 1994
    (Commission File No. 000-15905).

(4) Incorporated herein by reference to Exhibits filed in connection with Form
    10-K of Blue Dolphin Energy Company for the year ended December 31, 1995
    under the Securities and Exchange Act of 1934, dated March 29, 1996
    (Commission File No. 000-15905).

(5) Incorporated herein by reference to Exhibits filed in connection with Form
    10-K of Blue Dolphin Energy Company for the year ended December 31, 1996
    under the Securities and Exchange Act of 1934, dated March 31, 1997
    (Commission File No. 000-15905).

                                       65
<PAGE>
(6) Incorporated herein by reference to Exhibits filed in connection with the
    definitive Information Statement on Schedule 14C of Blue Dolphin Energy
    Company under the Securities and Exchange Act of 1934, dated November 18,
    1997 (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 March 1, 1999 (Commission File No. 000-15905).

(8) Incorporated herein by reference to Exhibits filed in connection with
    Schedule 13D of Blue Dolphin Energy Company under the Securities and
    Exchange Act of 1934, dated October 22, 1999 (commissions File No.
    000-15905).

   *   Management Compensation Plan.
  **   Previously filed.
 ***   Filed herewith.

    (b)  Reports on Form 8-K

         On December 7, 1999, the Company filed a current report on Form 8-K
         dated December 2, 1999 that it closed the purchase of 39,509,457 shares
         of common stock of American Resources Offshore, Inc. The items reported
         in such current report were Item 2 (Acquisitions or Dispositions of
         Assets) and Item 7 (Financial Statement and Exhibits).

         On December 17, 1999, the Company filed a current report on Form 8-KA
         dated December 17, 1999, with respect to the acquisition of American
         Resources Offshore, Inc. The items reported in such current report were
         Item 2 (Acquisitions or Dispositions of Assets) and Item 7 (Financial
         Statement and Exhibits).

                                       66
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      BLUE DOLPHIN ENERGY COMPANY
                                      (Registrant)


                                      By: /s/ MICHAEL J. JACOBSON
                                         -----------------------------------
                                              Michael J. Jacobson, President
                                              (principal executive officer)

                                      Date:  September 6, 2000



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

       SIGNATURE                      TITLE                          DATE

/s/ MICHAEL J. JACOBSON         President (principal          September 6, 2000
-------------------------       executive officer)
    Michael J. Jacobson


/s/ G. BRIAN LLOYD              Vice President, Treasurer     September 6, 2000
-------------------------       (principal accounting and
    G. Brian Lloyd              financial officer)


/s/ IVAR SIEM                   Chairman                      September 6, 2000
-------------------------
    Ivar Siem

/s/ HARRIS A. KAFFIE            Director                      September 6, 2000
-------------------------
    Harris A. Kaffie

/s/ ROBERT L. BARBANELL         Director                      September 6, 2000
-------------------------
    Robert L. Barbanell


/s/ MICHAEL S. CHADWICK         Director                      September 6, 2000
-------------------------
    Michael S. Chadwick

                                       67