BLUE DOLPHIN ENERGY COMPANY

                            1996 STOCK OPTION PLAN

                            I. PURPOSE OF THE PLAN

      The BLUE DOLPHIN ENERGY COMPANY 1996 STOCK OPTION PLAN (the "Plan") is
intended to provide a means whereby certain employees of BLUE DOLPHIN ENERGY
COMPANY (the "Company"), and its subsidiaries may develop a sense of
proprietorship and personal involvement in the development and financial success
of the Company, and to encourage them to remain with and devote their best
efforts to the business of the Company, thereby advancing the interests of the
Company and its shareholders. Accordingly, the Company may grant to directors
and certain employees ("Optionees") the option ("Option") to purchase shares of
the common stock of the Company ("Stock"), as hereinafter set forth. Options
granted under the Plan may only be options which DO NOT constitute Incentive
Stock Options under the terms of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").

                              II.  ADMINISTRATION

      The Plan shall be administered by a committee (the "Committee") of, and
appointed by, the Board of Directors of the Company (the "Board"), and the
Committee shall be comprised solely of two or more directors. The Committee
shall have sole authority to select the Optionees from among those individuals
eligible hereunder and to establish the number of shares which may be issued
under each Option; provided, however, that, notwithstanding any provision in the
Plan to the contrary, the Committee shall not grant Options which (together with
any other Options which are exercisable under applicable provisions of the Plan)
may become exercisable in any one calendar year to purchase more than one-third
of the aggregate number of shares of Stock which may be issued under Options
granted under the Plan as provided in Paragraph V below (subject to adjustment
in the same manner as provided in Paragraph VIII hereof with respect to shares
of Stock subject to Options then outstanding). In selecting the Optionees from
among individuals eligible hereunder and in establishing the number of shares
that may be issued under each Option, the Committee may take into account the
nature of the services rendered by such individuals, their present and potential
contributions to the Company's success and such other factors as the Committee
in its discretion shall deem relevant. The Committee is authorized to interpret
the Plan and may from time to time adopt such rules and regulations, consistent
with the provisions of the Plan, as it may deem advisable to carry out the Plan.
All decisions made by the Committee in selecting the Optionees, in establishing
the number of shares which may be issued under each Option and in construing the
provisions of the Plan shall be final.

                            III.  OPTION AGREEMENTS

      Each Option shall be evidenced by a written agreement between the Company
and the Optionee ("Option Agreement") which shall contain such terms and
conditions as may be approved by the Committee. The terms and conditions of the
respective Option Agreements need not be identical. An Option Agreement may
provide for the payment of the option price, in whole or in part, by the
delivery of a number of shares of Stock (plus cash if necessary) having a fair
market value equal to such option price.

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      For all purposes under the Plan, the fair market value of a share of Stock
on a particular date shall be equal to the mean of the high and low sales prices
of the Stock (i) reported by the National Market System of NASDAQ on that date
or (ii) if the Stock is listed on a national stock exchange, reported on the
stock exchange composite tape on that date; or, in either case, if no prices are
reported on that date, on the last preceding date on which such prices of the
Stock are so reported. If the Stock is traded over-the-counter at the time a
determination of its fair market value is required to be made hereunder, its
fair market value shall be deemed to be equal to the average between the
reported high and low bid prices of Stock on the most recent date on which Stock
was publicly traded. In the event Stock is not publicly traded at the time a
determination of its value is required to be made hereunder, the determination
of its fair market value shall be made by the Committee in such manner as it
deems appropriate.

      Each Option and all rights granted thereunder shall not be transferable
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder, and shall be exercisable during the Optionee's lifetime only by the
Optionee or the Optionee's guardian or legal representative.

                         IV.  ELIGIBILITY OF OPTIONEE

      Options may be granted only to individuals who are Directors or key
employees (including officers who are also key employees) of the Company or any
parent or subsidiary corporation (as defined in section 424 of the Code) of the
Company at the time the Option is granted. Options may be granted to the same
individual on more than one occasion.

                        V.  SHARES SUBJECT TO THE PLAN

      The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed in the aggregate 10% of the sum of (x) the
number or issued and outstanding shares of Stock plus (y) the number of shares
of Stock issuable upon conversion of outstanding shares of convertible preferred
stock of the Company. Such shares may consist of authorized but unissued shares
of Stock or previously issued shares of Stock reacquired by the Company. Any of
such shares which remain unissued and which are not subject to outstanding
Options at the termination of the Plan shall cease to be subject to the Plan,
but, until termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the requirements of the Plan.
Should any Option hereunder expire or terminate prior to its exercise in full,
the shares theretofore subject to such Option may again be subject to an Option
granted under the Plan. The aggregate number of shares which may be issued under
the Plan shall be subject to adjustment in the same manner as provided in
Paragraph VIII hereof with respect to shares of Stock subject to Options then
outstanding. Exercise of an Option in any manner, including an exercise
involving a Stock Appreciation Right, shall result in a decrease in the number
of shares of Stock which may thereafter be available, both for purposes of the
Plan and for sale to any one individual, by the number of shares as to which the
Option is exercised.
                                VI. OPTION PRICE

      The purchase price of Stock issued under each Option shall be determined
by the Committee, but such purchase price shall not be less than 85% of the fair
market value of Stock subject to the Option on the date the Option is granted.

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                                VII. TERM OF PLAN

      The Plan shall be effective upon the date of its adoption by the Board.
Except with respect to Options then outstanding, if not sooner terminated under
the provisions of Paragraph IX, the Plan shall terminate upon and no further
Options shall be granted after the expiration of ten years from the date of its
adoption by the Board.

                   VIII.  RECAPITALIZATION OR REORGANIZATION

      (a) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.

      (b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.

      (c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Stock covered by an Option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record of the number of
shares of Stock then covered by such Option. If (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company), (ii) the Company sells, leases or exchanges all or
substantially all of its assets to any other person or entity (other than a
wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved
and liquidated, (iv) any person or entity, including a "group" as contemplated
by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control
(including, without limitation, power to vote) of more than 50% of the
outstanding shares of the Company's voting stock (based upon voting power), or
(v) as a result of or in connection with a contested election of directors, the
persons who were directors of the Company before such election shall cease to
constitute a majority of the Board (each such event is referred to herein as a
"Corporate Change"), no later than (a) ten days after the approval by the
shareholders of the Company of such merger, consolidation, reorganization, sale,
lease or exchange of assets or dissolution or such election of directors or (b)
thirty days after a change of control of the type described in Clause (iv), the
Committee, acting in its sole discretion without the consent or approval of any
Optionee, shall act to effect one or more of the following alternatives, which
may vary among individual Optionees and which may vary among Options held by any
individual Optionee: (1) accelerate the time at which Options then outstanding
may be exercised and waive any limitations set forth in or imposed by Paragraph
II so that such Options may be exercised in full for a limited period of time on
or before a specified date (before or after such Corporate Change) fixed by the

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Committee, after which specified date all unexercised Options and all rights of
Optionees thereunder shall terminate, (2) require the mandatory surrender to the
Company by selected Optionees of some or all of the outstanding Options held by
such Optionees (irrespective of whether such Options are then exercisable under
the provisions of the Plan) as of a date, before or after such Corporate Change,
specified by the Committee, in which event the Committee shall thereupon cancel
such Options and the Company shall pay to each Optionee an amount of cash per
share equal to the excess, if any, of the amount calculated in Subparagraph (d)
below (the "Change of Control Value") of the shares subject to such Option over
the exercise price(s) under such Options for such shares, (3) make such
adjustments to Options then outstanding as the Committee deems appropriate to
reflect such Corporate Change (provided, however, that the Committee may
determine in its sole discretion that no adjustment is necessary to Options then
outstanding) or (4) provide that the number and class of shares of Stock covered
by an Option theretofore granted shall be adjusted so that such Option shall
thereafter cover the number and class of shares of stock or other securities or
property (including, without limitation, cash) to which the Optionee would have
been entitled pursuant to the terms of the agreement of merger, consolidation or
sale of assets and dissolution if, immediately prior to such merger,
consolidation or sale of assets and dissolution, the Optionee had been the
holder of record of the number of shares of Stock then covered by such Option.

      (d) For the purposes of clause (2) in Subparagraph (c) above, the "Change
of Control Value" shall equal the amount determined in clause (i), (ii) or
(iii), whichever is applicable, as follows: (i) the per share price offered to
shareholders of the Company in any such merger, consolidation, reorganization,
sale of assets or dissolution transaction, (ii) the price per share offered to
shareholders of the Company in any tender offer or exchange offer whereby a
Corporate Change takes place, or (iii) if such Corporate Change occurs other
than pursuant to a tender or exchange offer, the fair market value per share of
the shares into which such Options being surrendered are exercisable, as
determined by the Committee as of the date determined by the Committee to be the
date of cancellation and surrender of such Options. In the event that the
consideration offered to shareholders of the Company in any transaction
described in this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Committee shall determine the fair cash equivalent
of the portion of the consideration offered which is other than cash.

      (e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be
subject to any required shareholder action.

      (f) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price per
share.

                   IX.  AMENDMENT OR TERMINATION OF THE PLAN

      The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided, that no change in any Option theretofore granted may be
made which would impair the rights of the Optionee without the consent of such
Optionee.

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                           X.  COMPLIANCE WITH LAWS

      The Company shall not be required to sell or issue any shares of Stock
under any Option if the issuance of such shares constitute a violation by the
Optionee or the Company of any provision of any law, statute, or regulation of
any governmental authority whether it be Federal or State. Specifically in
connection with the Securities Act of 1993 (as now in effect or hereafter
amended), upon exercise of any Option, unless a registration statement under
such Act is in effect with respect to the shares of Stock covered by such
Option, the Company shall not be required to issue such shares unless the
Committee has received evidence satisfactory to it to the effect that the holder
of such Option is acquiring such shares of Stock for investment and not with a
view to the distribution thereof and that such shares of Stock may otherwise be
issued without registration under such Act or state securities laws. Any
determination in this connection by the Committee shall be final, binding and
conclusive. The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Securities Act of 1933 (as now in
effect or as hereafter amended). The Company shall not be obligated to take any
affirmative action in order to cause the exercise of an Option or the issuance
of shares pursuant thereto to comply with any law or regulation of any
governmental authority.

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