**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe fiscal year ended December 31, 2006**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe transition period from               to**

**CommissionFile Number: 000-29098**

**BPZ Energy, Inc.**

(Exact name of registrant as specified in its charter)

| **Colorado**                                    |   | **33-0502730**                           |
|-------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation) |   | (I.R.S. Employer  Identification Number) |

 

**580 Westlake Park Blvd.,Suite 525Houston, Texas 77079(Address of principal executive office)**

Registrant’s telephone number, including area code:  **(281) 556-6200**

Securities registered pursuant toSection 12(b) of the Exchange Act:  **Common Stock, With No Par Value**

Securities registered pursuant toSection 12(g) of the Exchange Act:  **None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.   Yes  o   No  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or 15(d)of the Act.    Yes  o   No  x

**Note** — Checking the box above will notrelieve any registrant required to file reports pursuant to Section 13 or 15(d)of the Exchange Act from their obligations under those Sections.

Indicateby check mark whether the registrant (1) filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past90 days.      Yes x   No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.     o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer as defined in Rule 12b-2 of theSecurities Exchange Act of 1934.

| o     Large  accelerated filer |   | x     Accelerated  filer |   | o     Non-Accelerated  filer |
|---------------------------------------------------------|--------|---------------------------------------------------|--------|-------------------------------------------------------|

 

Indicateby check mark whether the registrant is a shell company as defined in Rule12b-2 of the Exchange Act  Yes o  No x

Registrantdid not earn revenues for the fiscal year ended December 31, 2006.

Thenumber of shares of Common Stock held by non-affiliates as of  June 30, 2006 was 38,419,431 shares, all ofone class of common stock, no par value, having an aggregate market value ofapproximately $153,677,724 based upon the closing price of registrant’s commonstock on such date of $4.00 per share as quoted on the Pink Sheets.  For purposes of the foregoing calculation,all directors, executive officers, and 5% beneficial owners have been deemedaffiliated.

As ofFebruary 27, 2007, there were 54,253,869 shares of common stock, no par value,outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

Information required by Part III will either be included in the BPZEnergy, Inc.’s definitive proxy statement filed with the Securities andExchange Commission or filed as an amendment to this Form 10-K no later than120 days after the end of the Company’s fiscal year, to the extent required bythe Securities Exchange Act of 1934, as amended.

 

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**TABLE OF CONTENTS**
| **PART I**   | ** ** | ** ** | ** **                                                                                                                | ** ** | ** ** |
|-------------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|
|              |       |       |                                                                                                                      |       |       |
| Item  1.          |       |       | Business                                                                                                                  |       |       |
| Item  1A.         |       |       | Risk  Factors                                                                                                             |       |       |
| Item 1B.          |       |       | Unresolved Staff  Comments                                                                                                |       |       |
| Item  2.          |       |       | Properties                                                                                                                |       |       |
| Item  3.          |       |       | Legal  Proceedings                                                                                                        |       |       |
| Item 4.           |       |       | Submission of Matters  to a Vote of Security Holders                                                                      |       |       |
|              |       |       |                                                                                                                      |       |       |
| **PART II**  | ** ** | ** ** | ** **                                                                                                                | ** ** | ** ** |
| Item 5.           |       |       | Market for  Registrant’s Common Equity and Related Stockholder Matters and Issuer  Purchases of 

Equity  Securities |       |       |
| Item 6.           |       |       | Selected Financial  Data                                                                                                  |       |       |
| Item 7.           |       |       | Management’s  Discussion and Analysis of Financial Conditions and Results of Operations                              |       |       |
| Item 7A.          |       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                               |       |       |
| Item 8.           |       |       | Financial  Statements and Supplementary Data                                                                              |       |       |
| Item 9            |       |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosures                                    |       |       |
| Item 9A.          |       |       | Controls and  Procedures                                                                                                  |       |       |
| Item 9B.          |       |       | Other Information                                                                                                         |       |       |
|              |       |       |                                                                                                                      |       |       |
| **PART III** | ** ** | ** ** | ** **                                                                                                                | ** ** | ** ** |
| Item 10.          |       |       | Directors,  Executive Officers and Corporate Governance                                                                   |       |       |
| Item 11.          |       |       | Executive  Compensation                                                                                                   |       |       |
| Item 12.          |       |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                          |       |       |
| Item 13.          |       |       | Certain  Relationships and Related Transactions, and Director Independence                                                |       |       |
| Item 14.          |       |       | Principal  Accountant Fees and Services                                                                                   |       |       |
|              |       |       |                                                                                                                      |       |       |
| **PART IV**       | ** ** | ** ** | ** **                                                                                                                | ** ** | ** ** |
| Item 15.          |       |       | Exhibits and  Financial Statement Schedules                                                                               |       |       |
|              |       |       |                                                                                                                      |       |       |
| Signatures        |       |       |                                                                                                                      |       |       |
|              |       |       |                                                                                                                      |       |       |
| Certifications    |       |       |                                                                                                                      |       |       |

 

 

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**PART I**

*BPZ Energy, Inc. cautions that this documentcontains forward-looking statements. All statements, other than statements ofhistorical facts, included in or incorporated by reference into thisForm 10-K which address activities, events or developments which theCompany expects, believes or anticipates will or may occur in the future areforward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,”“projects,” “estimates,” “predicts” and similar expressions are also intendedto identify forward-looking statements. These statements are based on certainassumptions and analyses made by the management of BPZ in light of itsexperience and its perception of historical trends, current conditions andexpected future developments as well as other factors it believes areappropriate under the circumstances. BPZ cautions the reader that theseforward-looking statements are subject to risks and uncertainties, many ofwhich are beyond BPZ’s control that could cause actual events or results todiffer materially from those expressed or implied by the statements. See Item1A. — “Risk Factors” included on thisForm 10-K.*

**ITEM1. BUSINESS**

**Overview**

BPZ Energy, Inc., (the “Company” or  “BPZ”) a Colorado corporation, formerly namedNavidec, Inc., was incorporated in 1993 and is based in Houston, Texas. Weare an exploratory stage company focused on the exploration and production ofoil and natural gas and we intend to utilize part of our future natural gasproduction for the complementary development of gas-fired power generation.

On September 10, 2004, BPZ Energy, Inc., aTexas, (BPZ-Texas”) corporation consummated a reverse merger withNavidec, Inc., a Colorado corporation (“Navidec”), whereby BPZ-Texasbecame a wholly owned subsidiary of Navidec (the “Merger”). See “Business—NavidecMerger Transaction” and Note 2 to the Company’s Consolidated FinancialStatements, both included in this filing, for detailed discussion regarding theMerger.

We maintain a registered branch office in Peru.Currently, we have exclusive rights and license agreements for oil and gasexploration and production covering a total of approximately 2.4 millionacres in northwest Peru. Our license contracts cover 100% ownership of bothBlock Z-1 (739,205 acres) and Block XIX (472,860 acres). The Block Z-1 contractwas signed in November 2001, and the Block XIX contract was signed inDecember 2003. Our license contracts provide for an initial explorationperiod of seven to thirteen years and seven to ten years, respectively, andrequire that we conduct specified activities on the properties during thisperiod. If the exploration activities are successful, the total contract termcan extend up to 30 years for oil exploration and production and up to 40 yearsfor gas exploration and production. We have presented all necessarydocumentation requested by Perupetro in order to become the qualified operatorunder a license contract for Block XXII (948,000 acres, referred to as Area VIin previous filings) which we previously held under a Technical EvaluationAgreement. Subsequently, in March 2006, we were notified by Perupetro that wequalified as an operator for Block XXII. In July 2006 Perupetro officiallyinformed us that our proposal for the 248,000 acre Block XXIII, located onshorein northwest Peru between our Blocks Z-1 and XIX, was the winning bid in theirrecent license tender process. We have presented all necessary documentation tobecome the qualified operator of this new block under an exploration and productionlicense contract

Through our wholly owned subsidiary, SMCEcuador Inc., a Delaware corporation, and its registered branch inEcuador, we also own a 10% non-operated working interest in an oil and gasproducing property, Block 2, located in the southwest region of Ecuador (the “SantaElena Property”). The license agreement covering the property extends throughMay 2016.

We are in the exploratory stage of our oil and naturalgas business and to date our activities in Peru have been primarily limited toanalysis and evaluation of technical data on the properties and preparation ofthe development plans for the properties, including detailed engineering anddesign of the power plant and gas processing facilities, refurbishment of oneof our offshore platforms, procuring machinery and equipment for an extendeddrilling campaign, obtaining all necessary environmental and operating permitsand securing the required capital and financing to complete the current plan ofoperation.  We commenced drilling of ourinitial well, the CX11-21XD, in the Corvina Gas Field at the CX-11 platform inSeptember 2006, and a total depth of 10,457 feet (9,234 feet true verticaldepth) was reached in November 2006.  InMarch 2007, after a total of four Drill Stem Tests were conducted on separatepotential pay zones covering 413 feet from the Lower and Upper Zorritosformations, the well tested at a rate of 40 million cubic feet per day (MMcfpd)of natural gas and 3,150 barrels per day of crude oil (bopd).  We next plan to workover the shut-in CX11-16Xwell, followed by the drilling of our second new well in the Corvina field, totest for additional gas reserves and further appraise the oil discovery.However, we caution readers that test data is not necessarily indicative ofactual results.  We have not drilled anyother wells or recognized any revenues from operations, and we do notanticipate generating significant revenues from our properties prior to early2008.

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**Navidec Merger Transaction**

On September 10, 2004, BPZ Energy, Inc., aTexas corporation, consummated a reverse merger with Navidec, Inc., aColorado corporation (“Navidec”), whereby BPZ-Texas became a wholly ownedsubsidiary of Navidec (the “Merger”). In the Merger, the stockholder group ofBPZ-Texas obtained majority ownership and management control of the combinedcompany. Accordingly, for accounting purposes, BPZ-Texas was treated as theacquiring entity. See Note 2 to the Consolidated Financial Statements,included in this filing, for detailed discussion regarding the Merger. Allfinancial statements herein represent the historical financial statements ofthe accounting acquirer, BPZ — Texas. Upon completion of the Merger, theofficers and directors of Navidec resigned, except for the former CEO ofNavidec, John R. McKowen, who remained a director. Mr. McKowen, togetherwith the management and the four directors of BPZ-Texas, became the executiveofficers and directors of the surviving entity. Mr. McKowen did not stand for re-election to the board of directors atthe annual meeting of shareholders held on July 1, 2005.  On February 4, 2005, Navidec changed itsname to BPZ Energy, Inc. Although the Company’s name has been changed, thepre-merger company may be referred to as Navidec in this filing, as the contextmay require, to avoid confusion.

The Merger required the transfer of all of the pre-mergerbusiness operations, assets and liabilities of Navidec to its wholly ownedsubsidiary, Navidec Financial Services, Inc. (“NFS”), followed by thetransfer of ownership of NFS to the pre-merger shareholders of record as ofSeptember 9, 2004, the day prior to the consummation of the Merger.Accordingly, the pre-merger shareholders of BPZ-Texas were not entitled toreceive shares of NFS. All legal requirements for the transfer of ownership ofNFS have been completed. On July 13, 2006, NFS filed a RegistrationStatement on Form 10SB with the SEC and an amendment thereto onOctober 27, 2006. It is our understanding that the Registration Statementhas become effective under applicable SEC rules. NFS’ results are excluded fromour financial statements for all periods presented.

As a result of the Merger, the shareholders ofBPZ-Texas received the majority of the voting interests and control of theBoard of Directors and management of the combined entity. The Merger Agreementprovided for the immediate issuance by Navidec of 9,000,000 shares of itscommon stock to the shareholders of BPZ-Texas and the future issuance of anadditional 18,000,000 shares on an earn-out basis if the Company achievescertain reserve and production goals. The first 9,000,000 earn-out shares werecontingent on achieving certain reserve targets, which were achieved inDecember 2004. The remaining 9,000,000 earn-out shares are issuable oncethe Company is entitled to receive as its proportionate share from grossproduction from any oil and gas wells owned or operated by the Company not lessthan 2,000 barrels of oil per day or its equivalent (approximately 12 millioncubic feet of gas per day) prior to December 28, 2007.

**Plan of Operation**

*CorvinaGas-to-Power*

Ourplan of operation is initially focused on the development and exploitation ofthe oil and natural gas resource opportunities in the offshore Block Z-1in northwest Peru, in which we own a 100% working interest. Our initialproject, referred to as the Corvina Gas-to-Power project, with an estimatedcapital budget of $132.3 million, entails the refurbishment of the CorvinaCX-11 platform, rehabilitation of an existing well and the drilling of two newwells, installation of a 10-mile gas pipeline from the platform to shore,construction of gas processing facilities and a 160 MW simple-cycleelectric generating plant, and the construction of a 40-mile gas pipeline tosupply gas to third party generators in Arenillas, Ecuador.  In order to achieve our objectives, we mustobtain significant financing from external sources.  To date we have raised approximately $60million through several private placements of our common stock.  In addition, on December 20, 2006, the International FinanceCorporation’s (“IFC”) Board of Executive Directors approved a $120 millionfinancial package related to this project. See “Capital Expenditures and Liquidity andCapital Resources” below for further discussion.

Our first priority is drilling the initial gas wells inthe Corvina Gas Field to develop reserves and establish deliverability atexpected levels. In December 2005, we signed a drilling contract withPetrex S.A., a subsidiary of Saipem SpA of Italy. Under this contract, PetrexS.A. provided us with a platform rig capable of drilling to 16,000 feet andupgraded the rig to meet our specifications. We paid $5.5 million toupgrade and mobilize the rig. In exchange, we received a competitive fixed dayrate and exclusive rights to use the rig, at our option, during the two-yearperiod commencing with delivery of the rig in September 2006. In addition,after the guaranteed two-year period, we have the option to extend the contractfor an additional year at market rates.

In April 2006, we acquired and equipped a deck bargethat was used to transport the drilling rig to the Corvina CX-11 platform andthen act as a tender for offshore drilling operations at Corvina, andeventually at our other properties. The deck barge, officially named BPZ-01, isequipped with a 200 ton crane for loading and off-loading. BPZ-01 and relatedequipment, including a smaller 35 ton crane, two winches and related spareparts, were acquired for approximately $6.0 million. BPZ-01 is animportant element in the Company’s strategy to control drilling costs byallowing the use of existing platforms and avoiding the use of high-priceddrill ships or barges.

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The Corvina Gas Field has two existing platforms, theCX-11, which we recently refurbished and the CX-13 which we plan to refurbishin the future. The CX-11platform was evaluated as fit for operations by theindependent risk management consulting firm of ABSG Consulting, Inc.

Our initial plans include the drilling of two new wells from the CorvinaCX-11 platform which also has a shut-in gas well which we intend to recompleteand utilize for gas production. We have secured all tubular goods required tomeet our expected needs for these first three gas wells. We have obtained therequired environmental and drilling permits in order to commence drillingoperations. We commenced drilling of our initial well, the CX11-21XD, in theCorvina Gas Field at the CX-11 platform in September 2006 and a totaldepth of 10,457 feet (9,234 feet true vertical depth) was reached in November2006. In March 2007, after a total of four Drill Stem Tests (DST) wereconducted on separate potential pay zones covering 413 feet from the Lower andUpper Zorritos formations, the well tested at a rate of 40 million cubic feetper day (MMcfpd) of natural gas and 3,150 barrels per day of crude oil (bopd).However, we caution the reader that test results are not necessarily indicativeof actual production.  The gas isessentially pure methane with no impurities, making it ideal for the Company’sproposed 160 MW power plant project which will require 40 MMcfpd offeedstock.  The drilling of this firstwell at Corvina fulfills our contractual exploration commitment under thecurrent second exploration period of the Block Z-1 License Contract. Wenext plan to workover the shut-in CX11-16X well, followed by the drilling ofour second new well in the Corvina field, to test for additional gas reservesand further appraise the oil discovery.

Our initial plan of operation envisions the installationof a Company-owned 160 megawatt (“MW”) simple-cycle, gas-fired, electricgeneration plant at Nueva Esperanza, near the town of Caleta Cruz, in northwestPeru. In August 2005, we awarded the turnkey contract for the engineering,procurement and construction (EPC) of the power plant project to BTEC TurbinesLP of Houston (“BTEC”). The contract was awarded following a comprehensivesix-month bidding process that included field visits by all of the bidders. Theengineering portion of the contract is ongoing and nearing completion.  Final terms of the procurement andconstruction portions of contract are currently being negotiated. BTEC isexpected to supply two General Electric Frame 7EA simple-cyclegas-fired turbines. BTEC will also act as the main contractor for the design,transportation, construction, startup and commissioning of the power plant. Ourplan is to own 100% of the power plant. Accordingly, our revenues from thenatural gas delivered to the power plant will be derived from the sale ofelectricity.

To transport the natural gas from the Corvina Gas Fieldto our planned power plant we intend to construct a 10-mile offshore pipeline.The power plant site is located adjacent to an existing substation and powertransmission lines which, with certain upgrades, are expected to be capable ofhandling up to 360 MW of power. In order to support our proposed electricgeneration project, we commissioned an independent power market analysis forthe region. The Peruvian electricity market is deregulated and power istransported through an interconnected national grid managed by the Committeefor Economic Dispatching of Electricity (known as “COES”). Based on this study,we believe we will be able to sell economic quantities of electricity from theinitial 160 MW power plant. The market study also indicates that there may befuture opportunities for us to generate and sell significantly greater volumesof power into the Peruvian and Ecuadorian power markets.

During the planning stage for the drilling of the firstCorvina well in Block Z-1, we incurred a substantial delay in the procurementof a drilling rig.  Also, during thefinal stages of completing the Corvina well, we encountered a mechanicalproblem.  This problem resulted from a gaskick following the cementing of the 7” liner in the Zorritos formation andcaused cement and several joints of drill pipe to block part of the 9 5/8”intermediate casing. All obstructions were successfully cleared. Primarilybecause of these two events, projected power sales to the Peruvian market arenow anticipated to commence in early 2008. This timeline is subject to manyfactors, including completion of required financing arrangements, which may bebeyond our control. Based on the revised timeline, we will focus our capitalexpenditures on critical drilling activities. Procurement activities for theother phases of the project will be coordinated with expected additionalfunding from the IFC project-based debt financing, as described above, oradditional equity financing.

In addition to the local power market targeted in ourinitial project in Peru, we intend to simultaneously develop a gas salesstrategy for nearby Ecuador to capitalize on what we believe to be significantupside gas potential of the Corvina and Piedra Redonda Gas Fields located inBlock Z-1, as well as the potentially significant natural gas resources inthe adjacent onshore Block XIX. These properties are within 30 miles of theEcuadorian border and we plan to develop them for export sales of either rawgas or power generation via connection to the transmission system of Ecuador. Ourplan for eventual Ecuadorian gas sales includes the construction of a 40-milepipeline from Caleta Cruz, the terminal point of our offshore pipeline from theCorvina Gas Field, to Arenillas, Ecuador. We intend to sell gas for thegeneration of electricity by third party power producers in the local market inEcuador. We are planning to complete this pipeline for first sales of gas toEcuador in late 2008, though this schedule is subject to many factors outsideour control, including all necessary financing and no assurance can be giventhat we can meet this schedule.

In addition to the initial Corvina Gas-to-Powerdevelopment project described above, we have exploration and 

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development rights to other fields within Block Z-1 and Blocks XIX,XXII and XXIII.  We plan to seekadditional financing for these projects from industry or capital marketsources, and we are not currently planning to make significant capitalexpenditures for seismic acquisition, excluding Block XIX as described below,or other exploration and development activities beyond our initial CorvinaGas-to-Power project as described above, until we have secured such additionalfinancing. Below is a brief summary of some of our possible future explorationand development projects:

*Block Z-1*

In light of the recent oil discovery on the CX11-21XDwell in the Corvina field, as discussed above, we plan on targeting the samezones on the workover of the shut-in well as well as on the second newwell.  If the test results also indicatethe presence of commercially viable oil, we may consider implementing afast-track oil development program simultaneous with or possibly prior to thefull implementation of the Corvina gas-to-power project and development of theAlbacora Oil Field.

Future plans for Block Z-1 include:  further development of the Corvina and PiedraRedonda Gas Fields for future industrial markets, such as petrochemicals, andfor additional gas sales into Guayaquil, Ecuador, known as the industrial centerof Ecuador; the development of the Albacora Oil Field for which we havecompleted the baseline field work towards the securing of the environmentalpermits required for repair of an existing platform, the workover of threeshut-in wells, and the related drilling program.  We have completed ourinternal evaluation of the Albacora oilfield’s estimated reserves based on thedefinitions and standards adopted in 1997 by the Society of Petroleum Engineers& World Petroleum Congresses (SPE/WPC), and we are seeking an independentcertification of such reserves, though no assurance can be given that any suchreserves can be proven, or will be certified as proven, or that we candemonstrate our technical or financial ability to recover any such reserves. Wealso have begun planning for eventual exploration and development work in thedeeper water sections of Block Z-1

*Block XIX*

In connection with our onshore Block XIX licensecontract, we are obligated to shoot at least 100 kilometers of 2-D seismicsurveys during the first half of 2007, unless an extension is requested andgranted.  Depending on the results ofthis work, we may elect to drill an exploratory well.  We havesecured the environmental permits and other authorizations to perform seismictesting in this block.

*Blocks XXII and XXIII*

We have initiated negotiations to obtain a licensecontract for exploration and development activities for Block XXII, which untilDecember 31, 2005, we held under a Technical Evaluation Agreement. Block XXIIis a large onshore block in northwest Peru which encompasses the LanconesBasin. In March 2006, we were notified by Perupetro that we qualified as anoperator of Block XXII.

In July 2006, Perupetro officially informed us thatour proposal for the 248,000 acre Block XXIII, located onshore in northwestPeru between our Blocks Z-1 and XIX, was the winning bid in their tenderprocess. We have presented all necessary documentation to become the qualifiedoperator of this new block under an exploration and production licensecontract.

See Item 2. — “Properties” and  “Liquidity and Capital Resources” included inItem 7 of this Form 10-K for further information.

**Available Information**

The Company files annual,quarterly and current reports, proxy statements and other documents with theSecurities and Exchange Commission (“SEC”) under the Securities Act of 1934.The public may read and copy any materials that we file with the SEC at the SEC’sPublic Reference Room at Headquarters Office, 100 F Street, NE,Room 1580, Washington, DC 20549. The public may obtain information on theoperation of the Public Reference Room by calling the SEC at1-800-SEC-0330. Also, the SEC maintains an Internet website that containsreports, proxy and information statements, and other information regardingissuers, including us, that file electronically with the SEC. The public canobtain any documents that we file electronically with the SEC athttp://www.sec.gov. In addition, the Company maintains a website(http://www.bpzenergy.com), on which we make available, free of charge, all ofthe Company’s above mentioned filings with the SEC, including Forms 3, 4 and 5filed with respect to our equity securities under Section 16(a) of theSecurities Act of 1934. These filings will be available as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the SEC.

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**Our Competition**

There is intense competition in the oil and gas industrywith respect to the acquisition of producing properties, undeveloped acreage,and rights to explore for these properties. Many major and independent oil andgas companies actively pursue and bid for the mineral rights of desirableproperties, and many companies have been actively engaged in acquiring oil andgas properties in Peru and Ecuador.

We believe that our early efforts and knowledge of ourtargeted areas have given us a competitive advantage in Peru, and to a lesserextent, in Ecuador. Although there are unleased tracts within our target area,we believe that these properties may be less attractive to other companiesbecause it will be difficult for them to obtain a significant amount ofcontiguous mineral acres. This results in part from our significant holdings inthe vicinity of these unleased tracts. However, increased demand for licenserights in surrounding areas may impact our ability to expand and grow in thefuture, particularly because many of our competitors have substantially greaterfinancial and other resources, better name recognition and longer operatinghistories. As a result, we may not be able to acquire additional oil and gasproperties in desirable locations.

There is also intense competition in the oil and gasindustry for access to drilling and other contract services and experiencedtechnical and operating personnel needed to drill and complete wells. Werecently experienced difficulty obtaining a drilling rig for our planneddrilling operations, but now have a drilling rig under contract. Competitionfor drilling and contract services in our target area is increasing and mayaffect our plan of operation. We periodically adjust our operating plans andtimelines to adapt to this changing environment. Increasing future demand fordrillers and contractors may limit our ability to execute in a timely mannerand may negatively impact our ability to grow.

**Regulation Impacting Our Business**

***General***

Various aspects of our oil and natural gas operations arecurrently or will be subject to various foreign laws and governmentalregulations. These regulations may be changed from time to time in response toeconomic or political conditions. Although we believe that our operations areand will be in substantial compliance with existing legislation andrequirements of governmental bodies, our ability to conduct continuedoperations is subject to satisfying applicable regulatory and permittingcontrols. Our principals have many collective decades of experience in dealingdirectly with the Peruvian government on energy projects and in some cases havebeen directly involved in the drafting and promulgation of petroleum legislation.Therefore we believe we are in a unique position to understand and comply withlocal rules and regulations. However, our current permits and authorizationsand our ability to obtain future permits and authorizations may, over time, besusceptible to increased scrutiny and greater complexity which could result inincreased costs or delays in receiving appropriate authorizations.

***Peru***

***Peruvian hydrocarbon legislation.***  Peru’shydrocarbon legislation, which includes the Organic Hydrocarbon LawNo. 26221 and the regulations thereunder (the “Organic Hydrocarbon Law”),governs our operations in Peru. This legislation covers the entire range ofpetroleum operations, defines the roles of Peruvian government agencies whichregulate and interact with the oil and gas industry, requires that investmentsin the petroleum sector be undertaken solely by private investors (eithernational or foreign), and provides for the promotion of the development ofhydrocarbon activities based on free competition and free access to alleconomic activities. This law provides that pipeline transportation and naturalgas distribution must be handled via contracts. All other petroleum activitiesare to be freely operated and are subject only to local and internationalsafety and environment standards.

Under this legal system, Peru is the owner of thehydrocarbons located below the surface in its national territory. However, Peruhas given the ownership right to extracted hydrocarbons to Perupetro, a statecompany that is responsible for promoting and overseeing the investment ofhydrocarbon exploration and exploitation activities in Peru. Perupetro isempowered to enter into contracts for either the exploration and exploitationor the exploitation of petroleum and gas on behalf of Peru, which are describedfurther below. The Peruvian government also plays an active role in petroleumoperations through the involvement of the Ministry of Energy and Mines, thespecialized government department in charge of devising energy, mining andenvironmental protection policies, enacting the rules applicable to all thesesectors and supervising compliance with such policies and rules. Within theMinistry of Energy and Mines, the Supervising Office for Investments in Energy(“OSINERG”) is the agency charged with economic and technical supervision. Weare subject to the laws and regulations of all of these entities and agencies.

Perupetro generally enters into either license contractsor service contracts for hydrocarbon exploration and 

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exploitation. Peru’s laws also allow for other contract models, but theinvestor must propose contract terms that are compatible with Peru’s interests.A company must be qualified by Perupetro to enter into hydrocarbon explorationand exploitation contracts in Peru. In order to qualify, the company must meetthe standards under the Regulations Governing the Qualifications of OilCompanies. These qualifications generally require the company to have thetechnical, legal, economic and financial capacity to comply with all obligationsit will assume under the contract based on the characteristics of the arearequested, the possible investments and the environmental protection rulesgoverning the performance of its operations. When a contractor is a foreigninvestor, it is expected to incorporate a subsidiary company or registeredbranch in accordance with Peru’s municipal laws and appoint representatives whowill interact with Perupetro.

Our Peruvian branch, BPZ Energy, Inc., SucursalPeru, has been qualified by Perupetro with respect to our current contracts.However, Perupetro reviews the qualification for each specific contract to besigned by a company. Additionally, the qualification for foreign companies isgranted in favor of the home office or corporation, which is jointly andseverally liable at all times for the technical, legal, economic and financialcapacity of its Peruvian branch.

When operating under a license contract, the licensee isthe owner of the hydrocarbons extracted from the contract area during theperformance of operations, and pays royalties which are collected by Perupetro.The licensee can market the hydrocarbons in any manner whatsoever, subject to alimitation in the case of natural emergencies where the law stipulates suchmanner.

Licensees are obligated to submit quarterly reports tothe Petroleum Bureau (Direccion General de Hidrocarburos). Licensees must alsosubmit a monthly economic report to the Central Bank of Peru. These reports aregenerally combined and delivered together with other operating reports requiredto be submitted to Perupetro.

Previously, all license contracts were granted by theMinistry of Energy and Mines. The change to Perupetro as the license contractgrantor subjects all license contracts to a new legal framework. Although thereis precedent for these new licensing procedures, there may still be someuncertainly as to exactly how the licensing procedures will function in thefuture.

Under exploitation service contracts, the ownership ofall of the extracted petroleum is vested in Perupetro and the company willreceive compensation agreed to by the parties. However, Perupetro is grantedthe power to remunerate the investor either in cash or in kind, depending onthe level of investment and the volume of production. We have no servicecontracts, nor do we foresee operating under this form of contract.

The duration of the license contracts is based on thenature of the hydrocarbons discovered. The contract duration for crude oil isthirty years, while the contract duration for natural gas and condensates isforty years. The periods commence on an agreed date and are determined based onlocation of the contract area, season of the year in which explorationcommences, and other similar factors. Contracts typically include an explorationphase and an exploitation phase, unless the contract is solely an exploitationcontract. Within the contract term, seven years is allotted to exploration,with the possibility of three extensions of one year each. There is also apotential deferment period for a maximum of ten years if certain factorsrecognized by law delay the economic viability of a discovery, such as lack oftransportation facilities or lack of a market. The exploration phase isgenerally divided into several periods, with a maximum of seven periods, andeach period includes a minimum work program. The fulfillment of work programsmust be supported by an irrevocable bank guaranty, usually in the amount ofthirty to forty percent of the estimated value of the minimum work program.

Perupetro also grants technical evaluation agreements.These agreements give the contractor the right to conduct technical evaluationsof the areas under such agreements and to enter into license contracts if theevaluations indicate the potential for profitable operations. The technicalevaluation agreement is generally for a period of twenty-four months, dependingupon the volume and nature of the work to be carried out.

We currently have two license contracts and are in theprocess of finalizing negotiations on the terms and conditions of twoadditional license contracts. As of December 31, 2006, we believe we werein compliance with all of the material requirements of each of such contracts.We have executed certain letters of guaranty to guarantee our performance underthe license contracts and technical evaluation agreements, including a $350,000bond posted in August 2005, to secure our obligation under the licensecontract for Block XIX. The bond was partially secured by the deposit ofrestricted cash with the financial institution which issued the bond. Should wefail to fulfill our obligations under the license contract without technicaljustification or other good cause, Perupetro could seek recourse to the bond orterminate the license.

***Peruvian fiscal regime.***  Peru’sfiscal regime determines the levels of the government’s entitlement frompetroleum activities. This regime is subject to change, which could negativelyimpact our business.

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License contracts are subject to royalty payments, which are usually afixed percentage of the actual production sold. The taxing regulationsstipulate a minimum royalty payment of five percent increasing incrementally toa maximum of twenty percent based on production.

The Organic Hydrocarbon Law and the Regulations Governing the TaxStability Guaranty and Other Tax Rules of the Organic Hydrocarbon Law providethat the tax regime in force on the date of signing a contract will remainunchanged during the term of the contract. Therefore, any change to the taxregime, which results in either an increase or decrease in the tax burden, willnot affect the operator.

During the exploration phase, operators are exempt from import dutiesand other forms of taxation applicable to goods intended for explorationactivities. Exemptions are withdrawn at the production phase, but exceptionsare made in certain instances, and the operator may be entitled to import goodstax-free for an additional two-year period.

Taxable income is determined by deducting allowable operating andadministrative expenses, including royalty payments. Income tax is levied onthe income of the operator based upon the legal corporate tax rate in effect atthe date the contract was signed. Operators engaged in the exploration andproduction of crude oil, natural gas and condensates must determine theirtaxable income separately for each license contract under which it operates.Where a contractor carries out these activities under different individuallicense contracts, it may offset its earnings before income tax under onelicense contract with losses under another license contract, as long as thecontract with the loss is in the production phase, for purposes of determiningthe corporate income tax.

***Peruvian labor and safetylegislation.***  Our operations in Peru will also be subjectto the Unified Labor Law, which governs the labor force in the petroleumsector. In addition, the Organic Hydrocarbon Law and related Safety Regulationsfor the Petroleum Industry also regulate the safety and health of workersinvolved in the development of hydrocarbon activities. All entities engaged inthe performance of activities related to the petroleum industry must providethe General Hydrocarbons Bureau on a semi-annual basis with the list of theirpersonnel, indicating their nationality, specialty and position. These entitiesmust also permanently train their workers on the application of safety measuresin the operations, and control of disasters and emergencies. Each entity mustkeep detailed records of all accidents that occur in its operations and reportall accidents to the General Hydrocarbons Bureau. The regulations also containprovisions on accident prevention and personnel health and safety, which inturn include rules on living conditions, sanitary facilities, water quality atworkplaces, medical assistance and first-aid services. Provisions specificallyrelated to the exploration phase, which is our current phase of operations, arealso contained in the regulations and include safety measures in camps, medicalassistance, food conditions, and handling of explosives. Additional safetyregulations may also apply as we expand and develop our operations.

***Peruvian electric power legislation.***  Ourbusiness plan envisions the generation of electricity and the sale of suchelectric power in Peru. The basic laws in Peru governing electric power, whichwill apply to our future operations, are the Law of Electric Power Concessionsand the Regulations for the Environmental Protection of Electric PowerActivities, the corresponding regulations for each, as well as additionalrelated laws and regulations, including all legislation regarding ElectricPower Tariffs and all regulations and technical norms created by the NationalCommission of Electric Power Tariffs.

***Peruvian environmental regulation.***  Ouroperations are subject to numerous and frequently changing laws and regulationsgoverning the discharge of materials into the environment or otherwise relatingto environmental protection. Peru has enacted specific environmentalregulations applicable to the petroleum industry. The Code on the Environmentand the Natural Resources establishes a framework within which all specificlaws and regulations applicable to each sector of the economy are to bedeveloped. These laws and regulations are designed to ensure the continualbalance of environmental and petroleum interests. The regulations stipulatecertain environmental standards expected from contractors. They also specifyappropriate sanctions to be enforced by the Ministry of Mines and Energy if acontractor fails to maintain such standards. The Ministry of Mines and Energyis charged with the responsibility of issuing the applicable standards. OSINERGis responsible for ensuring compliance with applicable environmental rulescovering hydrocarbon activities.

The Organic Hydrocarbon Law also addresses theenvironmental regulatory regime in Peru. The law originally prohibited anymining or extractive operations within certain areas designated for protection.It was, however, subsequently modified to enable investors to prospect forhydrocarbons within protected areas, provided there is compliance with severalobligations. We must comply with these obligations as we conduct our businesson an ongoing basis. The Environmental Regulations for Hydrocarbon Activitiesprovide that companies participating in the implementation of projects,performance of work and operation of facilities related to hydrocarbonactivities, are responsible for the emission, discharge and disposal of wastesinto the environment. Companies must annually file a report correspondingto the previous year describing the company’s compliance with the environmentallegislation in force.

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Companies involved in hydrocarbon activities must alsoprepare and file an Environmental Impact Study (“EIS”) with the GeneralHydrocarbons Bureau, which is part of the Ministry of Energy and Mines, inorder for the relevant activities to comply with the maximum permissibleemission limits set forth by the Ministry of Energy and Mines. An EIS must beprepared for each project to be carried out. All of these proposals must be approvedby the General Environmental Bureau, which is also part of the Ministry ofEnergy and Mines.

In addition, any party responsible for hydrocarbonactivities must file an “Oil Spill and Emergency Contingency Plan” with theGeneral Hydrocarbons Bureau. The plan must be updated at least once a year andmust contain information regarding the measures to be taken in the event ofspills, explosions, fires, accidents, evacuation, etc. It must also containinformation on the procedures, personnel and equipment required to be used andprocedures to be followed to establish uninterrupted communication between thepersonnel, the government representatives, the General Hydrocarbons Bureau andother State entities.

Peru has recently enacted amendments to its environmentallaw, imposing substantial restrictions on the use of natural resources,interference with the natural environment, location of facilities, handling andstorage of hydrocarbons, use of radioactive material, disposal of waste,emission of noise and other activities. Additionally, the laws requiremonitoring and reporting obligations in the event of any spillage orunregulated discharge of hydrocarbons.

Any failure to comply with environmental protectionrules, the import of contaminated products, or failure to keep a monitoringregister or send reports to the General Hydrocarbons Bureau in a timelyfashion, could subject the company to fines. In addition, the GeneralHydrocarbons Bureau may consider imposing a prohibition or restriction of therelevant activity, an obligation to compensate the aggrieved parties and/or anobligation to immediately restore the area. The company responsible for anydefault can also be subject to a suspension of operations for a term of one,two or three months, or indefinitely. Furthermore, any contract signed with thePeruvian government, the implementation of which jeopardizes or endangers theprotection or conservation of protected natural areas, can be terminated.

We are subject to all Peruvian environmental regulationsapplicable to the petroleum industry now in existence and those existing in thefuture. The enactment and enforcement of environmental laws and regulations inPeru is relatively new. We are therefore uncertain how Peruvian authoritieswill enforce and supervise environmental compliance and standards. Further, wecannot predict any future regulation or the cost associated with futurecompliance.

Although we believe that our operations are insubstantial compliance with existing environmental requirements, our ability toconduct continued operations is subject to satisfying applicable regulations.Our current permits and authorizations and ability to obtain future permits andauthorizations may be susceptible, on a going forward basis, to increasedscrutiny, greater complexity resulting in increased costs, or delays inreceiving appropriate authorizations. In particular, we may experience in thefuture delays in obtaining permits and authorizations in Peru necessary for ouroperations. We are required to obtain an environmental permit or approval fromthe government in Peru prior to conducting any seismic operations, drilling awell or constructing a pipeline in Peruvian territory, including the waters inoffshore Peru where we intend to conduct oil and gas operations.

***Compliance with Existing Legislationin Peru***

Although we believe that our operations are and will bein substantial compliance with existing legislation and requirements ofPeruvian governmental bodies, our ability to conduct continued operations issubject to satisfying applicable regulatory and permitting controls. As notedabove, our principals have many collective decades of experience in dealingdirectly with the Peruvian government on energy projects and in some past caseshave been directly involved in the drafting and promulgation of petroleumlegislation. Therefore, we believe we are in a good position to understand andcomply with local rules and regulations.

***Ecuador***

SMC Ecuador, Inc. has had its 10% non-operatinginterest in the Santa Elena oil fields since 1997. As a non-operator, we arenot directly subject to the laws and regulations of Ecuador covering the oiland gas industry and the environment. However, if we begin operating activitiesin Ecuador, we will be directly subject to such laws and regulations.

**Environmental Compliance and Risks**

As an owner or lessee and operator of oil and gasproperties throughout South America, we are subject to various national, stateand local laws and regulations relating to discharge of materials into, andprotection of, the environment. These laws and regulations may, among otherthings, impose liability on the contractor under an oil and gas licenseagreement for the cost of pollution clean-up resulting from operations, subjectthe contractor to liability for pollution damages, and require 

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suspension or cessation of operations in affected areas.

Except for certain pollution coverage related to ourbarge, we do not presently maintain environmental insurance coverage, because,in management’s judgment, such coverage is not cost-effective at this time inview of our limited activities. However, we may acquire such insurance coveragein the future based on our assessment of the risks of our operations and thecosts of such coverage. No such coverage can insure us fully against allenvironmental risks. We are not aware of any environmental claims existingwhich would have a material impact upon our financial position or results ofoperations.

We have made and will continue our efforts to comply withthese requirements, which we believe are necessary to successful long-termoperations in the oil and gas industry. We have established guidelines forcontinuing compliance with environmental laws and regulations. In order tocarry out our plan of operation, we are required to conduct environmentalimpact studies and obtain environmental approvals for operations. We haveengaged outside consultants to perform these studies and assist us in obtainingnecessary approvals. Our estimated cost for these studies and assistancerelated to the Corvina gas-to-power project, Block XIX and Albacora areapproximately $522,000, of which $488,000 has been incurred as of December 31,2006.

We do not believe that compliance with federal, state orlocal provisions regulating the discharge of materials into the environment, orotherwise relating to the protection of the environment, will have a materialadverse effect upon the capital expenditures, earnings or competitive positionof the Company or its subsidiaries. However, there is no assurance that changesin or additions to laws or regulations regarding the protection of theenvironment will not have such an impact.

**Operational Hazards and Insurance**

Our operations will be subject to the usual hazardsincident to the drilling and production of oil and gas, such as blowouts,cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires,pollution, releases of toxic gas and other environmental hazards and risks.These hazards can cause personal injury and loss of life, severe damage to anddestruction of property and equipment, pollution or environmental damage andsuspension of operations.

As iscommon in the oil and natural gas industry, we do not insure fully against allrisks associated with our business either because such insurance is notavailable or because premium costs are considered prohibitive. We currently have general liability insurancecoverage which we believe is adequate for our current stage of operations basedon management’s assessment.  Suchinsurance may not cover every potential risk associated with the drilling,production and processing of oil and gas. In particular, coverage is notobtainable for all types of environmental hazards. Additionally, the occurrenceof a significant adverse event, the risks of which are not fully covered by ourinsurance policy, could have a material adverse effect on our financialcondition and results of operations. Moreover, no assurance can be given thatwe will be able to maintain adequate insurance or increase current coverageamounts at rates we consider reasonable.

**Research and Development**

We seek to use advanced technologies in the evaluation ofour oil and gas properties and new opportunities. We generally do not developsuch technologies internally, but our technical team works with outside vendorsto test and utilize these technologies to the fullest practical extent,particularly in the application of geophysical and exploration software. Incertain cases, our collaboration has aided the development of thesetechnologies. We do not believe we have incurred any quantifiable incrementalcosts in connection with research and development activities.

**Executive Officers**

The following table sets forth the names of our chairmanand executive officers along with their positions and ages, as of December 31,2006. The chairman has served since his appointment in September 2004.
| Name                                         | ** ** | **Age** | ** ** | **Position**                                             |
|----------------------------------------------|------------|---------|------------|----------------------------------------------------------|
| Dr. Fernando Zúñiga y Rivero       |       | 79      |       | Chairman of the Board                                    |
| Manuel Pablo  Zúñiga-Pflücker |       | 45      |       | Chief Executive Officer, President, and Director         |
| Frederic Briens                              |       | 47      |       | Chief Operating Officer                                  |
| Edward G.  Caminos(1)                        |       | 44      |       | Vice President—Finance and Chief Accounting Officer |
| Edward Gilliard(1)                           |       | 51      |       | Vice President—Finance and Treasurer                |

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(1)           Appointed to theirrespective positions on October 30, 2006.

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Dr. Zúñiga y Rivero, Chairman of the Board, is thefather of the Company’s President, CEO and Director, Mr. Zúñiga-Pflücker.No other family relationships exist between any directors or executive officersof the Company. Set forth below are brief descriptions of the recent employmentand business experience of the officers and directors of the Company.

**Dr. Fernando Zúñiga y Rivero, Chairman of theBoard.**  Dr. Zúñiga y Rivero became Chairman ofthe Board of BPZ upon consummation of the Merger with Navidec, Inc. inSeptember 2004. Immediately prior to the Merger and since 1996, he servedas Chairman of BPZ & Associates Inc., (the former parent companyof BPZ—Texas), which has been inactive subsequent to the Merger.Dr. Zúñiga y Rivero was also Energy Division project officer of The WorldBank, where he planned and implemented exploration promotion projects in 58countries, primarily in East and West Africa, Eastern Europe, Southeast Asiaand Latin America from 1979 to 1996. Dr. Zúñiga y Rivero has fifty yearsof experience in the international energy industry starting as an explorationgeologist, biostratigrapher, and exploration head of an Exxon affiliate in Peru;and continuing as exploration production manager, integrated operationsmanager, general manager, and ultimately serving as Chairman and CEO ofPetroleos del Peru, the national oil company of Peru. Dr. Zúñiga y Riveroholds a B.S., a M.S. and a Ph.D. in Geology from the University of SanAugustin, Peru, and he conducted postgraduate studies at the University ofCalifornia, Los Angeles. In April 2005, Dr. Zúñiga y Rivero became adirector of Transmeridian Exploration, Inc., a public oil and gas companywith operations in Kazakhstan.

**Manuel Pablo Zúñiga-Pflücker, President, ChiefExecutive Officer and Director.**  Mr. Zúñiga-Pflückerbecame President and Director of BPZ upon consummation of the Merger withNavidec, Inc. in September 2004 and in May 2005 assumed theadditional title of Chief Executive Officer. Immediately prior to the Mergerand since its formation in 2001, Mr. Zúñiga-Pflücker served asPresident of BPZ—Texas. Mr. Zúñiga-Pflücker also served as Presidentof BPZ & Associates, Inc., the former parent company ofBPZ—Texas, from 1989 until its Merger with Navidec, Inc. inSeptember 2004, at which time BPZ & Associates, Inc. becameinactive. Mr. Zúñiga-Pflücker began his career with OccidentalPetroleum Corporation. Mr. Zúñiga-Pflücker has spent the past20 years in the international oil and gas business, and he has beeninvolved in projects throughout Latin America and other areas of the worldranging from exploitation of marginal oil and gas fields to frontierexploration projects. He has also focused on the creative development ofnatural gas fields utilizing power generation and gas to liquids technology. Heholds a B.S. in mechanical engineering from the University of Maryland as wellas an M.S. in petroleum engineering from Texas A&M University.

**Frederic Briens, Chief Operating Officer.** Mr. Briens joined BPZ as Vice President of Engineering inDecember 2004 and was named Chief Operating Officer in May 2005. From2002 through 2004, Mr. Briens served as Geosciences and Business DevelopmentManager for Perenco in Venezuela. From 1999 to 2002, Mr. Briens was theChief Reservoir Engineer for Lundin Petroleum in Switzerland. Mr. Briensis a petroleum engineer with over 20 years of operating experience ininternational oil and gas projects spanning the globe. He has also served insenior technical and operating positions with Conoco, Schlumberger and Chevron.Mr. Briens holds an M.S. and a Ph.D. in petroleum engineering from TexasA&M University, an MBA from Colorado State University and an engineering degreefrom Ecole Centrale de Paris. Mr. Briens was a co-founder ofBPZ & Associates, Inc., a predecessor to the Company, in 1989.

**Edward G. Caminos, Vice President—Finance and ChiefAccounting Officer.**  Mr. Caminos was appointed as VicePresident—Finance and Chief Accounting Officer of the Company, effectiveOctober 30, 2006. Mr. Caminos served as interim Chief FinancialOfficer since June 15, 2006 and as Corporate Controller of the Companysince January 2005. Prior to joining the Company, Mr. Caminos servedas Director Financial Reporting for the Americas Division at Duke Energy fromJune 2004 to January 2005. From February 2001 to May 2004,Mr. Caminos served as Financial Reporting Manager and, prior to its sale,as interim Controller for the Europe Division, at Reliant Energy.

**Edward Gilliard, Vice President—Finance andTreasurer.**  Mr. Gilliard was appointed as VicePresident—Finance and Treasurer of the Company, effective October 30,2006. Mr. Gilliard started his career in 1977 with Amoco Production Companyas an operations and reservoir engineer. He worked in energy lending andproject financing with Continental Illinois National Bank, Banque Indosuez, andReliant Energy International, formerly Houston Industries Energy, where heworked on project financing for power projects in South America, as well asother regions. In 1997, he joined Burlington Resources and worked in areas suchas international finance, strategic planning, business development, andgovernmental affairs. In the latter capacity, Mr. Gilliard was a leadeditor on the National Petroleum Council’s 1999 and 2003 landmark studies onnatural gas. He holds a Bachelor’s Degree in Chemical Engineering from TexasA&M University and an MBA from the University of Houston.

**Employees**

As of December 31, 2006, we employed 18 full-timeemployees (of which 3 are executive officers) in our Houston office and 14full-time employees (of which 1 is an executive officer) in our Lima, Peruoffice.  We had one full-time employee inthe Quito, Ecuador office.  BPZ believesthat its relationship with its employees is satisfactory. None of our employeesare 

 

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**represented by a union.**

**ITEM 1A.  RISK FACTORS**

***Risks Relating to the Oil and NaturalGas Industry, the Power Industry, and Our Business.***

***We have a limited operating historyand have only engaged in start-up activities.***  AlthoughBPZ-Texas was formed in 2001, we are in the exploratory stage because we havenot had significant business operations since formation and have generated norevenues from the production of oil or gas from our properties. We are alsosubject to all of the risks inherent in attempting to expand a relatively newbusiness venture. Such risks include, but are not limited to, the possibleinability to profitably operate our existing properties or properties to beacquired in the future, our possible inability to fully fund the development requirementsof such properties and our possible inability to acquire additional propertiesthat will have a positive effect on our operations. We can provide no assurancethat we will achieve a level of profitability that will provide a return oninvested capital or that will result in an increase in the market value of oursecurities. The experience of our management team has primarily been in the oiland natural gas exploration and production industry and we have limitedexperience in the power generation business. We are initially relying onconsultants and outside engineering and technical firms to provide theexpertise to plan and execute the power generation aspects of our strategy andwe have not yet hired all necessary full-time employees to manage this line ofbusiness. Accordingly, we are subject to the risk that because of these factorsand other general business risks noted throughout these “Risk Factors,” we maynot be able to profitably execute our power generation strategy.

***We own rights to oil and gas properties that have not yetbeen developed.***  Weown rights to oil and gas properties that have limited or no development. Thereare no guarantees that our properties will be developed profitably or that thepotential oil and gas resources on the property will produce as expected ifthey are developed.

***Werequire additional financing for the exploration and development of our foreignoil and gas properties and the construction of our proposed power generationfacility, pipeline and gas processing facility***.  With the net proceeds from: (i) a$6 million private offering completed on September 30, 2004,(ii) a $34.4 million private offering completed on July 19,2005, (iii) a $5.0 million private offering on March 10, 2006,(iv) a $12.3 million private offering on June 20, 2006, and (v)$19.5 million private placement to the International Finance Corporation (“IFC”)on December 20, 2006, we have begun to implement our plans to develop ourexisting oil and gas properties as discussed in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Plan of Operation.”  On December 20, 2006, the InternationalFinance Corporation’s (“IFC”) Board of Executive Directors approved a $120million financial package.  IFC is theprivate sector arm of the World Bank Group based in Washington, D.C.  As part of the financing, we completed aprivate placement of 6,500,000 shares of common stock, no par value, to the IFCpursuant to a Subscription Agreement dated December 18, 2006.  The commonstock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million.  The offering was placed directly by us andthere were no placement fees.  The remaining $100.5 million portion of IFCfinancing consists of $30.5 million of debt facilities for IFC’s own accountand $70 million of debt facilities for the account of third-party financialinstitutions.  Syndication of thethird-party debt component is expected to take place during the second quarterof 2007.  The remaining debt portion ofthe financing is subject to identification of the lending syndicate members andsubsequent negotiation and approval of the necessary loan documentation.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources”for further discussion. If we are unable to timely obtain adequate funds tofinance our exploration and development, our ability to develop our oil and gasreserves may be limited or substantially delayed. Such limitations or delayscould result in the potential loss of our oil and gas properties if we wereunable to meet our obligations under the license agreements. Inability totimely obtain funds also could cause us to delay, scale back or abandon ourplans for construction of our power generation facility, pipelines, and gasprocessing facility.

We anticipate that future amounts required to fund our foreignactivities will be obtained through debt financing, sale of additional equityinterests, joint venture arrangements, the sale of oil and gas interests,and/or future cash flows from operations. The exact nature and terms of suchfunding sources are unknown at this time, and there can be no assurance that wewill obtain such funding or have adequate funding available to finance ourfuture operations.

***Our future operating revenue isdependent upon the performance of our properties.***  Our futureoperating revenue depends upon our ability to profitably operate our existingproperties by drilling and completing wells that produce commercial quantitiesof oil and gas and our ability to expand our operations through the successfulimplementation of our plans to explore and acquire additional properties. Thesuccessful development of oil and gas properties requires an assessment of potentialrecoverable reserves, future oil and gas prices, operating costs, potentialenvironmental and other liabilities and other factors. Such assessments arenecessarily inexact. There can be no assurance that once in operation we canproduce sufficient revenue to operate our existing properties or acquireadditional oil and gas producing properties and leases. We may not discover orsuccessfully produce any recoverable reserves, or we may not be able to make aprofit from the reserves that we may discover.

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In the event that we are unable to produce sufficient operating revenueto fund our future operations, we will be forced to seek additional, third-partyfunding, if such funding can be obtained. Such options would possibly includedebt financing, sale of equity interests in the Company, joint venturearrangements, or the sale of oil and gas interests. If we are unable to securesuch financing on a timely basis, we could be required to delay or scale backour operations. If such unavailability of funds continued for an extendedperiod of time, this could result in the termination of our operations and theloss of an investor’s entire investment.

***Our business involves manyuncertainties and operating risks that may prevent us from realizing profitsand can cause substantial losses.***  Our exploration and productionactivities may be unsuccessful for many reasons, including weather, thedrilling of dry holes, cost overruns, equipment shortages and mechanicaldifficulties. Moreover, the successful drilling of a natural gas or oil wellwill not ensure we will realize a profit on our investment. A variety offactors, both geological and market-related, can cause a well to becomeuneconomical or only marginally economical. Our business involves a variety ofoperating risks, including:

·                  fires;

·                  explosions;

·                  blow-outs andsurface cratering;

·                  uncontrollableflows of natural gas, oil and formation water;

·                  naturaldisasters, such as hurricanes and other adverse weather conditions;

·                  pipe, cement,subsea well or pipeline failures;

·                  casingcollapses;

·                  mechanicaldifficulties, such as lost or stuck oil field drilling and service tools;

·                  abnormallypressured formations;

·                  environmentalhazards, such as natural gas leaks, oil spills, pipeline ruptures anddischarges of toxic gases.

If we experience any of these problems, any well bores,platforms, gathering systems and processing facilities could be affected, whichcould adversely affect any drilling operations we may commence. We could alsoincur substantial losses as a result of:

·                  environmentalhazards, such as natural gas leaks, oil spills, pipeline ruptures anddischarges of toxic gases;

·                  injury or lossof life;

·                  severe damage toand destruction of property, natural resources and equipment;

·                  pollution andother environmental damage;

·                  clean-upresponsibilities;

·                  regulatoryinvestigation and penalties;

·                  suspension ofour operations; and

·                  repairs toresume operations.

If any of these risks occur, and our resulting losses aresignificant, we may have to curtail or suspend any drilling or productionoperations we may eventually commence.

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***We plan to conduct offshore exploration,exploitation and production operations off the coast of northwest Peru, all ofwhich are also subject to a variety of operating risks peculiar to the marineenvironment.***  Such risks include capsizing, collisions anddamage or loss from adverse weather conditions or interference from commercialfishing activities. These conditions can cause substantial damage to facilitiesand interrupt production. As a result, we could incur substantial liabilitiesthat could reduce or eliminate the funds available for exploration,exploitation and acquisitions or result in loss of equipment and properties.

***Disruption of services provided by our deck barge couldtemporarily impair our operations. ***We depend on ourdeck barge BPZ-01 to transport equipment to our offshore platformsand to act as a tender for our offshore drilling operations in Block Z-1. BPZ-01 is an important element in our strategy to control drilling costs byallowing the use of existing platforms and avoiding the use of high-priceddrill ships or barges.  Any disruption of the services provided by ourdeck barge because of adverse weather conditions, accidents, mechanicalfailures, insufficient personnel or other events could temporarily impair ouroperations, delay implementation of our business plan, and increase ourdrilling costs.  In addition, our insurance may not be adequate to coverany resulting losses.

***Construction and operation of powergeneration and gas processing facilities and pipelines involve significantrisks that cannot always be covered by insurance or contractual protections.***  Theconstruction of power generation and gas processing facilities and pipelinesinvolve many risks, including:

·                  supplyinterruptions,

·                  work stoppages,

·                  labor disputes,

·                  social unrest,

·                  inability tonegotiate acceptable construction, supply or other contracts,

·                  inability toobtain required governmental permits and approvals,

·                  weatherinterferences,

·                  unforeseenengineering, environmental and geological problems, and

·                  unanticipatedcost overruns.

The ongoing operation of these facilities involves all ofthe risks described above, in addition to risks relating to the breakdown orfailure of equipment or processes and performances below expected levels ofoutput or efficiency. We intend to maintain commercially reasonable levels ofinsurance where such insurance is available and cost effective, obtainwarranties from vendors and obligate contractors to meet certain performancelevels. However, the coverage or proceeds of any such insurance, warranties orperformance guarantees may not be adequate to cover lost revenues or increasedexpenses. Any of these risks could cause us to operate below expected capacitylevels, which in turn could result in lost revenues, increased expense andhigher maintenance costs.

***Our success depends on the existenceand growth of markets for natural gas and electricity in Peru and Ecuador.***  Peru has arelatively well-developed and stable market for electricity, while the powermarket in Ecuador is not as well-developed or stable. Both countries rely onhydro-electric generating capacity for a significant portion of theirpower demand. Hydro plants are much less expensive to operate than plants thatutilize natural gas, but they are subject to variable output based on rainfalland reservoir levels. The majority of the non-hydro, or thermal, power capacityin both countries consists of generating plants that utilize diesel or fueloil, which are significantly more costly than natural gas at this time. Bothcountries have natural gas reserves and production, but neither has awell-developed natural gas infrastructure. Our immediate business plan relieson the continued stability of the power market in Peru (and Ecuador for thepurpose of gas sales to third-party power producers in Ecuador), and ourlonger-term plans depend on the further development of the electricity marketin Ecuador. We are subject to the risks that relatively more favorable businessconditions for hydro plants or other competitive issues may adversely affectthe demand and prices for the electricity that we expect to produce. We arealso subject to the risks associated with potential disruptions or changes to regulationsof the natural gas or power markets in these countries. We plan to enter intolong-term contracts to sell a significant part of our future power production.A market for long-term purchases of power and natural gas exists, but there can

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be no assurance that we will be successful in obtaining such contractson favorable terms. We will also be subject to the general commercial issuesrelated to being in the power business, including the credit-worthinessof, and collections from future customers and the ability to profitably operateour future power plants.

***The geographic concentration of ourproperties in northwest Peru and southwest Ecuador subjects us to an increasedrisk of loss of revenue or curtailment of production from factors affecting thatregion specifically.***  The geographic concentration of ourproperties in northwest Peru and southwest Ecuador and adjacent waters meansthat some or all of our properties could be affected by the same event shouldthat region, for example, experience:

·                  severe weather(such as the effects of “El Niño,” which can cause excessive rainfall andflooding in Peru and Ecuador);

·                  delays ordecreases in production, the availability of equipment, facilities or services;

·                  delays ordecreases in the availability of capacity to transport, gather or processproduction; or

·                  changes in theregulatory environment.

Because all our properties could experience the sameconditions at the same time, these conditions could have a relatively greaterimpact on our results of operations than they might have on other operators whohave properties over a wider geographic area.

***Instability of InternationalOperations.***  Presently, all of our oil and gas propertiesare located in South America, specifically Peru and Ecuador. The success andprofitability of our international operations may be adversely affected byrisks associated with international activities, including economic, labor andsocial conditions, political instability, tax laws (including host-countryexport, excise and income taxes and U.S. taxes on foreign operations) andfluctuations in the value of the U.S. dollar versus the local currencies inwhich oil and gas producing activities may be conducted. This instability inlaws, expenses of operations and fluctuations in exchange rates may make ourassumptions about the economic viability of our oil and gas propertiesincorrect. If these assumptions are incorrect, we may not be able to earnsufficient revenue to cover our costs of operations.

***Our operations in Peru and Ecuadorinvolve substantial costs and are subject to certain risks because the oil andgas industry in Peru and Ecuador is less developed than in the United States.***  The oiland gas industries in Peru and Ecuador are not as developed as the oil and gasindustry in the United States. As a result, our drilling and developmentoperations in many instances will take longer to complete and may cost morethan similar operations in the United States. The availability of technicalexpertise, specific equipment and supplies may be more limited in Peru andEcuador than in the United States. Further, once oil and natural gas productionis recovered, there are fewer ways to transport it to market for sale. Pipelineand trucking operations are subject to uncertainty and lack of availability.Oil and natural gas pipelines and truck transport travel through miles ofterritory and are subject to the risk of diversion, destruction or delay. Weexpect that such factors will continue to subject our international operationsto economic and operating risks that companies with domestic operations do notexperience.

***The unavailability or high cost ofdrilling rigs, equipment, supplies, personnel and oil field services couldadversely affect our ability to execute our exploration and exploitation planson a timely basis and within our budget.***  Shortagesor the high cost of drilling rigs, equipment, supplies or personnel could delayor adversely affect our exploitation and exploration operations, which couldhave a material adverse effect on our business, financial condition or resultsof operations. If the unavailability or high cost of rigs, equipment, suppliesor personnel were particularly severe in Peru and Ecuador, we could bematerially and adversely affected because our operations and properties areconcentrated in those areas.

***We are subject to numerous foreignlaws and regulations of the oil and natural gas industry that can adverselyaffect the cost, manner or feasibility of doing business.***  Ouroperations are subject to extensive foreign laws and regulations relating tothe exploration for and the development, production and transportation of oiland natural gas as well as electrical power generation. Future laws orregulations, any adverse change in the interpretation of existing laws or ourfailure to comply with existing legal requirements may harm our results ofoperations and financial condition. We may be required to make large andunanticipated capital expenditures to comply with governmental regulations,such as:

·                  work programguarantees and other financial responsibility requirements;

·                  taxation;

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·                  royaltyrequirements;

·                  customerrequirements;

·                  operationalreporting; and

·                  safetyrequirements.

Under these laws and regulations, we could be liable for:

·                  personal injuries;and

·                  property andnatural resource damages; and

·                  governmentalinfringements and sanctions.

***If we fail to comply with the termsof certain contracts related to our foreign operations, we could lose ourrights under each of those contracts.***  The termsof each of our contracts with the government of Peru, including our Peruvianlicense contracts and technical evaluation agreements, require that we performcertain activities, such as seismic interpretations and the drilling ofrequired wells in accordance with those contracts and agreements. Our failureto timely perform those activities as required could result in the loss of ourrights under a particular contract or the loss of the amounts we have posted asa guaranty for the performance of such activities, which would likely result ina significant loss to us.

***We are subject to complexenvironmental regulatory and permitting laws and regulations that can adverselyaffect the cost, manner and feasibility of our planned operations.***  Theexploration for, and the development, production and sale of, oil and gas inSouth America are subject to extensive environmental laws and regulations. Ourability to conduct continued operations is subject to satisfying applicableregulatory and permitting controls. For example, we are required to obtain anenvironmental permit or approval from the government in Peru prior toconducting seismic operations, drilling a well or constructing a pipeline inPeruvian territory, including the waters in offshore Peru, where we intend toconduct future oil and gas operations. Additionally, recent environmental lawsand regulations promulgated in Peru impose substantial restrictions on the useof natural resources, interference with the natural environment, location offacilities, handling and storage of hydrocarbons, use of radioactive material,disposal of waste, emission of noise and other activities. The laws createadditional monitoring and reporting obligations in the event of any spillage orunregulated discharge of hydrocarbons.  Failureto comply with these laws and regulations also may result in the suspension ortermination of our planned drilling operations and subject us toadministrative, civil and criminal penalties.

Our current permits and authorizations and our ability toget future permits and authorizations may, over time, be susceptible toincreased scrutiny, resulting in increased costs, or delays in receivingappropriate authorizations. In particular, we may experience delays inobtaining permits and authorizations in Peru and Ecuador necessary for ouroperations. Compliance with these laws and regulations may increase our costsof operations, as well as further restrict our foreign operations. Moreover,these laws and regulations could change in ways that substantially increase ourcosts. These laws and regulations have changed in the past and have generallyimposed more stringent requirements that increase operating costs or requirecapital expenditures in order to remain in compliance. It is also possible thatunanticipated developments could cause us to make environmental expendituresthat are significantly higher than those we currently anticipate, therebyincreasing our overall costs. Failure to comply with new regulations couldcause us to suspend or terminate certain operations or subject us toadministrative, civil and criminal penalties. Any of these liabilities,penalties, suspensions, terminations or regulatory changes could materiallyadversely affect our financial condition and our ability to implement our planof operation.

***Compliance with, or breach of, lawsrelating to the discharge of materials into, and the protection of, theenvironment can be costly and could limit our operations.***  As anowner or lessee and operator of oil and gas properties in Peru and Ecuador, weare subject to various national, state and local laws and regulations relatingto discharge of materials into, and protection of, the environment. These lawsand regulations may, among other things, impose liability on the owner orlessee under an oil and gas lease for the cost of property damage, oil spills,discharge of hazardous materials, remediation and clean-up resulting fromoperations, subject the owner or lessee to liability for pollution damages andother environmental damages, and require suspension or cessation of operationsin affected areas.

We have established practices for continued compliancewith environmental laws and regulations. We believe the costs incurred by thesepolicies and procedures are necessary business costs in the oil and gasindustry. There is no assurance that changes in or additions to laws orregulations regarding the protection of the environment will not increase suchcompliance

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costs, or have a material adverse effect upon our capital expenditures,earnings or competitive position.

***Our oil and gas operations involvesubstantial costs and are subject to various economic risks.***  Our oiland gas operations are subject to the economic risks typically associated withexploration, development and production activities, including the necessity ofsignificant expenditures to locate and acquire producing properties and todrill exploratory wells. The cost and length of time necessary to produce anyreserves may be such that it will not be economically viable. In conductingexploration and development activities, the presence of unanticipated pressureor irregularities in formations, miscalculations or accidents may cause ourexploration, development and production activities to be unsuccessful. We alsoface the risk that the oil and/or gas reserves may be less than anticipated,that we will not have sufficient funds to successfully drill on the property,that we will not be able to market the oil and/or gas due to a lack of a marketand that fluctuations in the prices of oil and/or gas will make development ofthose leases uneconomical. This could result in a total loss of our investment.In addition, the cost and timing of drilling, completing and operating wells isoften uncertain.

***Competition for oil and natural gas propertiesand prospects is intense; some of our competitors have larger financial,technical and personnel resources that give them an advantage in evaluating andobtaining properties and prospects.***  We operatein a highly competitive environment for reviewing prospects, acquiringproperties, marketing oil and natural gas and securing trained personnel andequipment. In addition, changes in Peruvian government regulation have enabledmultinational and regional companies to enter the Peruvian energy market.Competition in our business activities has increased and will increase further,as existing and new participants expand their activities as a result of theseregulatory changes. Many of our competitors possess and employ financialresources that allow them to obtain substantially greater technical andpersonnel resources than we have. We actively compete with other companies inour industry when acquiring new leases or oil and gas properties. For example,if several companies are interested in an area, Perupetro may choose to callfor bids, either through international competitive biddings or through privatebidding processes by invitation, and award the contract to the highest bidder.These additional resources can be particularly important in reviewing prospectsand purchasing properties. Our competitors may be able to evaluate, bid for andpurchase a greater number of properties and prospects than our financial orpersonnel resources permit. Our competitors may also be able to pay more forproductive oil and natural gas properties and exploratory prospects than we areable or willing to pay. On the acquisition opportunities made available to us,we compete with other companies in our industry for properties operated bythird parties through a private bidding process, direct negotiations or somecombination thereof. Our ability to acquire additional prospects and to findand develop reserves in the future will depend on our ability to evaluate andselect suitable properties and to consummate transactions in a highlycompetitive environment. If we are unable to compete successfully in theseareas in the future, our future revenues and growth may be diminished orrestricted. The availability of properties for acquisition depends largely onthe divesting practices of other oil and natural gas companies, commodityprices, general economic conditions and other factors we cannot control orinfluence.

***The loss of senior management or keytechnical personnel could adversely affect us.***  We haveengaged certain members of management who have substantial expertise in thetype of endeavors we presently conduct. We do not maintain any life insuranceagainst the loss of any of these individuals. To the extent their servicesbecome unavailable, we will be required to retain other qualified personnel.There can be no assurance we will be able to recruit and hire qualified personsupon acceptable terms.

Similarly, the oil and gas exploration industry requiresthe use of personnel with substantial technical expertise. In the event thatthe services of our current technical personnel become unavailable, we willneed to hire qualified personnel to take their place. No assurance can be giventhat we will be able to recruit and hire such persons on acceptable terms.

***Insurance does not cover all risks.*** Exploration for, and production of, oil and natural gas can behazardous, involving unforeseen occurrences such as blowouts, cratering, firesand loss of well control, which can result in damage to or destruction of wellsor production facilities, formations, injury to persons, loss of life, ordamage to property or the environment. As a result, we presently maintaininsurance coverage in amounts consistent with our business activities and tothe extent required by our license contracts. Such coverage includes certainphysical damage to the Company’s and third parties’ property, hull andmachinery, protection and indemnity, employer’s liability, comprehensive thirdparty general liability, workers compensation and certain pollution and environmentalrisks. However, we are not fully insured against all risks in all aspects ofour business, such as political risk, civil unrest, war, business interruptionand reservoir loss or damage. No such insurance coverage can insure for alloperational or environmental risks. The occurrence of an event that is notinsured or not fully insured could result in losses to us. For example,uninsured environmental damages, property damages or damages related topersonal injuries could divert capital needed to implement our plan ofoperation. If any such uninsured losses are significant, we may have to curtailor suspend our drilling operations until such time as replacement capital isobtained, if ever, and this could have a material impact on our financial position.

***A substantial or extended decline inoil and natural gas prices may adversely affect our business, financialcondition, cash flow, liquidity or results of operations as well as our abilityto meet our capital expenditure obligations and financial***

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***commitments to implement our businessplan.***  With respect to our oil and gas business, anyrevenues, cash flow, profitability and future rate of growth we achieve will begreatly dependent upon prevailing prices for oil and gas. Our ability tomaintain or increase our borrowing capacity and to obtain additional capital onattractive terms is also expected to be dependent on oil and gas prices. Oiland natural gas are commodities, and, therefore, their prices are subject towide fluctuations in response to relatively minor changes in supply and demand.Historically, oil and gas prices and markets have been volatile and are likelyto continue to be volatile in the future. Prices for oil and gas are subject topotentially wide fluctuations in response to relatively minor changes in supplyof and demand for oil and gas, market uncertainty, and a variety of additionalfactors beyond our control. Those factors include:

·                  internationalpolitical conditions (including wars and civil unrest);

·                  the domestic andforeign supply of oil and gas;

·                  the level ofconsumer demand;

·                  weatherconditions;

·                  domestic andforeign governmental regulations and other actions;

·                  actions taken bythe Organization of Petroleum Exporting Countries (OPEC);

·                  the price andavailability of alternative fuels; and

·                  overall economicconditions.

Lower oil and natural gas prices may not only decreaseour revenues on a per unit basis, but may also reduce the amount of oil andnatural gas we can produce economically, if any. A substantial or extendeddecline in oil and natural gas prices may materially affect our futurebusiness, financial condition, results of operations, liquidity and borrowingcapacity, and may require a reduction in the carrying value of our oil and gasproperties. While our revenues may increase if prevailing oil and gas pricesincrease significantly, exploration and production costs and acquisition costsfor additional properties and reserves may also increase.

***We may not be able to develop aproven reserve base.***  Our future success will depend upon ourability to find, acquire and develop oil and gas reserves that are economicallyrecoverable. Any reserves we develop will decline as they are produced, exceptto the extent that we conduct successful revitalization activities, or are ableto acquire properties containing proven reserves, or both. To develop reservesand achieve production, we must implement our development and productionprograms, identify and produce previously overlooked or by-passed zones andshut-in wells, acquire additional properties or undertake other replacementactivities. Our current strategy is to develop a reserve base, production andcash flow through the development of oil and gas fields to which we havedevelopment rights and selective acquisitions of other desirable oil and gasproperties where we can utilize new and existing technology. We can give noassurance that our planned development, revitalization, and acquisitionactivities will result in significant reserves or that we will have success indiscovering and producing reserves at economical exploration and developmentcosts. We may not be able to locate geologically satisfactory property,particularly since we will be competing for such property with other oil andgas companies, most of which have much greater financial resources than we do.Moreover, even if desirable properties are available to us, we may not havesufficient funds with which to acquire them.

***Investor profits, if any, may belimited for the near future.***  In the past, we have never paida dividend. We do not anticipate paying any dividends in the near future.Accordingly, investors in our common stock may not derive any profits fromtheir investment in us for the foreseeable future, other than through any priceappreciation of our common stock that may occur. Further, any appreciation inthe price of our common stock may be limited or nonexistent as long as wecontinue to have operating losses. We have not been profitable and haveaccumulated deficits during our exploratory stage of operations totaling$37,799,937 through December 31, 2006. To date we have not had any revenue orearnings from operations, and we will continue, in all likelihood, to sustainoperating expenses without corresponding revenues until we are able, if ever, tosuccessfully implement our plan of operation.

***Additional infusions of capital mayhave a dilutive effect on existing shareholders.***  To financeour operations we plan to sell additional shares of our stock. Any additionalequity financing that we receive may involve substantial dilution to ourthen-existing shareholders. Furthermore, we may issue stock to acquireproperties, assets, or businesses. In the event that any such shares areissued, the proportionate ownership and voting power of other shareholders willbe reduced. In addition, we are authorized to issue up to 25,000,000shares of preferred stock, the rights and preferences of which may bedesignated by our

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board ofdirectors.  If we issue shares ofpreferred stock, such preferred stock may have rights and preferences that aresuperior to those of our common stock.

***Shares eligible for future sale byour current shareholders may impair our ability to raise capital through thesale of our stock.***  As of December 31, 2006, we had 54,143,717shares of common stock issued and outstanding. In December, 2006, we filed aRegistration Statement on Form S-1 for the resale of 6,500,000 shares of commonstock issued to the IFC. This registration statement has not been declaredeffective by the SEC as of the date of this filing.  In addition, we have outstanding 14,006,152shares of other potentially dilutive securities, which includes 9,450,000common shares, which may be issued to the former shareholders of BPZ-Texas andtwo executive officers on an earn-out basis once we are entitled to receive asour proportionate share from gross production from any oil and gas wells ownedor operated by us, not less than 2,000 barrels of oil per day or its equivalent(approximately 12 million cubic feet of gas per day) prior toDecember 28, 2007. We also have an additional 1,156,000 common sharesavailable under our Long-Term Incentive Compensation Plan.  The possibility that substantial amounts ofshares of our common stock may be sold in the public market may cause prevailingmarket prices for our common stock to decrease and thus could impair ourability to raise capital through the sale of our equity securities.

***We are controlled by our officers,directors and entities affiliated with them.***  In theaggregate, our management and directors own or control approximately 13.4% ofour common stock issued as of December 31, 2006. These shareholders, if actingtogether, will be able to significantly influence all matters requiringapproval by our shareholders, including the election of directors and theapproval of mergers or other business combination transactions.

***The transfer of NFS could result inliability to us because the shares transferred were not registered with theSEC.***  On September 9, 2004, the day prior tothe effective date of the Merger, Navidec assigned all of its pre-mergerbusiness operations, assets and liabilities to NFS, and all issued andoutstanding shares of NFS were subsequently transferred to the Navidecpre-merger shareholders of record as of September 9, 2004 for no cashconsideration. Pursuant to the terms of the Merger Agreement, the transfer andany necessary qualifications or registrations of the NFS shares underapplicable securities laws was agreed to be handled by NFS, and we believed,based on information provided by NFS and its advisors, that NFS had undertakenthe necessary actions to comply with applicable registration requirements. OnJuly 13, 2006, NFS filed a Registration Statement on Form 10SB withthe SEC and an amendment thereto on October 27, 2006. It is ourunderstanding that this Registration Statement has become effective underapplicable SEC rules. However, because a registration of the NFS shares was noteffective at the time of the transfer of the NFS shares, it might be determinedthat the distribution of the NFS shares was made without full compliance withapplicable registration or qualification requirements under applicablesecurities laws. As a result, although we took no actions in connection withthe transfer, we might incur liability, as a successor to Navidec, by merger,with respect to any damages resulting from such failure to register. If,despite the fact that we did not control the transfer of the NFS shares,regulatory authorities determine that we did not comply with applicableregistration requirements with respect to the transfer, fines or othersanctions might be imposed on us.

**ITEM 1B.  UNRESOLVED STAFFCOMMENTS**

None

**ITEM2. PROPERTIES**

**Offices**

Our corporate headquarters office is in Houston, Texas,where we lease approximately 7,770 square feet of office space under afive-year lease which expires on September 30, 2010. We also maintainadministrative offices in Lima, Peru of 3,700 square feet and Quito, Ecuador of829 square feet, both under month-to-month leases.

**Peru**

We currently have exclusive rights to four properties innorthwest Peru. We have a 100% working interest in license contracts for BlockZ-1 and Block XIX. The license contracts afford an initial exploration periodof seven to thirteen years and, if exploration efforts are successful, providea total contract term of up to 40 years for gas exploration and productionand up to 30 years for oil exploration and production. We also arecurrently in negotiations to obtain license contracts for Blocks XXII and XXIII.These four blocks cover a combined area of approximately 2.4 millionacres.

The following table is a summary of our properties innorthwest Peru. All acreage is considered undeveloped.

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| **PROPERTY**   | ** ** | **BASIN**       | ** ** | **ACRES**  | ** ** | **BPZ’s  Ownership** | ** ** |
|----------------|------------|-----------------|------------|------------|------------|---------------------------|------------|
| ** **     | ** ** | ** **      | ** ** | ** ** | ** ** | ** **                | ** ** |
| Block Z-1(a)   |       | Tumbes/Talara   |       | 739,205    |       | 100                       | %          |
| Block XIX(a)   |       | Tumbes/Talara   |       | 472,860    |       | 100                       | %          |
| Block XXII(b)  |       | Lancones/Talara |       | 948,000    |       | 100                       | %          |
| Block XXIII(b) |       | Tumbes/Talara   |       | 248,000    |       | 100                       | %          |
| Total          |       |            |       | 2,408,065  |       |                      |       |

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(a)           License Contract

(b)           Negotiating licensecontract

**Description of Block Z-1 and License Contract**

Block Z-1, a coastal offshore area encompassing 739,205acres, is situated at the southern end of the Gulf of Guayaquil in northwestPeru. Geologically, the block lies within the Tumbes basin. From the coastline,water depths increase gradually. The average water depth of the area isapproximately 200 feet and only 10% of the area has depths greater than 500feet. Located within Block Z-1 are five structures which were drilled in the1970’s and 1980’s by previous operators, including Tenneco, Inc. and BelcoOil and Gas Corporation. These structures are known as the Albacora, Barracuda,Corvina, Delfin and Piedra Redonda fields. Wells drilled in each of thesestructures encountered hydrocarbons, principally natural gas, while drilling atdepths ranging from 6,000 to 12,000 feet. However, at the time the wells weredrilled, it was not considered economic to produce and sell natural gas fromthe fields. Consequently, the wells were either suspended or abandoned.

We originally acquired our initial interest in Block Z-1in a joint venture with Syntroleum Corporation, under an exploration andproduction license contract dated November 30, 2001, with an effectivedate of January 29, 2002. Under the original contract, BPZ owned a 5%non-operating working interest in the block. Syntroleum later transferred itsinterest to Nuevo Energy, Inc. Subsequent to the merger of NuevoEnergy, Inc. and Plains Exploration and Production Company, NuevoEnergy, Inc. transferred its interest in Block Z-1 to BPZ which thenassumed a 100% working interest, as well as the remaining obligations under thecontract. Perupetro approved the assumption of Nuevo’s interest by BPZ and thedesignation of BPZ as a qualified operator under the contract in November 2004.This action was subject to official ratification and issuance of a SupremeDecree by the government of Peru, which was issued in February 2005.Accordingly, an amended contract was signed with Perupetro, naming BPZ as theowner of 100% of the participation under the license contract.

The license contract provides for an initial explorationphase of seven years, which is divided into four periods, and can be extendedunder certain circumstances up to an additional six years. Each period has a commitmentfor exploration activities and requires a financial guarantee to secure theperformance of the work commitment during such period. Block Z-1 is currentlyin the second exploration period. During the second exploration period, we mustdrill at least one exploratory well or acquire 300 square kilometers of seismicdata. We posted a $1.3 million performance bond in January 2005 inconnection with the second exploration period which was originally scheduled tolast for 24 months and end in July 2006. However, permission wasgranted to extend the second exploration period to May 2007 to compensatefor the delay by the Ministry of Energy and Mines in approving ourEnvironmental Impact Study. In December, 2006 the $1.3 million performance bondand related cash posted as collateral was released. The third explorationperiod is scheduled to begin in May 2007 and expire in November 2008.It will require the drilling of an additional exploratory well or otherequivalent work commitments and will require a performance bond of$1.0 million. The fourth and final exploration period is scheduled tobegin in November 2008 and expire in November 2009. It will also requirethe drilling of an additional exploratory well or other equivalent work commitmentsand will require a performance bond of $1.0 million. The performance bondamounts are not cumulative, and are released at the end of each explorationperiod if the work commitment for that period has been satisfied. In addition,we are required to make technology transfer payments related to training costsof Perupetro professional staff during the exploration phase of $50,000 peryear.

The exploitation, or development period of the contractwill commence as soon as we declare a commercial discovery and receive approvalfor a field development plan. We must declare a commercial discovery no laterthan the end of the last exploration period, including any extensions ordeferments. Under the contract, oil exploration, development and production cancontinue for a total of up to 30 years from the effective date of thecontract, and gas exploration, development and production can continue for upto 40 years. Royalties under the contract vary from 5% to 20% based onproduction volumes.

** **

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**Description of Block XIX and License Contract**

Block XIX covers approximately 472,860 acres, lyingentirely onshore and adjacent to Block Z-1 in northwest Peru. Geologically, theblock lies primarily within the Tumbes basin of Oligocene-Neogene age,but also covers part of the Talara Basin to the south.

In February 2003, we entered into a TechnicalEvaluation Agreement with Perupetro for Block XIX. In December 2003, wesigned a license contract whereby we acquired a 100% interest in Block XIX. Theterm for the exploration period is seven years and can be extended undercertain circumstances for an additional period of up to three years. If acommercial discovery is made during the exploration period, the contract willallow for the exploration and production of oil for a period of 30 yearsfrom the effective date of the contract and the exploration and production ofgas for a period of 40 years. Royalties under the contract vary from 5% to20% based on production volumes.

The seven year exploration phase is divided into fiveperiods of 18 months, 24 months, 15 months, 15 months and12 months, respectively. We are currently in the second explorationperiod, which is scheduled to end in August 2007, unless an extension ofup to six months to complete the work commitment is requested. During thesecond exploration period, we are required to acquire and interpret 100kilometers of new 2-D seismic data and to conduct certain integratedgeological, geophysical, geochemical and reservoir engineering evaluationstudies. In connection with the second exploration period, we posted a $350,000performance bond in August 2005. The third exploration period is scheduledto begin in August 2007 and will require a performance bond of $585,000.The fourth exploration period is scheduled to begin in November 2008 andwill require a performance bond of $585,000. The fifth and final explorationperiod is scheduled to begin in February 2009 and will require aperformance bond of $585,000. The performance bond amounts are not cumulative,and will be released at the end of each exploration period if the workcommitment for that period has been satisfied. In addition, we are required tomake technology transfer payments related to training costs of Perupetroprofessional staff during the exploration phase in the amount of $5,000 peryear. The exploitation, or development, period of the contract will commence assoon as the Company declares a commercial discovery and receives approval for afield development plan. We must declare a commercial discovery no later than theend of the last exploration period, including any extensions or deferments.

**Description of Block XXII**

Block XXII is located onshore in northwest Peru withinthe Lancones Basin of Cretaceous—Upper Eocene Age and covers an area ofapproximately 948,000 acres. The Lancones Basin is primarily an exploratoryarea and has had limited drilling and seismic activity.  In December 2005, the Company notifiedPerupetro that it had decided to exercise its exclusive option to convert itsTechnical Evaluation Agreement on Block XXII (formerly known as Area VI), intoa license contract. In March 2006, the Company was notified by Perupetro thatit qualified as an operator for Block XXII. The negotiations on the licensecontract are still underway and the Company does not have sufficientinformation to determine the timing nor estimate the value of the variousobligations and commitments in connection with this property.

**Description of Block XXIII**

In July 2006, Perupetro informed the Company thatits proposal for Block XXIII, which consists of approximately 248,000 acres andis located onshore in northwest Peru between the Company’s Blocks Z-1 and XIX,was the winning bid in their recent tender process. The Company has presentedall necessary documentation to become the qualified operator of this new blockunder an exploration and production license contract. The Company’s proposalcovers only the exploration period and commits the Company to drill a certainnumber of wells, acquire certain amount of either 2-D or 3-D seismic data andprepare an integrated geological, geochemical and reservoir engineeringevaluation of the hydrocarbon prospects in the block. In connection with thisblock, after the license contract has been signed, the Company will have topost a performance bond to guarantee its various obligations and commitments.However, as the negotiations on the license contract are still underway, theCompany does not have sufficient information to determine the timing, nor toestimate the value of the performance bond to be posted in connection with thisproperty.

**Oil and Gas Resources**

During 2004, we retained Gaffney Cline &Associates, Inc. (“GCA”), an internationally recognized firm ofindependent reserve engineers, to evaluate the oil and gas resource potentialof the Corvina and Piedra Redonda Fields in the Block Z-1 license contractarea. GCA focused its evaluation on the wells that were drilled by previousoperators of Block Z-1 and the seismic and other geological and geophysicaldata available on the block.

In the Corvina Field, five wells were drilled, includingtwo wells drilled by Tenneco, Inc. in the mid-1970’s and three wellsdrilled by Belco Oil and Gas Corporation (“Belco”) in the late 1970’s and early1980’s. Two drilling and production platforms were set up by Belco during thisperiod and are still in place in the Corvina Field. The platforms need to berepaired and refurbished, but they are structurally sound, and we believe theyare suitable for our future operations. All seven wells in the

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Corvina Field encountered indications of natural gas and apparentreservoir-quality formations, although only one of the wells, theCX11-16X, was completed and tested. At the time these wells were drilled, therewas no commercial market for natural gas in the region. The CX11-16X producednatural gas at rates as high as 16.6 million cubic feet of gas per day (“MMcf/d”)during two separate tests over a period of approximately 20 days each. Thewell was temporarily abandoned. We believe this well can be reestablished as a producingwell.

In the Piedra Redonda Field, two wells were drilled byBelco in the late 1970’s and early 1980’s. Indications of natural gas werepresent in both wells. One well was completed, while the other well encounteredabnormally high pressures and was abandoned for mechanical reasons prior toreaching its intended total depth. A previously constructed drilling andproduction platform is still in place in the Piedra Redonda Field. Thecompleted well in the Piedra Redonda Field, the C18X, produced natural gas atrates as high as 8.3 MMcf/d over a period of approximately 20 days duringan extended test in 1979 and was also temporarily abandoned. We believe thiswell can be reestablished as a producing well.

GCA reviewed all available technical data available withrespect to the Corvina and Piedra Redonda Fields, including a large volume of2-D seismic data, well logs, drilling and completion reports, well testinformation, and other geological and geophysical data and analysis. TheCompany intends to develop these resources as discussed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.” Thedevelopment of these resources will require a significant financial investmentwhich is presently estimated to be in excess of $132.3 million.  We do not currently have the financialcapacity or commitments for a development program of this magnitude.Accordingly, the Company has not disclosed amounts of proved reserves in itsSEC filings. At such time as we obtain sufficient financial commitments toproceed with the full development of Block Z-1 and all other conditionsnecessary to record proved reserves are met, we expect to record SEC provedreserves as permitted under SEC rules and disclose such reserves in future SECfilings.

**Ecuador**

Through our wholly-owned subsidiary, SMCEcuador Inc., a Delaware corporation, and its registered branch inEcuador, we also own a 10% non-operated working interest in an oil and gasproducing property, Block 2, located in the southwest region of Ecuador (the “SantaElena Property”). The Santa Elena Property is located west of the city ofGuayaquil along the coast of Ecuador. The license contract provides for royaltypayments equal to 23% of production. There have been almost 3,000 wells drilledin the field since production began in the 1920’s. Currently, there areapproximately 1,250 active wells which produce approximately 2,000 barrels ofoil per day. The majority of the wells produce intermittently by gas lift,mechanical pump or swabbing techniques. Crude oil is gathered in holding tanksand pumped via pipeline to an oil refinery in the city of Libertad, Ecuador.The license agreement covering the property extends through May 2016.

**ITEM3. LEGAL PROCEEDINGS**

*SEC Inquiry of Navidec*

Navidec was advised in February 2004 that the SECwas conducting an informal inquiry to determine whether Navidec had violatedfederal securities laws.. Based on information available to us, we believe theSEC’s investigation relates, at least in part, to the restatement of Navidec’sreported earnings for the first and second quarters of 2003. This restatementwas reported in Navidec’s Form 10-Q for the third quarter of 2003 filed onDecember 11, 2003.

In December 2004, we received notice that the SEChad issued an Order Directing a Private Investigation and Designating Officersto Take Testimony and would be conducting a formal investigation. We havecooperated fully with the SEC in this matter. Pursuant to the Merger agreement,we have been indemnified by NFS for the costs of the SEC investigation, and NFShas borne the costs incurred to date. We are not aware of the future actions,if any, which the SEC intends to pursue in this matter, but no assurance can begiven that the investigation has been and will be resolved without negativeconsequences to the Company.

*Transfer of Ownership in NFS*

On July 8, 2004, Navidec and BPZ-Texas entered intoa Merger Agreement which was consummated on September 10, 2004. The MergerAgreement provided that all of the pre-merger business operations, assets andliabilities of Navidec would be transferred to a wholly-owned subsidiary,Navidec Financial Services, Inc. (“NFS”), followed by the transfer of NFSto the pre-merger shareholders of record as of September 9, 2004, the dayprior to the consummation of the Merger. See “*Businessand Properties—Navidec Merger Transaction*,” “*Risk Factors—Risk Relating to the Offering—Thetransfer of NFS could result in liability to us because the shares transferredwere not registered with the SEC,*” and Note 2 to the ConsolidatedFinancial Statements, included in this filing, for detailed discussionregarding the Merger.

23

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The Merger Agreement provided that the transfer of all ofthe pre-merger business operations, assets and liabilities of NFS was effectiveas of September 9, 2004. Accordingly, the Company originally believed thatit had no continuing ownership of NFS and, therefore, did not account for thepost-merger operations of NFS in the presentation of its financial statements.After receipt of comments from the SEC in connection with its review of theCompany’s registration statement on Form SB-2 originally filed on July 27,2005 and further review of this issue, the Company concluded it was the record,but not beneficial, owner of NFS shares, and that any ownership interest was atmost temporary.

In part because of difficulty obtaining necessaryinformation from NFS to clarify the ownership issue, the Company commenced anaction against NFS (the “Action”) on or about February 13, 2006, inDistrict Court, Arapahoe County, Colorado (the “Court”), seeking dissolution ofNFS, the appointment of a receiver, and access to NFS corporate records. TheCompany commenced the Action uncertain whether or when the required spin-off ofNFS shares pursuant to the terms and conditions of the Merger had occurredunder Colorado corporate law. The Company asserted in the Action that it believedit was a record shareholder of NFS as of the date of the request and hadstanding for the relief sought. NFS denied that the Company had standing to actas a shareholder and asserted that the Company had not been a shareholder ofNFS since September 9, 2004. The Action was settled amongst the parties onMay 19, 2006. In connection with the settlement, a Finding of Fact andConclusions of Law (the “Order”) was issued by the Court stating that theCompany was not a shareholder of NFS at any time after September 9, 2004.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECUTITY HOLDERS**

There were no matterssubmitted to a vote of stockholders during the fourth quarter of the fiscalyear covered by this Form 10-K.

**PART II**

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

**Market Information**

Our Common Stock began trading on the American StockExchange (“AMEX”) under the symbol “BZP”, on January 12, 2007.  Prior to trading on the AMEX, our Common Stock traded on the OTC Bulletin Boardunder the symbol “NVDC” beginning on Wednesday, August 20, 2003. Inconnection with the Merger, we changed our name to BPZ Energy, Inc. andbegan trading under the symbol “BPZI” on February 7, 2005, also on the OTCBulletin Board. On December 27, 2005, as a result of a delay in filing ourquarterly report on Form 10-Q for the quarterly period endedSeptember 30, 2005, the Company became ineligible for trading on the OTCBulletin Board and began trading on the Pink Sheets under the symbol “BPZI.”

The following table sets forth, for the periodsindicated, the high and low prices of a share of our Common Stock as reportedon OTC Bulletin Board and the Pink Sheets for the applicable time periods. Thequotations provided for the over the counter market reflect interdealer priceswithout retail mark-up, mark-down or commissions, and may not represent actualtransactions.

|                | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2006**       |       |     |       |    |       |
| Fourth quarter |       | $        | 4.59       |    | $          | 3.55 |   |
| Third quarter  |       | 5.45     |       | 3.40    |       |
| Second quarter |       | 4.00     |       | 2.42    |       |
| First quarter  |       | 3.95     |       | 3.20    |       |
| **2005**       |       |     |       |    |       |
| Fourth quarter |       | 5.05     |       | 1.01    |       |
| Third quarter  |       | 6.00     |       | 4.00    |       |
| Second quarter |       | 6.50     |       | 3.70    |       |
| First quarter  |       | 6.90     |       | 3.20    |       |
|                |            |          |            |         |            |  |  |

 

**Holders**

As of February 27, 2007, we had approximately 338shareholders of record, plus an estimated 3,978 beneficial owners of our common stock.

24

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**We currentlyintend to retain all future earnings to fund the development and growth of ourbusiness. **We have never paid cash dividends on our stock.  For the foreseeable future, we intend toretain earnings, if any, to meet our working capital requirements and tofinance future operations. Accordingly, we do not plan to declare or distributecash dividends to the holders of our common stock in the foreseeable future.  As of the date of this filing, we have notrepurchased any of our equity securities and have not adopted a stockrepurchase program.

**Equity Compensation Plan**

The BPZ Energy, Inc.2005 Long-Term Incentive Compensation Plan (the “LTIP” or “Plan”) permits ourBoard of Directors to award eligible employees, directors and consultants withincentive-based and non-incentive-based compensation.
| ** **                                                     | ** ** | **Number of   securities  to be issued  upon  exercise of  outstanding  options,  warrants  and rights** | ** ** | **Weighted-  average  exercise price  of outstanding  options,  warrants and  rights** | ** ** | **Number of  securities  remaining  available  for future  issuance under  equity  compensation  plans  (excluding  securities  reflected  in column (a))** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **(a)**                                                                                                                                | ** ** | **(b)**                                                                                               | ** ** | **(c)**                                                                                                                                                                              | ** ** |
| *Equity  compensation plans approved by security holders:*     |       |                                                                                                                                   |       |                                                                                                  |       |                                                                                                                                                                                 |       |
| BPZ Long Term  Incentive Compensation Plan                     |       | —                                                                                                                                 |       | $                                                                                                     | —     |                                                                                                                                                                                 | 1,156,000  |   |
| *Equity  compensation plans not approved by security holders:* |       |                                                                                                                                   |       |                                                                                                  |       |                                                                                                                                                                                 |       |
| Contingent  Incentive Earn-Out Shares                          |       | 450,000                                                                                                                                |       | $                                                                                                     | —     |                                                                                                                                                                                 | —     |   |
| Navidec, Inc.  2004 Stock Option Plan                          |       | 378,652                                                                                                                                |       | 1.67                                                                                                  |       | —                                                                                                                                                                               |       |
| Options pursuant  to Business Consulting Agreement             |       | 1,125,000                                                                                                                              |       | 2.00                                                                                                  |       | —                                                                                                                                                                               |       |
| Stock Options  pursuant to Director’s Agreement           |       | 1,000,000                                                                                                                              |       | 1.30                                                                                                  |       | —                                                                                                                                                                               |       |
| Total not  approved by security holders                        |       | 2,953,652                                                                                                                              |       | 1.42                                                                                                  |       | —                                                                                                                                                                               |       |
| Total all compensation  plans                                  |       | 2,953,652                                                                                                                              |       | $                                                                                                     | 1.42       |                                                                                                                                                                                 | 1,156,000  |   |

 

**Recent Sales of Unregistered Securities**

On July 1, 2005 the Company issued 9,000,000 shares ofcommon stock to the former shareholders of BPZ-Texas in connection withearn-out provisions in the Merger Agreement. This transaction is more fullydescribed in “Business and Properties—Navidec Merger Transaction” includedherein.

On July 1, 2005, the Company issued 250,000 shares ofcommon stock to acquire a 4% net working interest in the Santa Elena Propertyin Ecuador from an individual who had received the interest in connection withfinancing provided to the Company for the original acquisition of the propertyin June 2004.

On July 19, 2005, the Company completed a privateplacement of 11,466,000 shares of common stock, no par value, pursuant to a StockPurchase Agreement dated July 19, 2005. The common stock was priced at $3.00per share, which resulted in gross proceeds to the Company of approximately$34.4 million. Net proceeds from the private placement were approximately $31.9million. For its services as placement agent in connection with thetransaction, Morgan Keegan & Company, Inc. received 7% of the grossproceeds from the offering and warrants to purchase 100,000 shares of theCompany’s common stock at an exercise price of $3.00 per share. Such warrantsexpire on July 19, 2010.

On September 30, 2005, the Company issued 15,000 sharesof common stock to an individual for financial management and consultingservices performed.

On December 31, 2005, the Company issued 10,000 shares ofcommon stock to an individual for legal consulting services performed.

25

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On March 10, 2006, the Company completed a privateplacement of 1,670,000 shares of common stock, no par value, to fourinstitutional and accredited investors pursuant to a Stock Purchase Agreement.The common stock was priced at $3.00 per share resulting in proceeds to theCompany of $5,010,000.

On May 21, 2006, the Company issued 10,000 shares,pursuant to a service agreement, to a consultant for legal and businessadvisory services rendered in Peru.

On June 30, 2006, the Company completed a privateplacement of common stock for proceeds of $12,325,500. The proceeds werereceived in July 2006. The Company sold 4,482,000 shares to eight institutionaland accredited investors at a price of $2.75 per share. There were no warrantsor dilutive securities issued to the investors in connection with the offering.The offering was placed directly by the Company, and there were no placementfees. However, the Company issued warrants to purchase 150,000 shares of theCompany’s common stock to Morgan Keegan & Company, Inc. in considerationfor their financial advisory services related to this private placement.

In connection with the July 19, 2005 private placement,as discussed above, the Company was obligated to prepare and file with the SECa registration statement and to use its best efforts to cause the registrationstatement to be declared effective by the SEC no later than ninety days fromJuly 19, 2005. The registration statement was not declared effective by therequired dates, and the Company became liable to the investors for liquidateddamages in an amount equal to 1.0% of the purchase price of the shares,approximately $343,980, for each thirty day period until the registrationstatement was declared effective by the SEC. Certain of the private placementinvestors, totaling 79% of the aggregate investment, have agreed to acceptcommon stock in lieu of cash for a maximum period of 90 days. Accordingly,867,609 shares of common stock have been issued, as of October 30, 2006, tothose certain investors for liquidated damages for the period of December 16,2005 through October 13, 2006. On November 8, 2006, the SEC declared effectivethe Registration Statement on Form S-1 covering the common shares issued inconnection with the July 19, 2005, March 10, 2006, and June 30, 2006, privateplacements. As a result, the Company is no longer subject to the liquidateddamages described above.

In connection with the March 10, 2006 private placement,as discussed above, the Company was obligated to prepare and file with the SECa registration statement within sixty days, and to use its best efforts tocause the registration statement to be declared effective by the SEC no laterthan ninety days, from March 8, 2006. The registration statement was not filedor declared effective by the required dates and the Company became liable tothe investors for liquidated damages in an amount equal to 1.0% of the purchaseprice of the shares, approximately $50,100, for each thirty day period untilthe registration statement was declared effective by the SEC. These liquidateddamages are payable, at the sole discretion of the Company, by cash or by theissuance of Company common stock. Accordingly, 90,334 shares of common stockwere issued, as of October 30, 2006, to those investors for liquidated damagesfor the period of June 7, 2006 through November 3, 2006. On November 8, 2006,the SEC declared effective the Registration Statement on Form S-1 covering thecommon shares issued in connection with the July 19, 2005, March 10, 2006, andJune 30, 2006, private placements. As a result, the Company is no longersubject to the liquidated damages described above.

On December 20, 2006, the Company completed a privateplacement of 6,500,000 shares of common stock, no par value, to an accreditedinvestor pursuant to a Subscription Agreement dated December 18, 2006. The common stock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million.  No warrants or dilutive securities wereissued in connection with the offering. The offering was placed directly by the Company and there were norelated placement fees.

The shares of common stock issued during the period wereexempted from registration in reliance upon Section 4(2) of the Securities Actof 1933, as amended, and Regulation D promulgated thereunder. Shares in theprivate placement were only offered to select accredited investors (as suchterm is defined in Rule 501(a) of Regulation D under the Securities Act).

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**ITEM6.  SELECTED FINANCIAL DATA**
| ** **                                                       | ** ** | **For the year ended December 31,** | ** **  |
|------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                                       | ** ** | **2006**                                                     | ** **  | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Revenue                                                          |       | $                                                            | —      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Operating and  administrative expenses:                          |       |                                                         |        |   |   |   |   |   |   |   |   |
| General and administrative                                       |       | 8,306,356                                                    |        | 4,422,747 |   | 1,856,111 |   | 537,125 |   | 158,115 |   |
| Stock-based compensation                                         |       | 3,225,508                                                    |        | 1,382,479 |   | 7,059,081 |   | — |   | — |   |
| Geological, geophysical and engineering                          |       | 2,048,742                                                    |        | 998,131 |   | 360,965 |   | — |   | — |   |
| Depreciation expense                                             |       | 213,815                                                      |        | 29,638 |   | 157 |   | — |   | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Total operating expenses                                         |       | 13,794,421                                                   |        | 6,832,995 |   | 9,276,314 |   | 537,125 |   | 158,115 |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Operating loss                                                   |       | (13,794,421                                                  | )           | (6,832,995 | ) | (9,276,314 | ) | (537,125 | ) | (158,115 | ) |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Other income  (expense):                                         |       |                                                         |        |   |   |   |   |   |   |   |   |
| Income from investment in Ecuador property, net of  amortization |       | 1,403,298                                                    |        | 468,726 |   | 147,861 |   | — |   | — |   |
| Interest expense                                                 |       | (15,815                                                      | )           | (11,149 | ) | (66,959 | ) | — |   | — |   |
| Amortization of deferred financing costs                         |       | —                                                       |        | (67,561 | ) | (360,439 | ) | — |   | — |   |
| Registration delay expense                                       |       | (3,552,513                                                   | )           | (515,967 | ) | — |   | — |   | — |   |
| Interest income                                                  |       | 787,455                                                      |        | 509,808 |   | — |   | — |   | — |   |
| Merger costs                                                     |       | —                                                       |        | — |   | (5,470,455 | ) | — |   | — |   |
| Miscellaneous income                                             |       | (315,463                                                     | )           | 42,149 |   | 13,129 |   | 1,445 |   | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Total other income (expense)                                     |       | (1,693,038                                                   | )           | 426,006 |   | (5,736,863 | ) | 1,445 |   | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Loss before income taxes                                         |       | (15,487,459                                                  | )           | (6,406,989 | ) | (15,013,177 | ) | (535,680 | ) | (158,115 | ) |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Income taxes                                                     |       | —                                                       |        | — |   | — |   | — |   | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Net loss                                                         |       | $                                                            | (15,487,459 | ) | $ | (6,406,989 | ) | $ | (15,013,177 | ) | $ | (535,680 | ) | $ | (158,115 | ) |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share                             |       | $                                                            | (0.35       | ) | $ | (0.20 | ) | $ | (0.99 | ) | $ | (0.13 | ) | $ | (0.04 | ) |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding                       |       | 44,751,761                                                   |        | 31,899,291 |   | 15,169,823 |   | 4,103,454 |   | 4,103,454 |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                                         |       |                                                         |        |   |   |   |   |   |   |   |   |
| Working Capital                                                  |       | $                                                            | 22,057,206  |   | $ | 29,036,304 |   | $ | 3,611,410 |   | $ | (376,312 | ) | $ | (359,812 | ) |
| Property, equipment and construction in progress,  net           |       | 38,726,910                                                   |        | 4,365,040 |   | 5,505 |   | — |   | — |   |
| Total assets                                                     |       | 74,036,726                                                   |        | 38,090,980 |   | 5,161,095 |   | 252,336 |   | 26,142 |   |
| Total long-term debt                                             |       | 55,815                                                       |        | 70,908 |   | — |   | 755,000 |   | — |   |
| Stockholders' equity                                             |       | 63,635,905                                                   |        | 36,731,577 |   | 4,586,155 |   | (891,312 | ) | (355,632 | ) |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| **Cash  Flow Data:**                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Cash flow used in operating activites                            |       | (6,681,722                                                   | )           | (4,461,328 | ) | (1,473,800 | ) | (528,806 | ) | 7,086 |   |
| Cash flow used in investing activities                           |       | (34,269,582                                                  | )           | (5,745,130 | ) | (1,305,662 | ) | (240,000 | ) | — |   |
| Cash flow  provided by financing activities                      |       | 36,820,407                                                   |        | 35,647,397 |   | 6,785,497 |   | 755,000 |   | — |   |

 

** **

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS**

*SEE RISKFACTORS IN ITEM 1 “BUSINESS” OF THIS ANNUAL REPORT FORM 10-K.  The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith our audited consolidated financial statement and related notes containedelsewhere in this report.*

**Overview**

We are in the exploratory stage of our oil and naturalgas business and to date our activities in Peru have been primarily limited toanalysis and evaluation of technical data on the properties and preparation ofthe development plans for the properties, including detailed engineering anddesign of the power plant and gas processing facilities, refurbishment of oneof our offshore platforms, procuring machinery and equipment for a drillingcampaign, obtaining all necessary environmental and operating permits andsecuring the required capital and financing to complete the current plan ofoperation.   We 

27

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commenceddrilling of our initial well, the CX11-21XD, in the Corvina Gas Field at theCX-11 platform in September 2006, and a total depth of 10,457 feet (9,234 feettrue vertical depth) was reached in November 2006.  In March 2007, after a total of four DrillStem Tests were conducted on separate potential pay zones covering 413 feetfrom the Lower and Upper Zorritos formations, the well tested at a rate of 40 millioncubic feet per day (MMcfpd) of natural gas and 3,150 barrels per day of crudeoil (bopd).  We next plan to workover theshut-in CX11-16X well, followed by the drilling of our second new well in theCorvina field, to test for additional gas reserves and further appraise otheroil discovery. However, we caution the reader that test results are not necessarilyindicative of actual production.  Wehave not drilled any other wells or recognized any revenues from operations,and we do not anticipate generating significant revenues from our propertiesprior to early 2008.

**Results of Operations**

***Year Ended December 31, 2006 Compared to Year EndedDecember 31, 2005***

|                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **Increase/  (Decrease)** | ** ** |
| General and  administrative              |       | $                                                            | 8,306,356  |   | $ | 4,422,747 |   | $ | 3,883,609 |   |
| Stock-based  compensation                |       | 3,225,508                                                    |       | 1,382,479 |   | 1,843,029 |   |
| Geological,  geophysical and engineering |       | 2,048,742                                                    |       | 998,131 |   | 1,050,611 |   |
| Depreciation  expense                    |       | 213,815                                                      |       | 29,638 |   | 184,177 |   |
| Total operating expenses                 |       | $                                                            | 13,794,421 |   | $ | 6,832,995 |   | $ | 6,961,426 |   |

 

Our operating and administrative expenses to date haveconsisted principally of general and administrative costs as well as geological,geophysical and engineering costs. General and administrative costs have increased significantly from$4,422,747 during the year ended December 31, 2005 to $8,306,356 during theyear ended December 31, 2006 as a result of our increased activity levels,additional personnel and costs associated with being a public company.  We incurred $2,048,742 of geological,geophysical and engineering costs for the year ended December 31,2006 comparedto $998,131 for the same period ended, 2005. This was primarily related to the commencement of our Block Z-1gas-to-power project.

Stock-basedcompensation expense for the twelve months ended December 31, 2006 wasapproximately $3,225,508, compared to $1,382,479 during the same period in2005.  Stock based compensation expenseis primarily related to our 2005 and 2006 restricted stock and option grantsand accrued stock-based compensation under our 2005 Long-Term IncentiveCompensation Plan.

We received net cash distributions from our Ecuadorproperty of $1,291,547 during the twelve months ended December 31, 2006,compared to net cash distributions of $605,278 during the same period ending2005.  Since our investment consists ofan interest in a producing oil and gas property, we are amortizing theinvestment on a straight-line basis over the remaining term of the licenseagreement covering the property. Accordingly, we recorded $187,584 of amortization expense during thetwelve months ended December 31, 2006, compared to $136,552 during the twelvemonths ended December 31, 2005.

We incurred interest expense of $15,815 during the twelvemonths ending December 31, 2006, primarily related to other debt related toacquiring furniture and fixtures as compared with interest expense of $11,149and amortization of deferred financing costs of $67,561 year ended December 31,2005, principally from notes payable incurred to finance the acquisition of SMCin September 2004.

For the year endedDecember 31, 2006, we recorded a foreign currency transaction gain of$56,000.  The primary reason for thetranslation difference related to the early recovery of Value Added Tax in Peru(“IGV”), which, by Peruvian law must be transacted and accounted for in thelocal currency.  Due to the relativelylow level of activity in 2005 and the relatively steady exchange rate in Peru,translation differences were immaterial during the twelve months ended December31, 2005.

For the twelve months ended December 31, 2006, we recorded registration delay expense totaling $3,552,513, of which approximately $1,221,734 was paid in cash and $2,330,779 was settled by the issuance of 865,238 shares of common stock.  In connection with the private placement of 11,466,000 common shares in July 2005, we were obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use our best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days from closing. The Registration Statement had not been declared effective by the required date and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the

28

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purchase price of the shares, approximately $343,000, for each thirty day period until the Registration Statement was declared effective by the SEC. In addition, in connection with the private placement of 4,482,000 common shares in March 2006, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 within ninety days, and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days, from March 8, 2006.  The Registration Statement was not filed or declared effective by the required dates and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,100, for each thirty day period until the Registration Statement was declared effective by the SEC.  On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements.  As a result, the Company is no longer subject to the liquidated damages described above.

As a result of the increased cash balance from the variousprivate placements of our common stock during 2005 and 2006, we receivedinterest income of $787,455 during the twelve months ended December 31, 2006,as compared to $509,808 during the same period ended December 31, 2005.

We realized a net loss of $15,487,459 or $(0.35) per sharefor the year ended December 31, 2006, compared to a net loss of $6,406,989,or $(0.20) per share,for the same period in 2005.

***Year Ended December 31, 2005 Compared to Year EndedDecember 31, 2004***

|                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** |
| General and  administrative              |       | $                                                            | 4,422,747  |   | $ | 1,856,111 |   | $ | 2,566,636 |   |
| Stock-based  compensation                |       | 1,382,479                                                    |       | 7,059,081 |   | (5,676,602 | ) |
| Geological,  geophysical and engineering |       | 998,131                                                      |       | 360,965 |   | 637,166 |   |
| Depreciation  expense                    |       | 29,638                                                       |       | 157 |   | 29,481 |   |
| Total operating expenses                 |       | $                                                            | 6,832,995  |   | $ | 9,276,314 |   | $ | (2,443,319 | ) |

 

Our operating andadministrative expenses to date have consisted principally of general andadministrative costs and geological, geophysical and engineering costs. Generaland administrative costs have increased significantly from $1,856,111 during2004 to $4,422,747 during 2005 as a result of our increased activity levels,additional personnel and costs associated with being a public company. Weincurred $998,131 of geological, geophysical and engineering costs in 2005primarily related to our Block Z-1 gas-to-power project, compared to $360,965in 2004.

Also, during 2005, weincurred $1,382,479, in stock-based compensation as a result of amortizing thedeferred compensation expense related to (i) a grant of 150,000 shares ofrestricted common stock to our independent directors; (ii) a grant of970,000 shares of restricted common stock to three of our officers; and (iii) 500,000stock options issued to the former CEO of Navidec. During 2004, we recordedstock-based compensation expense of $7,059,081 primarily as a result of sharesissued for services to employees and consultants of BPZ-Texas prior to theMerger.

We received net cash distributionsof $605,278 during 2005 from our Ecuador property, compared to net cashdistributions of $190,621 during 2004, which included only six months from theacquisition of the property in June 2004. Our net interest in the property alsoincreased from 6% to 10% in June 2005. Since our investment consists of aninterest in a producing oil and gas property, we are amortizing the investmenton a straight-line basis over the remaining term of the license agreementcovering the property. Accordingly, we recorded $136,552 of amortizationexpense during 2005, compared to $42,760 during the six months we owned theproperty during 2004.

We incurred interestexpense of $11,149 and amortization of deferred financing costs of $67,561 in2005, principally from notes payable incurred to finance the acquisition of SMCin June 2004. In the prior year we incurred interest expense of $66,959related to the notes payable incurred to finance the acquisition of SMC in June2004 and other borrowings, as well as amortization of deferred financing costsof $360,439 primarily from notes payable incurred to finance the acquisition ofSMC in June 2004.

As a result of ourincreased cash balance from the private placement of common stock, we receivedinterest income of $509,808 during the year ended December 31, 2005.However, as a result of a delay in obtaining an effective RegistrationStatement we were liable to the investors for liquidated damages in an amountequal to 1.0% of the purchase price of the 

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shares for eachthirty day period until the Registration Statement is declared effective by theSEC. Accordingly, the Company recorded $515,967 of registration delay expenseduring the year ended December 31, 2005.

We realized a net loss of$6,406,989, or $(0.20) per share, for the year ended December 31, 2005,compared to a net loss of $15,013,177, or $(0.99) per share for the same periodin 2004.

**Capital Expenditures**

Our initial project in the offshore Block Z-1 innorthwest Peru, totaling approximately $132.3 million including importduties and contingencies, entails the refurbishment of the Corvina CX-11platform, rehabilitation of an existing well and the drilling of two new wells,installation of a 10-mile gas pipeline from the platform to shore, constructionof gas processing facilities and a 160 MW simple-cycle electricgenerating plant, and the construction of a 40-mile gas pipeline to supply gasto third party generators in Arenillas, Ecuador.  We have obtained cost estimates for most ofthe major equipment components and the related shipping, construction,installation and associated services. However, the costs of these procurementand construction activities can be difficult to accurately predict and aresubject to changes and contingencies. Our budget has increased as a result ofhigher actual drilling costs in Block Z-1, primarily as a result of amechanical problem caused by an unexpected gas kick and resulting pipeobstruction, as well as higher projected drilling costs and the selection oflarger capacity turbines. These cost increases were partially offset by theremoval of one well from our initial drilling program. This estimate of capitalexpenditures does not include value added tax (referred to as “IGV” in Peru).IGV is generally imposed on goods and services at a rate of 19%. Certainexpenditures are exempt from IGV or eligible for immediate refund. IGV paid oncapital expenditures is generally recoverable from our future revenue billingswithin Peru and is not considered part of the capitalized costs of the equipmentto which it relates. We may also be able to defer payment of certain of theseexpenditures or obtain separate financing for the IGV.

**Project Capital Budget**
| ** **                           | ** ** | **($ in millions)** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| Power plant and  related equipment   |       | $                             | 50.4       |   |
| Pipelines and  processing facilities |       | 38.6                          |       |
| Platform and  wells                  |       | 38.3                          |       |
| Contingencies                        |       | 5.0                           |       |
| Total estimated  capital budget      |       | $                             | 132.3      |   |

 

**Liquidity and Capital Resources**

We currently have no source of revenue or cash flow fromoperations, and our primary source of cash flow has been cash proceeds fromprivate placements of our common stock. As of December 31, 2006, our cash balance was approximately$25.3 million.

In connection with the Merger, we received net proceedsof approximately $5.5 million from a private placement of our common stock.In July 2005, we completed a private placement of 11,466,000 shares ofcommon stock for net proceeds of approximately $31.9 million. MorganKeegan & Company, Inc. served as placement agent for theoffering. We also received $3.4 million from the exercise of warrantsduring the third and fourth quarters of 2005. In March 2006 andJune 2006, we completed private placements of 1,670,000 shares and4,482,000 shares of common stock, respectively, for net proceeds ofapproximately $5.0 million and $12.3 million, respectively.

On December 20, 2006, the International FinanceCorporation’s (“IFC”) Board of Executive Directors approved a $120 millionfinancial package.  IFC is the privatesector arm of the World Bank Group based in Washington, D.C.  As part of the financing, we completed aprivate placement of 6,500,000 shares of common stock, no par value, to theInternational Finance Corporation (“IFC”) pursuant to a Subscription Agreementdated December 18, 2006.  The common stock was priced at $3.00 per shareresulting in proceeds to us of approximately $19.5 million.  The offeringwas placed directly by us and there were no placement fees.  The remaining$100.5 million portion of IFC financing consists of $30.5 million of debtfacilities for IFC’s own account and $70 million of debt facilities for theaccount of third-party financial institutions. Syndication of the third-party debt component by IFC is expected to takeplace late in the second quarter of 2007 with disbursements expected shortlythereafter.  The remaining debt portionof the financing is subject to identification of the lending syndicate membersand subsequent negotiation and approval of the necessary loan documentation.

During the twelve months ended December 31, 2006, weincurred capital expenditures of approximately $34.8 million 

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primarily related to drilling and completion of our first well in theCorvina Gas Field for approximately $20.0 million.  We also incurred capital costs associatedwith the purchase of a deck barge and related equipment for approximately$6.5 million, the modernization and refurbishment of a platform tenderassist drilling rig of approximately $4.5 million, power plant, gas processingfacility, and pipeline designs of approximately $3.4 million and $0.4 millionrelated to other miscellaneous property and equipment.  In comparison, during the year endedDecember 31, 2005, we incurred capital expenditures of approximately$4.4 million, primarily related to refurbishment of the Corvina CX-11platform and power plant design costs.

In early August 2006, we incurred an operationaldelay of approximately three weeks resulting from a navigation incident whichcaused the BPZ-01 barge to be grounded on a sand bank in Talara Bay innorthwest Peru during the second mobilization trip to the Corvina CX-11platform. No injuries were sustained by any of our staff, nor to any of the tugboat operator’s crew members. The BPZ-01 is a U.S. flagged vessel and as suchwas inspected after the incident by the U.S. Coast Guard, to its satisfaction. Thebarge resumed normal operations immediately thereafter. Based upon informationcurrently available, the Company estimates that total expenditures related tothis incident will be approximately $1.1 million. As of December 31, 2006,approximately $382,000 has been incurred for barge recovery and temporaryrepairs to the vessel.  In addition, theCompany expects to incur approximately $330,000 in permanent repairs to thebarge and approximately $432,000 of consequential damages, primarily stand-by charges. As of the date of this filing, we have notpresented a final claim to our insurance carrier for the barge repairs and weare negotiating a settlement agreement with a third party for recovery of anydamages not covered through our insurance. We believe the majority of the costsassociated with this incident will be reimbursed through insurance or through athird party. No assurances can be given, however, that any such recoveries willbe sufficient to cover all costs associated with this incident or to the timingof any such recoveries. This incident is not expected to have a material impacton our operations or business plan.

As of December 31, 2006, in connection with our Peruproperties, we have deposited approximately $1.2 million as restricted cashto collateralize two performance bonds which guarantee our various obligationsand commitments under one of our license contracts and another agreement. Theperformance bonds were issued by Peruvian banks and their terms are governed bythe corresponding license contract or agreement.  We will be required to deposit approximately$1.0 million as restricted cash to collateralize a new performance bond inconnection with the beginning of the third exploration period under ourBlock Z-1 license contract, which begins in June 2007.  In addition, although we are stillnegotiating the terms of our commitments under our license contracts for BlocksXXII and XXIII, we anticipate having to deposit funds as restricted cash tocollateralize performance bonds to guarantee our obligations totalingapproximately $1 million in late 2007.

In connection with our Block XIX license contract, we areobligated to shoot at least 100 kilometers of 2-D seismic during the first halfof 2007, unless an extension is requested and granted.  Depending on the results of this work, we mayelect to drill an exploratory well. We estimate the cost to acquire this seismic data to be approximately $3million.

With our current cash balance, proceeds from the expectedIFC debt facilities and potentially from future equity raises, we believe wewill have sufficient capital resources to execute our initial gas-to-powerproject as we currently envision it. However, the timing and execution of ourproject is dependent on a variety of factors, including technical design offacilities, permitting, availability of equipment, time and costs required fordelivery and construction, performance by contractors and the success ofplanned financing, many of which factors are outside our control and cannot beassured.

**Off-Balance Sheet Arrangements**

As of December 31, 2006, we had no transactions,agreements or other contractual arrangements with unconsolidated entities orfinancial partnerships, often referred to as special purpose entities, whichgenerally are established for the purpose of facilitating off-balance sheetarrangements.

**Contractual Obligations**
| ** **                      | ** ** | **Payments Due by Period at December 31, 2006** | ** ** |
|---------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | ** **                                                                         | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| ** **                      | ** ** | **Total**                                                                          | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| **Contractual  Obligations:**   | ** ** | ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt  obligations(1)  |       | $                                                                                  | 83,020     |   | $ | 21,657 |   | $ | 61,363 |   | $ | — |   | $ | — |   |
| Operating lease  obligations(2) |       | 740,396                                                                            |       | 234,439 |   | 505,956 |   | — |   | — |   |
| Purchase  obligations(3)        |       | 3,998,357                                                                          |       | 3,998,357 |   | — |   | — |   | — |   |
| Total                           |       | $                                                                                  | 4,821,773  |   | $ | 4,254,453 |   | $ | 567,319 |   | $ | — |   | $ | — |   |

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(1)                                 Capital lease for office furniture in ourexecutive office in Houston, Texas.

(2)                                 Operating leases for our executive office inHouston, Texas, our branch office in Quito, Ecuador, and our branch office andcorporate apartments in Lima, Peru.

(3)                                 Primarily consists of purchase obligations forvarious equipment and services related to the Company’s drilling operations aswell as powerplant and pipeline projects in Peru.

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**Critical Accounting Policies**

The discussion and analysis of our financial conditionand results of operations is based on our consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”). Management uses estimates and assumptions in preparing theconsolidated financial statements in accordance with GAAP. Those estimates andassumptions affect the reported amounts of assets, liabilities, revenues andexpenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities. We have identified the following as criticalaccounting policies directly related to our business and operations, and theunderstanding of our financial statements.

***Successful Efforts Method ofAccounting***

We follow the successful efforts method of accounting forour investments in oil and gas properties. Under this method, oil and gas leaseacquisition costs and intangible drilling costs associated with explorationefforts that result in the discovery of proved reserves and costs associatedwith development drilling, whether or not successful, are capitalized whenincurred. Certain costs of exploratory wells are capitalized pendingdeterminations that proved reserves have been found. If the determination isdependent upon the results of planned additional wells and required capitalexpenditures to produce the reserves found, the drilling costs will becapitalized as long as sufficient reserves have been found to justifycompletion of the exploratory well and additional wells are underway or firmlyplanned to complete the evaluation of the well. All costs related tounsuccessful exploratory wells are expensed when such wells are determined tobe non-productive or at the one year anniversary of completion of the well ifproved reserves have not been attributed and capital expenditures as describedin the preceding sentence are not required. We assess our capitalizedexploratory wells pending evaluation each quarter to determine whether costsshould remain capitalized or should be charged to earnings. Other explorationcosts, including geological and geophysical costs, are expensed as incurred. Wewill recognize gains or losses on the sale of properties, should they occur, ona field-by-field basis.

The application of the successful efforts method ofaccounting requires management’s judgment to determine the proper designationof wells as either developmental or exploratory, which will ultimatelydetermine the proper accounting treatment of the costs incurred. The resultsfrom a drilling operation can take considerable time to analyze, and thedetermination that commercial reserves have been discovered requires bothjudgment and application of industry experience. Wells may be completed thatare assumed to be productive and actually deliver oil and gas in quantitiesinsufficient to be economic, which may result in the abandonment of the wellsat a later date. The evaluations of oil and gas leasehold acquisition costsrequires management’s judgment to estimate the fair value of exploratory costsrelated to drilling activity in a given area.

The successful efforts method of accounting can have asignificant impact on the operational results reported when we enter a newexploratory area in hopes of finding oil and gas reserves. Seismic costs can besubstantial, which will result in additional exploration expenses whenincurred. The initial exploratory wells may be unsuccessful and the associatedcosts will then be expensed as dry hole costs, and any associated leaseholdcosts may be impaired.

***Impairment of Long-Lived Assets***

We periodically evaluate the recoverability of thecarrying value of our long-lived assets and identifiable intangibles bymonitoring and evaluating changes in circumstances that may indicate that thecarrying amount of the asset may not be recoverable. Examples of events orchanges in circumstances that indicate the recoverability of the carryingamount of an asset should be assessed include, but are not limited to,(a) a significant decrease in the market value of an asset, (b) asignificant change in the extent or matter in which an asset is used or asignificant physical change in an asset, (c) a significant adverse changein legal factors or in the business climate that could affect the value of anasset or an adverse action or assessment by a regulator, (d) anaccumulation of costs significantly in excess of the amount originally expectedto acquire or construct an asset, and/or (e) a current period operating orcash flow loss combined with a history of operating or cash flow losses or aprojection or forecast that demonstrates continuing losses associated with anasset used for the purpose of producing revenue.

We consider historical performance and anticipated futureresults in our evaluation of potential impairment. Accordingly, when indicatorsof impairment are present, we evaluate the carrying value of these assets inrelation to the operating performance of the business and future discounted andnon-discounted cash flows expected to result from the use of these assets.Impairment losses are recognized when the expected future cash flows from anasset are less than its carrying value.

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***Future Dismantlement, Restoration,and Abandonment Costs***

The accounting for future development and abandonmentcosts changed on January 1, 2003, with the issuance of Statement ofFinancial Accounting Standards (“SFAS”) No. 143 “Accounting for AssetRetirement Obligation” (“ARO”), which requires the fair value of a liabilityfor an asset retirement obligation to be recognized in the period in which itis incurred if a reasonable estimate of fair value can be made. The associatedasset retirement costs are capitalized as part of the carrying amount of thelong-lived asset. The accrual is based on estimates of these costs for each ofour properties based upon the type of production structure, reservoircharacteristics, depth of the reservoir, market demand for equipment, currentlyavailable procedures and consultations with construction and engineeringconsultants. Because these costs typically extend many years into the future,estimating these costs is difficult and requires management to make estimatesand judgments that are subject to future revisions based on numerous factors,including changing technology, the political and regulatory environment andestimates as to the proper discount rate to use and timing of abandonment.

Our plan of operations includes the drilling of wells andthe construction of an electric power generation plant. We may be required toplug and abandon those wells and restore the well site and power generationsite upon completion of their production. However, due to the fact that we havenot yet begun operations, we do not have sufficient information to determinethe timing, nor calculate the present value, of the obligation. Therefore, nosuch provision is reflected in the accompanying consolidated financialstatements.

Our plan of operationsincludes the drilling of wells and the construction of an electric powergeneration plant. We will be required to plug and abandon those wells andrestore the well sites and power generation site upon abandonment if they areabandoned prior to the end of the contract period. However, due to the factthat we have not yet begun operations, we do not have sufficient information todetermine the timing, nor calculate the present value, of the obligation.Therefore, no such provision is reflected in the accompanying consolidatedfinancial statements.

***Accounting Changes and Error Corrections***

In June 2005, theFinancial Accounting Standards Board issued SFAS No. 154, AccountingChanges and Error Corrections, which replaced Accounting Principles BoardOpinion No. 20, Accounting Changes (“APB 20”), and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requiresretrospective application to prior period financial statements of a voluntarychange in accounting principle unless it is impracticable. In contrast, APB 20previously required that most voluntary changes in accounting principle berecognized by including the cumulative effect of changing to the new accountingprinciple in net income in the period of change. SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. Earlier application is permitted for accountingchanges and correction of errors made in fiscal years beginning afterJune 1, 2005. SFAS 154 does not change the transition provisions of anyexisting accounting pronouncements, including those that are in a transitionphase as of its effective date. We have elected to adopt the provisions of SFAS154 on January 1, 2006. We do not expect adoption to have a materialeffect on our results of operations or financial position.

***Principles of Consolidation***

Our consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries and branch offices. All intercompany balances and transactionshave been eliminated.

Our accounting policyregarding partnership or joint venture interests in oil and gas properties isto consolidate such interests on a pro-rata basis in accordance with acceptedpractice in the oil and gas industry. However, we have not been able to receivetimely information to allow us to proportionately consolidate the minoritynon-operated working interest owned by our consolidated subsidiary, SMC EcuadorInc. See Note 7 to the Consolidated Financial Statements for furtherdiscussion regarding the investment in our Ecuador property. Accordingly, weaccount for this investment under the cost method. As such, we record our shareof cash received or paid attributable to this investment as other income orexpense.

***Foreign Exchange***

The U.S. Dollar is thefunctional currency for our operations in both Peru and Ecuador. Ecuador hasadopted the U.S. Dollar as its official currency. Peru, however, still uses itslocal currency, Nuevo Soles, in addition to the U.S. Dollar and therefore ourfinancial results are subject to favorable or unfavorable fluctuations in theexchange rate and inflation of that country. We have adopted SFAS No. 52, “ForeignCurrency Translation,” which requires that the translation of the applicableforeign currency into U.S. dollars be performed for balance sheet monetaryaccounts using current exchange rates 

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in effect at thebalance sheet date, non-monetary accounts using historical exchange rates ineffect at the time the transaction occurs, and for revenue and expense accountsusing a weighted average exchange rate during the period reported. Accordingly,the gains or losses resulting from such translation are included in otherincome and expense in the consolidated statements of operations.

**Recent Accounting Pronouncements**

***FASB Staff Position (FSP) FAS 19-1 amends FASBstatement no. 19 to provide revised guidance concerning the criteria for continuedcapitalization of exploratory costs when wells have found reserves that cannotyet be classified as proved.***

FAS 19-1 providescircumstances that would permit the continued capitalization of exploratorywell costs beyond one year, other than when additional exploration wells arenecessary to justify major capital expenditures and those wells are under wayor firmly planned for the near future. Generally, the statement allowsexploratory well costs to continue to be capitalized when the well has found asufficient quantity of reserves to justify its completion as a producing welland the enterprise is making sufficient progress assessing the reserves and theeconomic and operating viability of the project.

****Accounting for Uncertainty inIncome Taxes.****

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes - an interpretation of SFAS No. 109”** **(“FIN 48”). Thisinterpretation provides guidance for recognizing and measuring uncertain taxpositions, as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48prescribes a threshold condition that a tax position must meet for any of thebenefit of the uncertain tax position to be recognized in the financialstatements. Guidance is also provided regarding derecognition, classificationand disclosure of these uncertain tax positions. FIN 48 is effective for fiscalyears beginning after December 15, 2006. The adoption of thisInterpretation is not expected to have a material impact on our consolidatedfinancial position, results of operations, or cash flows.

****Guidance for QuantifyingFinancial Statement Misstatement.****

In September 2006,the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”), whichestablishes an approach requiring the quantification of financial statementerrors based on the effect of the error on each of the company’s financialstatements and the related financial statement disclosures.  This model iscommonly referred to as a “dual approach” because it requires quantification oferrors under both the “iron curtain” and “roll-over” methods.  Theroll-over method focuses primarily on the impact of a misstatement on theincome statement, including the reversing effect of prior year misstatements;however, its use can lead to the accumulation of misstatements in the balancesheet. The iron curtain method focuses primarily on the effect of correctingthe period end balance sheet with less emphasis on the reversing effects ofprior year errors on the income statement. The Company currently uses the ironcurtain method for quantifying financial statement misstatements. The Companywill initially apply the provisions of SAB 108 in connection with thepreparation of the Company’s annual financial statements for the year endingDecember 31, 2006. The use of the dual approach is not expected to have amaterial impact on our consolidated financial position, results of operations,or cash flows.

***FASB Staff Position (FSP) No. EITF 00-19-2, “Accounting forRegistration Payment Arrangements and Financial Instruments Subject to SuchArrangements”***

In December 2006, the FASB issued FASB StaffPosition FSP EITF 00-19-2, *Accounting forRegistration Payment Arrangements*. This FASB Staff Position, orFSP, specifies that the contingent obligation to make future payments orotherwise transfer consideration under a registration payment arrangement,whether issued as a separate agreement or included as a provision of afinancial instrument or other agreement, should be separately recognized andmeasured in accordance with FASB Statement No. 5, *Accounting for Contingencies*. This FSPalso requires certain disclosures regarding registration payment arrangementsand liabilities recorded for such purposes. This FSP is immediately effectivefor registration payment arrangements entered into or modified afterDecember 21, 2006. The guidance of this FSP is effective for fiscal yearsbeginning after December 15, 2006, and interim periods within those fiscalyears for registration payment arrangements entered into prior toDecember 21, 2006. This FSP requires adoption by reporting a change inaccounting principle through a cumulative-effect adjustment to the openingbalance of our partners’ capital accounts as of the first interim period of theyear in which this FSP is initially applied. We do not expect our adoption ofthis FSP to materially affect our financial position, results of operations orcash flows.

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****Fair Value Measurements****.

In September 2006,the FASB issued SFAS No. 157**,**”Fair Value Measurements”, whichaddresses how companies should measure fair value when companies are requiredto use a fair value measure for recognition or disclosure purposes undergenerally accepted accounting principles (“GAAP”). As a result of SFAS No. 157,there is now a common definition of fair value to be used throughout GAAP. SFASNo. 157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those years. Although thedisclosure requirements may be expanded where certain assets or liabilities arefair valued such as those related to stock compensation expense and hedgingactivities, we do not expect the adoption of SFAS No. 157 to have a materialimpact on the Company’s consolidated financial position, results of operations,or cash flows.

**ITEM 7A. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The primary objective of the following information is toprovide forward-looking quantitative and qualitative information aboutour potential exposure to market risks. The term “market risk” refers to therisk of loss arising from adverse changes in interest rates, oil and naturalgas prices and foreign currency exchange rates. The disclosures are not meantto be precise indicators of expected future losses, but rather indicators ofreasonable possible losses. This forward-looking information provides indicatorsof how we view and manage our ongoing market risk exposures. All of our marketrisk sensitive instruments were entered into for purposes other thanspeculative trading.

*Interest Rate Risk*

As of December 31, 2006, the Company had long-termdebt of $55,815, consisting of two secured loans for the purchase of officefurniture. Both loans have a term of 60 months and bear interest at fixedrates of 5.94% and 9.44%, with principal and interest payments due on a monthlybasis. Significant changes in market interest rates may significantly affectthe level of financing that the IFC will structure with respect to our projectin Peru.

*Commodity Price Risk.*

With respect to our oil and gas business, any revenues,cash flow, profitability and future rate of growth we achieve will be greatlydependent upon prevailing prices for oil and gas. Our ability to maintain orincrease our borrowing capacity and to obtain additional capital on attractiveterms is also expected to be dependent on oil and gas prices. Oil and naturalgas are commodities, and, therefore, their prices are subject to widefluctuations in response to relatively minor changes in supply and demand.Historically, oil and gas prices and markets have been volatile and are likelyto continue to be volatile in the future. Prices for oil and gas are subject topotentially wide fluctuations in response to relatively minor changes in supplyof and demand for oil and gas, market uncertainty, and a variety of additionalfactors that are beyond our control.

Lower oil and natural gas prices may not only decreaseour revenues on a per unit basis, but may also reduce the amount of oil andnatural gas we can produce economically, if any. A substantial or extendeddecline in oil and natural gas prices may materially affect our futurebusiness, financial condition, results of operations, liquidity and borrowingcapacity, and we may require a reduction in the carrying value of our oil andgas properties. While our revenues may increase if prevailing oil and gas pricesincrease significantly, exploration and production costs and acquisition costsfor additional properties and reserves may also increase.

With respect to our planned electricity generationbusiness, the price we can obtain for the sale of power may not rise at thesame rate, or may not rise at all, to match a rise in the Company’s cost toproduce and transport gas reserves to our initial 160MW power plant in CaletaCruz. Prices for both electricity and natural gas have been very volatile inthe past year and have increase significantly over the past two years. Theprofitability of this business depends in large part on the difference betweenthe price of power and the price of fuel used to generate power, or “sparkspread.”

*Foreign Currency Exchange Rate Risk.*

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as itsofficial currency. Peru, however, still uses its local currency, Nuevo Soles,in addition to the U.S. Dollar, and therefore, our financial results aresubject to favorable or unfavorable fluctuations in the exchange rate andinflation of that country. Translation differences have been nominal to-datebut are expected to increase as our activities in Peru continue to escalate.

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**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

BPZ Energy, Inc. andSubsidiariesIndex to Consolidated Financial Statements
| Report of Independent Registered  Public Accounting Firm                                                                                                                   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                       |   |   |
| Consolidated Balance  Sheets as of December 31, 2006 and 2005                                                                                                         |   |   |
|                                                                                                                                                                       |   |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2006, 2005 and  2004 and for the Period from August 20, 2001 (Inception) to December 31, 2006 |   |   |
|                                                                                                                                                                       |   |   |
| Consolidated Statements of Stockholders’ Equity  (Deficit) for the Years Ended December 31, 2006, 2005 and 2004                                                  |   |   |
|                                                                                                                                                                       |   |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and  2004 and for the Period from August 20, 2001 (Inception) to December 31, 2006 |   |   |
|                                                                                                                                                                       |   |   |
| Notes to  Consolidated Financial Statements                                                                                                                                |   |   |

 

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**Report of Independent RegisteredPublic Accounting Firm**

To the Board of Directors BPZ Energy, Inc. and Subsidiaries

(An Exploration StageCompany)

We have audited theaccompanying consolidated balance sheets of BPZ Energy, Inc. and Subsidiaries(An Exploration Stage Company) as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity (deficit),and cash flows for each of the three years in the period endedDecember 31, 2006, and for the period from August 20, 2001 (Inception)through December 31, 2006. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theConsolidated Financial Statements referred to above present fairly, in allmaterial respects, the financial position of BPZ Energy, Inc. and Subsidiariesat December 31, 2006 and 2005, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2006 and for the period from August 20, 2001 (Inception)through December 31, 2006 in conformity with accounting principles generallyaccepted in the United States of America.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of BPZ Energy, Inc. and Subsidiaries’internal control over financial reporting as of December 31, 2006, basedon criteria established in Internal Control — Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission(COSO) and our report dated March 14, 2007, expressed an unqualifiedopinion thereon.

/s/ Johnson Miller &Co., CPA’s PC

Midland, Texas March 14, 2007

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**BPZ Energy, Inc. andSubsidiaries(An Exploratory Stage Company)Consolidated Balance Sheets**
| ** **                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                             | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                             |       |                  |       |   |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Current assets:                                                                                                                                                        |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                             |       | $                     | 25,324,233 |   | $ | 29,455,130 |   |
| Value added tax  receivable                                                                                                                                            |       | 3,159,698             |       | 362,555 |   |
| Inventory                                                                                                                                                              |       | 1,945,781             |       | — |   |
| Prepaid and  other current assets                                                                                                                                      |       | 1,972,500             |       | 507,114 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Total current  assets                                                                                                                                                  |       | 32,402,212            |       | 30,324,799 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Property, equipment and  construction in progress, net                                                                                                                 |       | 38,726,910            |       | 4,365,040 |   |
| Restricted cash                                                                                                                                                        |       | 1,150,000             |       | 1,455,953 |   |
| Investment in Ecuador  property, net                                                                                                                                   |       | 1,757,604             |       | 1,945,188 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Total assets                                                                                                                                                           |       | $                     | 74,036,726 |   | $ | 38,090,980 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |                  |       |   |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                   |       |                  |       |   |   |
| Accounts payable                                                                                                                                                       |       | $                     | 7,376,310  |   | $ | 747,347 |   |
| Accrued  liabilities                                                                                                                                                   |       | 2,849,376             |       | 470,632 |   |
| Other  liabilities                                                                                                                                                     |       | 119,320               |       | 70,516 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Total current  liabilities                                                                                                                                             |       | 10,345,006            |       | 1,288,495 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Long-term debt                                                                                                                                                         |       | 55,815                |       | 70,908 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Commitments and  contingencies (Note 13)                                                                                                                               |       |                  |       |   |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                             |       |                  |       |   |   |
| Preferred stock, no par  value, 25,000,000 authorized; none issued and outstanding                                                                                     |       | —                |       | — |   |
| Common stock, no  par value, 250,000,000 authorized; 54,143,717 and 40,349,979 shares issued  and outstanding at December 31, 2006 and December 31, 2005, respectively |       | 96,574,326            |       | 56,873,641 |   |
| Additional paid  in capital                                                                                                                                            |       | 5,092,341             |       | 2,401,239 |   |
| Stock  subscription receivable                                                                                                                                         |       | (230,825              | )          | (230,825 | ) |
| Deficit  accumulated during the exploratory stage                                                                                                                      |       | (37,799,937           | )          | (22,312,478 | ) |
|                                                                                                                                                                   |       |                  |       |   |   |
| Total  stockholders’ equity                                                                                                                                       |       | 63,635,905            |       | 36,731,577 |   |
|                                                                                                                                                                   |       |                  |       |   |   |
| Total  liabilities and stockholders’ equity                                                                                                                       |       | $                     | 74,036,726 |   | $ | 38,090,980 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

38

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**BPZ Energy, Inc. andSubsidiaries(An Exploratory Stage Company)Consolidated Statements of Operations**
| ** **                                                       | ** ** | **Cumulative Amounts  from August 20, 2001  (Inception) to** | ** **  | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|-------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **December 31, 2006**                                                       | ** **  | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue                                                          |       | $                                                                                     | —      |                                       | $          | — |   | $ | — |   | $ | — |   |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Operating and administrative expenses:                           |       |                                                                                  |        |                                       |       |   |   |   |   |
| General and administrative                                       |       | 15,484,133                                                                            |        | 8,306,356                                  |       | 4,422,747 |   | 1,856,111 |   |
| Stock-based compensation                                         |       | 11,667,068                                                                            |        | 3,225,508                                  |       | 1,382,479 |   | 7,059,081 |   |
| Geological, geophysical and engineering                          |       | 3,407,838                                                                             |        | 2,048,742                                  |       | 998,131 |   | 360,965 |   |
| Depreciation expense                                             |       | 243,610                                                                               |        | 213,815                                    |       | 29,638 |   | 157 |   |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Total operating expenses                                         |       | 30,802,649                                                                            |        | 13,794,421                                 |       | 6,832,995 |   | 9,276,314 |   |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Operating loss                                                   |       | (30,802,649                                                                           | )           | (13,794,421                                | )          | (6,832,995 | ) | (9,276,314 | ) |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Other income (expense):                                          |       |                                                                                  |        |                                       |       |   |   |   |   |
| Income from investment in Ecuador property, net of  amortization |       | 2,019,885                                                                             |        | 1,403,298                                  |       | 468,726 |   | 147,861 |   |
| Interest expense                                                 |       | (93,923                                                                               | )           | (15,815                                    | )          | (11,149 | ) | (66,959 | ) |
| Amortization of deferred financing costs                         |       | (428,000                                                                              | )           | —                                     |       | (67,561 | ) | (360,439 | ) |
| Registration delay expense                                       |       | (4,068,480                                                                            | )           | (3,552,513                                 | )          | (515,967 | ) | — |   |
| Interest income                                                  |       | 1,297,263                                                                             |        | 787,455                                    |       | 509,808 |   | — |   |
| Merger costs                                                     |       | (5,470,455                                                                            | )           | —                                     |       | — |   | (5,470,455 | ) |
| Miscellaneous income/(expense)                                   |       | (253,578                                                                              | )           | (315,463                                   | )          | 42,149 |   | 13,129 |   |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Total other income (expense)                                     |       | (6,997,288                                                                            | )           | (1,693,038                                 | )          | 426,006 |   | (5,736,863 | ) |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Loss before income taxes                                         |       | (37,799,937                                                                           | )           | (15,487,459                                | )          | (6,406,989 | ) | (15,013,177 | ) |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Income taxes                                                     |       | —                                                                                |        | —                                     |       | — |   | — |   |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Net loss                                                         |       | $                                                                                     | (37,799,937 | )                                          | $          | (15,487,459 | ) | $ | (6,406,989 | ) | $ | (15,013,177 | ) |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Basic and diluted net loss per share                             |       |                                                                                  |        | $                                          | (0.35      | ) | $ | (0.20 | ) | $ | (0.99 | ) |
|                                                             |       |                                                                                  |        |                                       |       |   |   |   |   |
| Weighted average  common shares outstanding                      |       |                                                                                  |        | 44,751,761                                 |       | 31,899,291 |   | 15,169,823 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

39

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**BPZ Energy, Inc. andSubsidiaries(An Exploratory Stage Company)Consolidated Statements of Stockholders’ Equity (Deficit)Years Ended December 31, 2006, 2005 and 2004**
| ** **                                                 | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **      | ** ** | **Deficit**         | ** ** | ** **  | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|-------------|------------|------------------|------------|-----------------|------------|---------------------|------------|-------------|------------|
| ** **                                                 | ** ** | ** **                              | ** ** | ** **  | ** ** | ** **       | ** ** | ** **      | ** ** | **Accumulated**     | ** ** | ** **  | ** ** |
| ** **                                                 | ** ** | ** **                              | ** ** | ** **  | ** ** | **Additional**   | ** ** | **Stock**       | ** ** | **During the** | ** ** | ** **  | ** ** |
| ** **                                                 | ** ** | **Common  Stock Issued** | ** ** | **Paid-in** | ** ** | **Subscription** | ** ** | **Exploratory** | ** ** | ** **          | ** ** |
| ** **                                                 | ** ** | **Shares**                              | ** ** | **Amount**  | ** ** | **Capital**      | ** ** | **Receivable**  | ** ** | **Stage**           | ** ** | **Total**   | ** ** |
| Balances,  December 31, 2003                               |       | 4,103,454                               |       | $           | 1,000      |             | $          | —          |       | $                   | —     |        | $          | (892,312 | ) | $ | (891,312 | ) |
| Common  stock issued for services                          |       | 2,857,642                               |       | 3,714,935   |       | —           |       | —          |       | —              |       | 3,714,935   |       |
| Stock-based  compensation                                  |       | —                                  |       | —      |       | 700,000          |       | —          |       | —              |       | 700,000     |       |
| Common  stock issued in acquisition                        |       | 3,860,517                               |       | 979,981     |       | —           |       | —          |       | —              |       | 979,981     |       |
| Warrant and stock options issued or assumed in acquisition |       | —                                  |       | —      |       | 7,134,620        |       | —          |       | —              |       | 7,134,620   |       |
| Conversion  of long-term debt to common stock              |       | 1,802,376                               |       | 685,000     |       | —           |       | —          |       | —              |       | 685,000     |       |
| Common stock issued for cash and future consideration      |       | 236,528                                 |       | 350,000     |       | —           |       | (230,825        | )          | —              |       | 119,175     |       |
| Exercise  of stock options assumed in acquisition          |       | 220,868                                 |       | 708,986     |       | (708,986         | )          | —          |       | —              |       | —      |       |
| Common  stock sold for cash, net of offering costs         |       | 3,000,000                               |       | 5,506,807   |       | —           |       | —          |       | —              |       | 5,506,807   |       |
| Conversion  of note payable to common stock                |       | 500,000                                 |       | 1,020,529   |       | —           |       | —          |       | —              |       | 1,020,529   |       |
| Forgiveness  of debt by parent                             |       | —                                  |       | —      |       | 629,597          |       | —          |       | —              |       | 629,597     |       |
| Net  loss                                                  |       | —                                  |       | —      |       | —           |       | —          |       | (15,013,177         | )          | (15,013,177 | )          |
| Balances,  December 31, 2004                               |       | 16,581,385                              |       | 12,967,238  |       | 7,755,231        |       | (230,825        | )          | (15,905,489         | )          | 4,586,155   |       |
|                                                       |       | —                                  |       |        |       |             |       |            |       |                |       |        |       |
| Stock-based  compensation                                  |       | 35,000                                  |       | 146,650     |       | 300,000          |       | —          |       | —              |       | 446,650     |       |
| Exercise  of stock options assumed in acquisition          |       | 401,389                                 |       | 1,288,459   |       | (1,288,459       | )          | —          |       | —              |       | —      |       |
| Exercise  of warrants                                      |       | 1,403,500                               |       | 4,566,621   |       | (698,361         | )          | —          |       | —              |       | 3,868,260   |       |
| Long-term  incentive compensation plan                     |       | 1,120,000                               |       | 4,928,000   |       | (3,992,172       | )          | —          |       | —              |       | 935,828     |       |
| Common  stock issued to acquire property interest          |       | 250,000                                 |       | 1,112,500   |       | —           |       | —          |       | —              |       | 1,112,500   |       |
| Common  stock sold for cash, net of offering costs         |       | 11,466,000                              |       | 31,917,213  |       | —           |       | —          |       | —              |       | 31,917,213  |       |
| Warrants issued in connection with sale of common stock    |       | —                                  |       | (325,000    | )          | 325,000          |       | —          |       | —              |       | —      |       |
| Common stock issued pursuant to merger earn-out agreement  |       | 9,000,000                               |       | —      |       | —           |       | —          |       | —              |       | —      |       |
| Common  stock issued for registration delay expenses       |       | 92,705                                  |       | 271,960     |       | —           |       | —          |       | —              |       | 271,960     |       |
| Net  loss                                                  |       | —                                  |       | —      |       | —           |       | —          |       | (6,406,989          | )          | (6,406,989  | )          |
| Balances  at December 31, 2005                             |       | 40,349,979                              |       | 56,873,641  |       | 2,401,239        |       | (230,825        | )          | (22,312,478         | )          | 36,731,577  |       |
|                                                       |       |                                    |       |        |       |             |       |            |       |                |       |        |       |
| Stock-based  compensation                                  |       | 10,000                                  |       | 43,900      |       | 318,281          |       | —          |       | —              |       | 362,181     |       |
| Exercise  of stock options assumed in acquisition          |       | 275,000                                 |       | 882,750     |       | (882,750         | )          | —          |       | —              |       | —      |       |
| Long-term  incentive compensation plan, net of forfeitures |       | (8,500                                  | )          | (143,599    | )          | 3,006,926        |       | —          |       | —              |       | 2,863,327   |       |
| Common  stock sold for cash, net of offering costs         |       | 12,652,000                              |       | 36,835,500  |       | —           |       | —          |       | —              |       | 36,835,500  |       |
| Warrants issued in connection with sale of common stock    |       | —                                  |       | (248,645    | )          | 248,645          |       | —          |       | —              |       | —      |       |
| Common  stock issued for registration delay expenses       |       | 865,238                                 |       | 2,330,779   |       | —           |       | —          |       | —              |       | 2,330,779   |       |
| Net  loss                                                  |       | —                                  |       | —      |       | —           |       | —          |       | (15,487,459         | )          | (15,487,459 | )          |
| Balances at December 31,  2006                             |       | 54,143,717                              |       | $           | 96,574,326 |             | $          | 5,092,341       |       | $                   | (230,825   | )           | $          | (37,799,937 | ) | $ | 63,635,905 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

40

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**BPZ Energy, Inc. andSubsidiaries(An Exploratory Stage Company)Consolidated Statements of Cash Flows**
| ** **                                                                                 | ** ** | **Cumulative**                  | ** **  | ** **                                                   | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|--------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **Amounts from**           | ** **  | ** **                                                   | ** ** |
| ** **                                                                                 | ** ** | **August 20, 2001**   | ** **  | ** **                                                   | ** ** |
| ** **                                                                                 | ** ** | **(Inception) to**         | ** **  | **For the year ended December 31,** | ** ** |
| ** **                                                                                 | ** ** | **December 31, 2006** | ** **  | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                     |       |                            |        |                                                         |       |   |   |   |   |
| Net loss                                                                                   |       | $                               | (37,799,937 | )                                                            | $          | (15,487,459 | ) | $ | (6,406,989 | ) | $ | (15,013,177 | ) |
| Adjustments to  reconcile net loss to net cash used by     operating activities: |       |                            |        |                                                         |       |   |   |   |   |
| Stock-based  compensation                                                                  |       | 11,667,068                      |        | 3,225,508                                                    |       | 1,382,479 |   | 7,059,081 |   |
| Stock issued in  merger                                                                    |       | 979,981                         |        | —                                                       |       | — |   | 979,981 |   |
| Options assumed  in merger                                                                 |       | 4,490,474                       |        | —                                                       |       | — |   | 4,490,474 |   |
| Stock issued for  registration delay expenses                                              |       | 2,602,739                       |        | 2,330,779                                                    |       | 271,960 |   | — |   |
| Depreciation  expense                                                                      |       | 243,610                         |        | 213,815                                                      |       | 29,638 |   | 157 |   |
| Amortization of  investment in Ecuador property                                            |       | 366,896                         |        | 187,584                                                      |       | 136,552 |   | 42,760 |   |
| Net gain on the  sale of asset                                                             |       | (150                            | )           | (150                                                         | )          |   |   |   |   |
| Amortization of  deferred financing fees                                                   |       | 428,000                         |        | —                                                       |       | 67,561 |   | 360,439 |   |
| Expenses paid by  affiliate                                                                |       | 629,596                         |        | —                                                       |       | — |   | 266,074 |   |
| Changes in  operating assets and liabilities:                                              |       |                            |        |                                                         |       |   |   |   |   |
| Increase in value  added tax receivable                                                    |       | (2,797,143                      | )           | (2,797,143                                                   | )          | — |   | — |   |
| Increase in  inventory                                                                     |       | (1,945,781                      | )           | (1,945,781                                                   | )          | — |   | — |   |
| Increase in other  assets                                                                  |       | (2,335,055                      | )           | (1,465,386                                                   | )          | (865,070 | ) | (418 | ) |
| Increase in  accounts payable                                                              |       | 7,376,310                       |        | 6,628,963                                                    |       | 435,735 |   | 301,137 |   |
| Increase in  accrued liabilities                                                           |       | 2,849,376                       |        | 2,378,744                                                    |       | 416,290 |   | 39,692 |   |
| Increase in other  liabilities                                                             |       | 119,320                         |        | 48,804                                                       |       | 70,516 |   | — |   |
| Net cash used by  operating activities                                                     |       | (13,124,696                     | )           | (6,681,722                                                   | )          | (4,461,328 | ) | (1,473,800 | ) |
|                                                                                       |       |                            |        |                                                         |       |   |   |   |   |
| Cash flows from  investing activities:                                                     |       |                            |        |                                                         |       |   |   |   |   |
| Property and  equipment additions                                                          |       | (38,970,370                     | )           | (34,575,535                                                  | )          | (4,389,177 | ) | (5,662 | ) |
| Restricted cash                                                                            |       | (1,150,000                      | )           | 305,953                                                      |       | (1,355,953 | ) | 140,000 |   |
| Investment in  Ecuador property                                                            |       | (1,440,000                      | )           | —                                                       |       | — |   | (1,440,000 | ) |
| Net cash used by  investing activities                                                     |       | (41,560,370                     | )           | (34,269,582                                                  | )          | (5,745,130 | ) | (1,305,662 | ) |
|                                                                                       |       |                            |        |                                                         |       |   |   |   |   |
| Cash flows from  financing activities:                                                     |       |                            |        |                                                         |       |   |   |   |   |
| Borrowings                                                                                 |       | 2,226,826                       |        | —                                                       |       | 96,828 |   | 1,375,000 |   |
| Repayments of  borrowings                                                                  |       | (465,482                        | )           | (15,093                                                      | )          | (234,904 | ) | (215,485 | ) |
| Proceeds from  exercise of warrants, net                                                   |       | 3,868,260                       |        | —                                                       |       | 3,868,260 |   | — |   |
| Proceeds from  sale of common stock, net                                                   |       | 74,379,695                      |        | 36,835,500                                                   |       | 31,917,213 |   | 5,625,982 |   |
| Net cash provided  by financing activities                                                 |       | 80,009,299                      |        | 36,820,407                                                   |       | 35,647,397 |   | 6,785,497 |   |
|                                                                                       |       |                            |        |                                                         |       |   |   |   |   |
| Net increase (decrease)  in cash and cash equivalents                                      |       | 25,324,233                      |        | (4,130,897                                                   | )          | 25,440,939 |   | 4,006,035 |   |
| Cash and cash  equivalents at beginning of period                                          |       | —                          |        | 29,455,130                                                   |       | 4,014,191 |   | 8,156 |   |
| Cash and cash  equivalents at end of period                                                |       | $                               | 25,324,233  |                                                         | $          | 25,324,233 |   | $ | 29,455,130 |   | $ | 4,014,191 |   |
|                                                                                       |       |                            |        |                                                         |       |   |   |   |   |
| Supplemental cash flow  information:                                                       |       |                            |        |                                                         |       |   |   |   |   |
| **Cash paid for:**                                                                         |       |                            |        |                                                         |       |   |   |   |   |
| Interest                                                                                   |       | $                               | 93,519      |                                                         | $          | 15,815 |   | $ | 13,761 |   | $ | 63,943 |   |
| **Non — cash items:**                                                                 |       |                            |        |                                                         |       |   |   |   |   |
| Common stock issued for  property interest                                                 |       | $                               | 1,112,500   |                                                         | $          | — |   | $ | 1,112,500 |   | $ | — |   |
| Warrants issued to  private placement agent                                                |       | 325,000                         |        | —                                                       |       | 325,000 |   | — |   |
| Imputed financing costs                                                                    |       | 428,000                         |        | —                                                       |       | — |   | 428,000 |   |
| Issuance of common stock  for subscription receivable                                      |       | 230,825                         |        | —                                                       |       | — |   | 230,825 |   |
| Conversion of long-term  debt to common stock                                              |       | 685,000                         |        | —                                                       |       | — |   | 685,000 |   |
| Conversion of notes  payable to common stock                                               |       | 1,020,529                       |        | —                                                       |       | — |   | 1,020,529 |   |
| Depreciation on support  equipment capitalized to property and equipment                   |       | 195,755                         |        | 195,755                                                      |       | — |   | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

41

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**BPZ Energy, Inc andSubsidiaries(An Exploratory Stage Company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2006**

**Note 1 — Basis ofPresentation and Significant Accounting Policies**

**Organization**

BPZEnergy, Inc., a Colorado corporation (“BPZ” or the “Company”) wasincorporated in 1993 and is based in Houston, Texas. BPZ is an exploratorystage company with properties in northwest Peru and southwest Ecuador and isfocused on the exploration and production of oil and natural gas and thecomplementary development of gas-fired power generation.

TheCompany maintains a registered branch office in Peru.  Currently, BPZ has exclusive rights andlicense agreements for oil and gas exploration and production covering a totalof approximately 2.4 million acres in northwest Peru.  The Company’s license contracts cover 100%ownership of both Block Z-1 (739,205 acres), which was signed inNovember 2001 and Block XIX (472,860 acres), which was signed inDecember 2003. The license contracts provide for an initial explorationperiod of seven to thirteen years and seven to ten years, respectively andrequire that we conduct specified activities on the properties during thisperiod.  If the exploration activitiesare successful, the total contract term may be extended up to 30 years for oilexploration and production and up to 40 years for gas exploration andproduction.  BPZ has presented allnecessary documentation requested by Perupetro in order to become the qualifiedoperator under a license contract for Block XXII (948,000 acres) which BPZpreviously held under a Technical Evaluation Agreement and was referred to asArea VI in the Company’s previous filings. Subsequently, in March 2006, theCompany was notified by Perupetro that it qualified as an operator of BlockXXII. The negotiations on the license contract are still underway and theCompany does have sufficient information to determine the timing nor estimatethe value of the various obligations and commitments in connection with thisproperty.  In July 2006 Perupetroofficially informed the Company that its proposal for the 248,000 acre BlockXXIII, located onshore in northwest Peru between the Company’s Blocks Z-1 andXIX, was the winning bid in Perupetro’s recent tender process.  The Company has presented all necessarydocumentation to become the qualified operator of this new block under anexploration and production license contract.

BPZthrough its wholly owned subsidiary, SMC Ecuador Inc. (a Delaware corporation),and its registered branch in Ecuador, also owns a 10% non-operating workinginterest in an oil and gas producing property, Block 2, located in thesouthwest region of Ecuador (the “Santa Elena Property”).  The license agreement covering the propertyextends through May 2016.

BPZis currently in the exploratory stage and to date its activities in Peru havebeen limited to analysis and evaluation of technical data on the properties andpreparation of the development plans for the properties, including detailedengineering and design of the power plant and gas processing facilities,refurbishment of one of its offshore platforms, procuring machinery andequipment for a drilling campaign, obtaining all necessary environmental andoperating permits, and securing the required capital and financing to completethe current plan of operation. .  The Company commenced drilling of our initialwell, the CX11-21XD, in the Corvina Gas Field at the CX-11 platform inSeptember 2006, and a total depth of 10,457 feet (9,234 feet true verticaldepth) was reached in November 2006.  InMarch 2007, after a total of four Drill Stem Tests were conducted on separatepotential pay zones covering 413 feet from the Lower and Upper Zorritosformations, the well tested at a rate of 40 million cubic feet per day (MMcfpd)of natural gas and 3,150 barrels per day of crude oil (bopd).  The Company plans to workover the shut-inCX11-16X well, followed by the drilling of their second new well in the Corvinafield, to test for additional gas reserves and further appraise the oil discovery.However, we caution the reader that test results are not necessarily indicativeof actual production.  No otherwell has been drilled and the Company has not recognized any revenues fromoperations, nor does it anticipate to recognize any revenues from operationsgenerating significant revenues from the Company’s properties prior to early2008**.**

**Basisof Presentation and****Principles ofConsolidation**

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries and branch offices. All intercompany balances and transactionshave been eliminated.

The Company’s accountingpolicy regarding partnership or joint venture interests in oil and gasproperties is to consolidate such interests on a pro-rata basis in accordancewith accepted practice in the oil and gas industry. However, the Company hasnot been able to receive timely information to allow it to proportionatelyconsolidate the minority non-operated working interest owned by itsconsolidated subsidiary, SMC Ecuador Inc. See Note 7 to the ConsolidatedFinancial Statements for further discussion regarding the Company’s investmentin its Ecuador property. Accordingly, the Company

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accounts for thisinvestment under the cost method. As such, the Company records its share ofcash received or paid attributable to this investment as other income orexpense.

The consolidated balance sheet atDecember 31, 2005 is derived from the December 31, 2005 audited consolidatedfinancial statements, as restated on the Company’s Annual Report on Form10-KSB/A for the year ended December 31, 2005 filed on October 16, 2006.

Certainreclassifications of prior year balances have been made to conform such amountsto corresponding 2006 classifications. These reclassifications have no impacton the Company’s net loss.

**Reporting and Functional Currency**

The U.S. Dollar is thefunctional currency for our operations in both Peru and Ecuador. Ecuador hasadopted the U.S. Dollar as its official currency. Peru, however, uses its localcurrency, Nuevo Soles, in addition to the U.S. Dollar and therefore ourfinancial results are subject to foreign currency gains and losses. We haveadopted Statement of Financial Accounting Standards (“SFAS”) No. 52, “ForeignCurrency Translation”, which requires that the translation of the applicableforeign currency into U.S. dollars be performed for balance sheet monetaryaccounts using current exchange rates in effect at the balance sheet date,non-monetary accounts using historical exchange rates in effect at the time thetransaction occurs, and for revenue and expense accounts using a weightedaverage exchange rate during the period reported. Accordingly, the gains orlosses resulting from such translation are included in other income and expensein the consolidated statements of operations. Due to the relatively low levelof activity to-date and the relatively steady exchange rate in Peru,translation differences were immaterial during the twelve months ended December31, 2005 and we had a translation gain of approximately $56,000 for the sameperiod ended December 31, 2006.  Theprimary reason for the translation difference related to the early recovery ofValue Added Tax in Peru (“IGV”), which by Peruvian law must be transacted andaccounted for in the local currency.

**Use of Estimates**

The preparation of theconsolidated financial statements in accordance with U.S. generally acceptedaccounting principles requires management to make certain estimates andassumptions. These estimates and assumptions affect the reported amounts ofassets, liabilities, revenues and expenses in the consolidated financialstatements, and the disclosure of contingent assets and liabilities. Actualresults could differ from these estimates.

**Cash and Cash Equivalents**

The Company considerscash on hand, cash in banks, money market mutual funds and highly liquid debtinstruments purchased with an original maturity of three months or less to becash equivalents. Certain of the Company’s cash balances are maintained inforeign banks which are not covered by deposit insurance. The cash balance inthe Company’s U.S. bank accounts may exceed federally insured limits.

**Restricted Cash**

As discussed in Note 8 tothe Consolidated Financial Statements, the Company has secured variousperformance bonds, collateralized primarily by certificates of deposit, toguarantee its obligations and commitments in connection with its exploratoryproperties in Peru. All of the performance bonds have been issued by Peruvianbanks and their terms are dictated by the corresponding License Contract orAgreement.

**Property, Equipment and Construction in Progress**

The Company follows the “successfulefforts” method of accounting of its costs of acquisition, exploration anddevelopment of oil and gas properties. Under this method, oil and gas leaseacquisition costs and intangible drilling costs associated with explorationefforts that result in the discovery of proved reserves and costs associatedwith development drilling, whether or not successful, are capitalized whenincurred. Certain costs of exploratory wells are capitalized pendingdeterminations that proved reserves have been found. If the determination isdependent upon the results of planned additional wells and required capitalexpenditures to produce the reserves found, the drilling costs will becapitalized as long as sufficient reserves have been found to justifycompletion of the exploratory well and additional wells are underway or firmlyplanned to complete the evaluation of the well. All costs related tounsuccessful exploratory wells are expensed when such

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wells aredetermined to be non-productive or at the one year anniversary of completion ofthe well if proved reserves have not been attributed and capital expendituresas described in the preceding sentence are not required.

The Company assesses itscapitalized exploratory wells pending evaluation each quarter to determinewhether costs should remain capitalized or should be charged to earnings. Otherexploration costs, including geological, geophysical and engineering costs, areexpensed as incurred. The Company recognizes gains or losses on the sale ofproperties, should they occur, on a field-by-field basis.

Projects underconstruction are not depreciated or amortized until placed in service. Forassets we construct, we capitalize direct costs, such as labor and materials,and indirect costs, such as overhead and interest. As of December 31,2006, property and equipment consists of office equipment, vehicles andleasehold improvements made to the Company’s offices. All values are stated atcost and are depreciated on a straight-line basis over the estimated usefullife of the assets or the term of the lease. Maintenance and repairs areexpensed as incurred. Replacements, upgrades or expenditures which improve andextend the life of the assets are capitalized. When assets are sold, retired orotherwise disposed, the applicable costs and accumulated depreciation andamortization are removed from the appropriate accounts and the resulting gainor loss is recorded.

**Impairment of Long-Lived Assets**

The Company periodicallyevaluates the recoverability of the carrying value of its long-lived assets,goodwill and identifiable intangibles by monitoring and evaluating changes incircumstances that may indicate that the carrying amount of the asset may notbe recoverable. Examples of events or changes in circumstances that indicatethat the recoverability of the carrying amount of an asset should be assessedinclude but are not limited to the following: a significant decrease in themarket value of an asset, a significant change in the extent or manner in whichan asset is used or a significant physical change in an asset, a significantadverse change in legal factors or in the business climate that could affectthe value of an asset or an adverse action or assessment by a regulator, anaccumulation of costs significantly in excess of the amount originally expectedto acquire or construct an asset, and/or a current period operating or cashflow loss combined with a history of operating or cash flow losses or aprojection or forecast that demonstrates continuing losses associated with anasset used for the purpose of producing revenue.

The Company considershistorical performance and anticipated future results in its evaluation ofpotential impairment. Accordingly, when indicators of impairment are present,the Company evaluates the carrying value of these assets in relation to theoperating performance of the business and future discounted and non-discountedcash flows expected to result from the use of these assets. Impairment lossesare recognized when the expected future cash flows from an asset are less thanits carrying value.

**Stock Based Compensation**

On January 1, 2006, theCompany adopted SFAS No. 123 — Revised 2004, *Share-BasedPayment*, which establishes accounting for stock-based paymenttransactions for employee services and goods and services received fromnon-employees. SFAS 123(R) is a revision of SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”), and supersedes APB No. 25,*Accounting for Stock Issued to Employees*.Under the provisions of SFAS 123(R), stock-based compensation cost is measuredat the date of grant, based on the calculated fair value of the award, and isrecognized as expense over the employee’s or non-employee’s service period,which is generally the vesting period of the equity grant.

Prior to January 1, 2006,the Company accounted for stock-based compensation in accordance with SFAS 123. As allowed under SFAS 123, the Companyaccounted for its stock-based compensation to employees using the intrinsicvalue method of accounting which bases compensation expense on the differencebetween the quoted market price of the award at the measurement date less theamount, if any, the employee is required to pay for the stock.  As of December 31, 2005, stock-based awardsto employees consisted of only restricted shares valued using the market priceof the Company’s traded common stock on the date of grant. The fair value methodused to value restricted shares would have yielded the same fair value and compensationexpense as the intrinsic value method used; thus, no pro forma results ofoperations are required to be presented.

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**Income Taxes**

The Company accounts forincome taxes using the liability method. Under this method, deferred tax assetsand liabilities are determined based on differences between the financial reportingand tax basis of assets and liabilities, and are measured using the enacted taxrates and laws that will be in effect when the differences are expected toreverse. Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized.

**Environmental**

The Company is subject toenvironmental laws and regulations of various U.S. and internationaljurisdictions. These laws and regulations, which are subject to change,regulate the discharge of materials into the environment and may require theCompany to remove or mitigate the environmental effects of the disposal orrelease of petroleum or chemical substances at various sites.

Environmental costs thatrelate to current operations are expensed or capitalized as appropriate. Costsare expensed when they relate to an existing condition caused by pastoperations and will not contribute to current or future revenue generation.Liabilities related to environmental assessments and/or remedial efforts areaccrued when property or services are provided and when such costs can bereasonably estimated.

**Loss per Common Share**

In accordance withprovisions of SFAS No. 128, Earnings per Share, basic earnings per shareis computed on the basis of the weighted-average number of common sharesoutstanding during the periods. Diluted earnings per share is computed basedupon the weighted-average number of common shares outstanding plus the assumedissuance of common shares for all potentially dilutive securities. Dilutedearnings per share equals basic earnings per share for the periods presentedbecause the effects of potentially dilutive securities are antidilutive.

**Recent Accounting Pronouncements**

***ContinuedCapitalization of Exploratory Costs***

FASBStaff Position (FSP) FAS 19-1 amends SFAS statement No. 19 to provide revisedguidance concerning the criteria for continued capitalization of exploratorycosts when wells have found reserves that cannot yet be classified asproved.  FAS 19-1 provides circumstancesthat would permit the continued capitalization of exploratory well costs beyondone year, other than when additional exploration wells are necessary to justifymajor capital expenditures and those wells are under way or firmly planned forthe near future. Generally, the statement allows exploratory well costs tocontinue to be capitalized when the well has found a sufficient quantity ofreserves to justify its completion as a producing well and the enterprise ismaking sufficient progress assessing the reserves and the economic andoperating viability of the project.

****Accounting for Uncertainty inIncome Taxes.****

In June 2006, the FASBissued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109” (“FIN 48”). Thisinterpretation provides guidance for recognizing and measuring uncertain taxpositions, as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48prescribes a threshold condition that a tax position must meet for any of thebenefit of the uncertain tax position to be recognized in the financialstatements. Guidance is also provided regarding derecognition, classificationand disclosure of these uncertain tax positions. FIN 48 is effective for fiscalyears beginning after December 15, 2006. The adoption of thisInterpretation is not expected to have a material impact on the Company’sconsolidated financial position, results of operations, or cash flows.

****Guidance for QuantifyingFinancial Statement Misstatement.****

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”), which establishes an approachrequiring the quantification of financial statement errors based on the effectof the error on each of the company’s financial statements and the relatedfinancial statement disclosures.  This model is commonly referred to as a “dualapproach” because it requires quantification of errors under both the “ironcurtain” and “roll-over” methods.  The roll-over method focuses primarilyon the impact of a misstatement on the income statement, including thereversing effect of prior year misstatements; however, its use can lead to theaccumulation of misstatements in the balance

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sheet. The iron curtainmethod focuses primarily on the effect of correcting the period end balancesheet with less emphasis on the reversing effects of prior year errors on theincome statement. The Company currently uses the iron curtain method forquantifying financial statement misstatements. The Company will initially applythe provisions of SAB 108 in connection with the preparation of the Company’sannual financial statements for the year ending December 31, 2006. The use ofthe dual approach is not expected to have a material impact on the Company’sconsolidated financial position, results of operations, or cash flows.

***FASB Staff Position (FSP) No. EITF 00-19-2, “Accounting forRegistration Payment Arrangements and Financial Instruments Subject to SuchArrangements”***

In December 2006,the FASB issued FASB Staff Position FSP EITF 00-19-2, *Accounting forRegistration Payment Arrangements*. This FASB Staff Position, orFSP, specifies that the contingent obligation to make future payments orotherwise transfer consideration under a registration payment arrangement,whether issued as a separate agreement or included as a provision of afinancial instrument or other agreement, should be separately recognized andmeasured in accordance with FASB Statement No. 5, *Accounting for Contingencies*. This FSPalso requires certain disclosures regarding registration payment arrangementsand liabilities recorded for such purposes. This FSP is immediately effectivefor registration payment arrangements entered into or modified afterDecember 21, 2006. The guidance of this FSP is effective for fiscal yearsbeginning after December 15, 2006, and interim periods within those fiscalyears for registration payment arrangements entered into prior toDecember 21, 2006. This FSP requires adoption by reporting a change inaccounting principle through a cumulative-effect adjustment to the openingbalance of our partners’ capital accounts as of the first interim period of theyear in which this FSP is initially applied. The adoption of this FSP is notexpected to materially affect the Company’s financial position, results ofoperations or cash flows.

****Fair Value Measurements******.**

In September 2006, theFASB issued SFAS No. 157**,**”Fair Value Measurements”, whichaddresses how companies should measure fair value when companies are requiredto use a fair value measure for recognition or disclosure purposes undergenerally accepted accounting principles (“GAAP”). As a result of SFAS 157,there is now a common definition of fair value to be used throughout GAAP. SFAS157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those years. Although thedisclosure requirements may be expanded where certain assets or liabilities arefair valued such as those related to stock compensation expense and hedgingactivities, the Company does not expect the adoption of SFAS 157 to have amaterial impact on the Company’s consolidated financial position, results ofoperations, or cash flows.

**Note 2 —Navidec Merger**

On July 8, 2004, Navidecand BPZ-Texas entered into a Merger Agreement (the “Merger Agreement”) whichwas consummated on September 10, 2004. The Merger was structured from a legalstandpoint as the acquisition of BPZ-Texas by Navidec. However, the stockholdergroup of BPZ-Texas obtained majority ownership and management control of thecombined company so, in substance, the transaction was a recapitalization ofBPZ-Texas rather than a business combination. This accounting treatment isidentical to that resulting from a reverse merger of BPZ-Texas with Navidecunder SFAS 141, except that no goodwill or other intangible asset has beenrecorded. All financial statements presented herein represent the historicalfinancial statements of the accounting acquirer, BPZ-Texas. BPZ-Texas enteredinto the Merger primarily to obtain access to the public markets to finance itsplanned activities in South America.

Immediately prior to therecapitalization of BPZ-Texas, Navidec transferred all its assets andliabilities to a subsidiary, Navidec Financial Services (“NFS”), which was notacquired by BPZ-Texas and was part of a planned spin-off to Navidecshareholders of record at the time of the Merger. The recapitalization ofBPZ-Texas was accomplished by Navidec, which had 3,198,368 shares outstanding,issuing 9,000,000 shares of its common stock in a one-for-one exchange for allof the outstanding common shares of BPZ-Texas. As additional incentive for theshareholders of Navidec to enter into the Merger, NFS received an additional662,149 shares of common stock of Navidec. In its recapitalization, the Companyassumed options to purchase 1,332,076 shares of Navidec common stock, which hadpreviously been issued to employees, directors and consultants of Navidec andwere outstanding on the date of the Merger. Under the terms of the MergerAgreement, the proceeds received from the exercise of these stock options arepayable to NFS. The Company also assumed outstanding Class

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A ($2.00 pershare) and Class B ($4.00 per share) warrants to purchase 1,129,000 shares(564,500 shares per class) of Navidec common stock.

The Company also issued options to purchase 1,500,000shares of common stock at an exercise price of $2.00 per share to NFS. Suchoptions were due to expire on July 31, 2006. However, on May 19,2006, the Company entered into a Settlement Agreement and Mutual Release (the “SettlementAgreement”) by and among the Company, NFS and John McKowen, the Chief ExecutiveOfficer of NFS and former Chief Executive Officer and Director of the Company(collectively, the “Parties”). Among other things, the agreement extended theexpiration date for NFS’s options. The Company agreed to extend the expirationdate in the remaining stock options from July 31, 2006, to one yearfollowing the effective date of the registration with the SEC of the shares NFSreceived in the Merger with Navidec. The registration of these shares becameeffective on December 15, 2006 and, as a result, the expiration date for theremaining options was extended to December 15, 2007.  Subsequent to the Merger, NFS conveyed540,000 of such options to third parties. During 2005, 275,000 options had beenexercised, resulting in net proceeds to the Company of $550,000. As of December31, 2006 1,225,000 of such options remained outstanding, of which 810,000 wereheld by NFS.

Additionally, the Company granted options to purchase1,000,000 shares of common stock at an exercise price of $1.30 per share to theformer CEO of Navidec in connection with his service as a director andfinancial consultant to the Company. On the date of the Merger, 500,000 of suchstock options became fully vested. Vesting of the remaining 500,000 stockoptions is contingent upon the receipt of additional investment proceedstotaling $6 million, including proceeds from the exercise of outstandingwarrants. Under the Settlement Agreement, among other things, the Companyagreed to extend the date for vesting in the remaining 500,000 stock optionsfrom September 10, 2006, to one year following the effective date of theregistration with the SEC of the shares NFS received in the Merger withNavidec. The registration of these shares became effective on December 15, 2006and as a result the expiration of the date for vesting was extended to December15, 2007. The Company further agreed that as of the date hereof,Mr. McKowen has raised $5,935,000 towards the required $6,000,000,mentioned above, as a condition for fully vesting of the additional 500,000options. These stock options, when vested, will expire 10 years from thedate of grant. They were recorded at a fair value of $1.20 per share using theBlack-Scholes model. The unvested options are being amortized over theoriginal 24-month vesting period at the rate of $25,000 per month unless theCompany concludes such options are no longer probable of vesting.

All shares underlyingsuch options and warrants are issuable as common stock of the Company. See Note10 — Stockholders’ Equity of the Notes to Consolidated Financial Statements fordetails about the stock options and warrants assumed or granted in connectionwith the Merger.

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After the transfer of theassets and liabilities of Navidec to NFS, Navidec had no assets, liabilities orstockholders’ equity. The 662,149 shares of common stock the Company issued toNFS in connection with the acquisition were valued at the average closing priceof Navidec’s common stock quoted on the OTCBB market during a five-day tradingperiod beginning two trading days prior to the announcement of the MergerAgreement on July 8, 2004. Navidec was publicly traded and had a marketfor its equity, while BPZ-Texas was privately owned. The stock options assumedto purchase 1,332,076 shares of Navidec common stock and the warrants assumedand issued to purchase 1,129,000 shares and 2,500,000 shares of Navidec commonstock, respectively, were valued using the Black-Scholes model. Inputs into theBlack-Scholes valuation model for the valuation of the warrants and stockoptions included the exercise price and remaining term for the stock optionsand warrants, and a volatility factor based on historical stock prices ofNavidec.

The following table summarizes the foregoingcompensation and Merger-related transactions as they were recorded in the yearended December 31, 2004:
| **Description**                                                          | ** ** | **Shares** | ** ** | **Fair   Value(1)** | ** ** | **Expense** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|-------------|------------|-------------------|------------|----------------------------------|------------|
| BPZ common stock  issued to NFS                                          |       | 662,149    |       | $                        | 1.48       |        | $          | 979,981           | (3)        | $                                | 979,981    |   | $ | — |   |
| BPZ options  issued to NFS (for investor relation services)              |       | 1,500,000  |       | 1.76                     |       | 2,644,146   | (4)        | —            |       | 2,644,146                        |       |
| BPZ options  issued to former CEO (for financial consulting services)(2) |       | 1,000,000  |       | 1.20                     |       | 675,000     | (4)        | —            |       | 675,000                          |       |
| Assumption of  Navidec stock options                                     |       | 1,332,076  |       | 3.21                     |       | 4,275,964   | (3)        | —            |       | 4,275,964                        |       |
| Assumption of  Navidec Class A warrants                             |       | 564,500    |       | 0.30                     |       | 169,350     | (3)        | —            |       | 169,350                          |       |
| Assumption of  Navidec Class B warrants                             |       | 564,500    |       | 0.08                     |       | 45,160      | (3)        | —            |       | 45,160                           |       |
| Common stock  issued to Navidec shareholders                             |       | 3,198,368  |       | N/A                      |       | —      |       | —            |       | —                           |       |
| Total purchase  consideration                                            |       |       |       |                     |       | $           | 8,789,601  |              | $          | 979,981                          |       | $ | 7,809,620 |   |
|                                                                          |            |            |            |                          |            |             |            |                   |            |                                  |            |  |  |  |  |

 

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(1)             Fairvalues per share were rounded to two decimal places for presentation purposes.

(2)             Amounts recordedrepresent the immediate vesting/expense of 500,000 options ($600,000) and theamortization of the second group of 500,000 options ($75,000) for the threemonths ended December 31, 2004.

(3)             Itemsrepresent total merger costs of $5,470,455 on the Company’s Statement ofOperations for the year ended December 31, 2004.

(4)             Itemsincluded in stock-based compensation on the Company’s Statement of Operationsfor the year ended December 31, 2004.

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*Transfer of NFS*

The Merger Agreement alsoprovided that all of the pre-merger business operations, assets and liabilitiesof Navidec would be transferred to its then wholly-owned subsidiary, NFS,followed by the transfer of ownership of NFS to the Navidec pre-mergershareholders of record as of September 9, 2004, the day prior to theconsummation of the Merger. Accordingly, the pre-merger shareholders ofBPZ-Texas are not entitled to receive shares of NFS. All legal requirements forthe transfer of ownership of NFS have been completed.  The Company believes,based on information provided by NFS and its advisors, that NFS has undertakenthe necessary actions to comply with applicable registration requirements. OnJuly 13, 2006, NFS filed a Registration Statement on Form 10SB withthe SEC and an amendment thereto on October 27, 2006. It is the Company’sunderstanding that this Registration Statement has become effective underapplicable SEC rules.

In June 2006, a Findingsof Fact and Conclusions of Law issued by the District Court, Arapahoe County,Colorado stated that the Company was not a shareholder of NFS at any time afterSeptember 9, 2004. Based on these findings, the Company concluded that itshould not account for the post-Merger operations of NFS in its consolidatedfinancial statements.

**Note3 — Value Added Tax Receivable**

Value-addedtax (referred to as “IGV” in Peru) is generally imposed on goods and servicesat a rate of 19%. Peru currently has an early recovery system for explorationcompanies. Under this regime, IGV paid on the acquisition of goods and servicesused directly in hydrocarbon exploration activities can be recovered withouthaving to wait until a commercial discovery takes place or production begins.The Company has applied for early recovery of IGV paid since it does notanticipate first sales of power to the Peruvian power market until early2008.  During the year ended December 31,2006 the Company received a refund of approximately $2.3 million under the IGVearly recovery program.  The Company’svalue added tax receivable balance as of December 31, 2006 was $3,159,698.  The Company’s value added tax receivablebalance at December 31, 2005 was $362,555.

**Note4 — Inventories**

Inventories consist primarily of tubular goods,accessories and spare parts for production equipment, stated at the lower of averagecost or market.  The balance in inventoryat December 31, 2006 was $1,945,781.

**Note 5 — Prepaid andOther Current Assets**

Below is a summary ofother current assets as of December 31, 2006 and 2005:
| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Prepaid expenses  and other |       | $        | 763,480    |     | $          | 17,150 |   |
| Deposits                    |       | 68,367   |       | 181,347  |       |
| Prepaid  insurance          |       | 517,974  |       | 253,753  |       |
| Insurance  receivable       |       | 612,033  |       | —   |       |
| Interest  receivable        |       | 10,646   |       | 54,864   |       |
|                        |       | $        | 1,972,500  |     | $          | 507,114 |   |

 

Prepaidexpenses are primarily related to crane, barge and barge equipment rentalswhich will be credited against the monthly charter or daily rates onceoperations commence. Deposits are primarily to secure delivery of the drillingrig and rent deposits in connection with the Company’s offices in Houston andPeru.  Prepaid insurance consists ofpremiums related to the Company’s operations as well as general liability anddirectors and officers insurance policies.

Insurancereceivable is related to the barge incident which occurred in early August2006.  The Company incurred anoperational delay of approximately three weeks resulting from a navigationincident which caused the BPZ-01 barge to be grounded on a sand bank in TalaraBay in northwest Peru during the second mobilization trip to the Corvinaplatform. As of December 31, 2006, a claim of approximately $712,000 forrepairs is expected to be filed with the insurance carrier.   A deductible of $100,000 will be applied tothis insurance claim when reimbursed. See Note 13 “Commitments and Contingencies”, included herein, forfurther discussion.

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**Note 6 — Property,Equipment and Construction in Progress**

Below is a summary ofproperty, equipment and construction in progress as of December 31, 2006 and2005:
| ** **                                              | ** ** | **2006**   | ** ** | **2005**  | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------|------------|
|                                                    |       |       |       |      |       |
| Construction in  progress:                              |       |       |       |      |       |
| Power plant and  related equipment                      |       | $          | 3,581,069  |      | $          | 2,252,413 |   |
| Platforms and  wells                                    |       | 25,759,009 |       | 1,190,707 |       |
| Pipelines and  processing facilities                    |       | 2,535,593  |       | 512,357   |       |
| Barge and related  equipment                            |       | 6,461,877  |       | —    |       |
| Office equipment,  leasehold improvements, and vehicles |       | 828,727    |       | 439,358   |       |
| Accumulated  depreciation and amortization              |       | (439,365   | )          | (29,795   | )          |
| Net property, equipment  and construction in process    |       | $          | 38,726,910 |      | $          | 4,365,040 |   |

 

Asof December 31, 2006, the Company incurred costs associated with itsdevelopment initiatives for the exploration and production of natural gasreserves and the complementary development of proprietary gas-fired powergeneration for sale in Peru.  The costsrelate to the initial engineering design work for the power plant, gas processingfacility and pipelines, modernization and refurbishment costs of the platformtender assist drilling rig, and acquisition and refurbishment of one of theCompany’s offshore platforms located in Block Z-1, as well as the purchase of adeck barge and related equipment.  TheCompany also incurred costs for office equipment and leasehold improvements forits offices in Houston, Peru and Ecuador as well as for vehicles used in itsPeruvian operations.  In accordance with “successfulefforts” method of accounting, the Company capitalized $195,755 of depreciationexpense related to support equipment to construction in progress during theyear ended December 31, 2006.

**Note 7 — Investment inEcuador Property and Note Payable**

The Company has a 10% netinvestment interest in an oil and gas property in Ecuador (the “Santa ElenaProperty”) totaling $1,757,604 and $1,945,188 as of December 31, 2006 and2005, respectively. The Company accounts for this investment under the costmethod and records its share of cash received or paid as other income orexpense. Since the Company’s investment represents ownership of an oil and gasproperty, which is a depleting asset, the Company is amortizing the cost of theinvestment on a straight-line basis over the remaining term of the licenseagreement which expires in May 2016. Accordingly, the Company recordedamortization expense of $187,584 and $136,552 for the years endedDecember 31, 2006 and 2005, respectively.

In connection with theacquisition of the Santa Elena property, the Company had a note payable balanceof $208,986 as of December 31, 2004. The note agreement required monthlyinstallment payments of $31,366, including imputed interest at 15%, throughJuly 1, 2005 and has been paid in full as of December 31, 2005.

As part of the noteagreement, the holder of the note payable received beneficial ownership of a 4%net working interest in the Santa Elena Property. In June 2005, theCompany issued 250,000 shares of the Company’s common stock, valued at$1,112,500, to acquire the holder’s 4% net working interest in the property.

**Note 8 — Restricted Cash**

Inconnection with its properties in Peru, the Company has obtained twoperformance bonds totaling $1,350,000 to guarantee certain obligations andcommitments.  As of December 31, 2006,BPZ had restricted cash deposits of $1,150,000, which collateralizes theperformance bonds.  In addition to thecash collateral posted by BPZ, an individual shareholder of the Companyprovided a guarantee in the amount of $200,000 to the financial institutionthat issued one of the bonds to secure the Company’s performance.  The performance bonds were issued by Peruvianbanks and their terms are governed by the corresponding license contract oragreement.

As of December 31,2005, the Company had posted performance bonds totaling $1,690,000 to securethe performance of its obligations and commitments related to its properties inPeru. Of such amount, $1,455,953 was collateralized by a 

50

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restricted cashdeposit. The remaining $240,000 performance bonds have been guaranteed by twoindividual shareholders of the Company.

All of the performancebonds were issued by Peruvian banks and their terms are governed by thecorresponding license contract or technical evaluation agreement.

**Note 9 — Long-Term Debt**

On December 31,2006, the Company had long-term debt of $55,815 compared to $70,908 inlong-term debt as of December 31, 2005. Long-term debt for both 2005 and 2006 consisted of two secured loans forthe purchase of office furniture. Both loans have a term of 60 months, bearinginterest at 5.94% and 9.44%, with principal and interest payments due on amonthly basis.

**Note 10 — Stockholders’Equity**

The Company has25,000,000 shares of preferred stock, no par value and 250,000,000 shares ofcommon stock, no par value, authorized for issuance.

**Private Placements of Common Stock**

On July 19, 2005,the Company completed a private placement of 11,466,000 shares of common stock,no par value, pursuant to a Stock Purchase Agreement.  The common stock was priced at $3.00 pershare, resulting in net proceeds to the Company of $31,917,213.  In connection with the private placement, theCompany was obligated to prepare and file with the SEC a Registration Statementon Form S-1 and to use its best efforts to cause the RegistrationStatement to be declared effective by the SEC no later than ninety days fromJuly 19, 2005. The Registration Statement was not declared effective bythe required date and the Company became liable to the investors for liquidateddamages in an amount equal to 1.0% of the purchase price of the shares,approximately $343,980, for each thirty day period until the RegistrationStatement is declared effective by the SEC. Certain of the private placementinvestors, totaling 76% of the aggregate investment, have agreed to accept commonstock in lieu of cash.  Accordingly,774,904 and 92,705 shares of common stock were issued during the year endedDecember 31, 2006 and 2005, respectively to those certain investors forliquidated damages.

On March 10, 2006 theCompany completed a private placement of 1,670,000 shares of common stock, nopar value, to four institutional and accredited investors pursuant to a StockPurchase Agreement. The common stock was priced at $3.00 per share resulting inproceeds to the Company of $5,010,000. In connection with the private placement, the Company was obligated toprepare and file with the SEC a Registration Statement on Form S-1 withinsixty days, and to use its best efforts to cause the Registration Statement tobe declared effective by the SEC no later than ninety days, from March 8,2006.  The Registration Statement was notfiled or declared effective by the required dates and the Company became liableto the investors for liquidated damages in an amount equal to 1.0% of thepurchase price of the shares, approximately $50,100, for each thirty day perioduntil the Registration Statement was declared effective by the SEC. Theseliquidated damages are payable, at the sole discretion of the Company, by cashor by the issuance of Company common stock. Accordingly, 90,334 shares of common stock were issued during the twelvemonths ended December 31, 2006, to those investors for liquidated damages.

On June 30, 2006, the Company completed a private placement of common stock for proceeds of $12,325,500 which were received in July 2006.  The Company sold 4,482,000 shares to eight institutional and accredited investors at a price of $2.75 per share.  There were no warrants or dilutive securities issued to the investors in connection with the offering.  The offering was placed directly by the Company and there were no placement fees.  The Company did, however, issue warrants to purchase 150,000 shares of the Company’s common stock to Morgan Keegan & Company, Inc. in consideration for their financial advisory services relating to the private placement.  In connection with the private placement, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than 150 days after June 30, 2006.

On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements.  As a result, the Company is no longer subject to the liquidated damages described above.

On December 20, 2006, the Company completed a privateplacement of 6,500,000 shares of common stock, no par value, to an accreditedinvestor pursuant to a Subscription Agreement dated December 18, 2006. The common stock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million.  No warrants or dilutive securities were 

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issued in connection with the offering.  The offering was placed directly by theCompany and there were no related placement fees.

**Stock Subscription Receivable**

In 2004, the Companyissued 236,528 shares to an individual investor for $119,175 of cash proceedsand a subscription receivable of $230,825. The investor has pledged assets to aPeruvian bank which secure one of the Company’s performance bonds. Thesubscription receivable is due at such time as the Company obtains its ownperformance bond to replace the one posted by the investor or until theperformance bond is no longer required.

**Potentially Dilutive Securities**

In addition to the sharesissued and outstanding, the Company has the following potentially dilutivesecurities. None of these potentially dilutive shares have been included in thecalculation of earnings per share as the effect would be anti-dilutive.
| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock options  outstanding                                          |       | 4,306,152             |       | 2,878,652 |   | 3,555,041 |   |
| Warrants  outstanding                                               |       | 250,000               |       | 100,000 |   | 1,129,000 |   |
| Shares issuable  to consultant for services                         |       | —                |       | 10,000 |   | — |   |
| Contingent  incentive earn-out shares                               |       | 450,000               |       | 485,000 |   | — |   |
| Earn-out shares                                                     |       | —                |       | — |   | 9,000,000 |   |
| Contingent  Merger earn-out shares                                  |       | 9,000,000             |       | 9,000,000 |   | 9,000,000 |   |
| Total potentially dilutive securities issued                        |       | 14,006,152            |       | 12,473,652 |   | 22,684,041 |   |
| Shares available  pursuant to Long-Term Incentive Compensation Plan |       | 1,156,000             |       | 2,880,000 |   | — |   |

 

On January 1, 2006, the Company adopted SFAS No. 123 —Revised 2004,*Share—Based Payment*(“SFAS 123(R)”), which establishes accounting for stock-based paymenttransactions for employee services and goods and services received fromnon-employees. SFAS 123(R) is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*,and supersedes APB No. 25, *Accountingfor Stock Issued to Employees*. Under the provisions of SFAS 123(R),stock-based compensation cost is measured at the date of grant, based on thecalculated fair value of the award, and is recognized as expense over theemployee’s or non-employee’s service period, which is generally the vestingperiod of the equity grant.

Prior to January 1, 2006, the Company accounted for stock-basedcompensation in accordance with SFAS 123. As allowed under SFAS 123, the Company accounted for its stock-basedcompensation to employees using the intrinsic value method of accounting whichbases compensation expense on the difference between the quoted market price ofthe award at the measurement date less the amount, if any, the employee isrequired to pay for the stock.  As ofDecember 31, 2005, stock-based awards to employees consisted of only restrictedshares valued using the market price of the Company’s traded common stock onthe date of grant. The fair value method used to value restricted shares wouldhave yielded the same fair value and compensation expense as the intrinsicvalue method used; thus, no pro forma results of operations are required to bepresented.

In addition, stock-basedawards to non-employees as of December 31, 2005 consisted of options andrestricted shares issued in exchange for various legal and investment bankingservices.  Equity instruments issued tonon-employees for services were accounted for at fair value at the date ofgrant.  The fair value for awards issuedto non-employees was measured using a Black-Scholes valuation model.  Expenses determined for employees andnon-employees were recognized in the Company’s financial statements over theapplicable service period.

TheCompany adopted SFAS 123(R) using the modified prospective application methodand, accordingly, no prior periods have been restated as a result of theadoption of this pronouncement. Under this method, compensation cost recognizedduring the year ended December 31, 2006 included: (a) compensation costfor all stock-based payments granted prior to, but not yet vested as ofJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the original 

52

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provisions of SFAS123; and (b) compensation cost for all stock-based payments granted on or afterJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with SFAS 123(R). SFAS 123(R) requires forfeitures to be estimatedat the time of grant and revised, if necessary, in subsequent periods toreflect actual forfeitures.   The Company’sforfeiture estimates were not changed as a result of adopting SFAS 123(R).

The following tablesummarizes stock-based compensation costs recognized under SFAS 123(R) for theyear ended December 31, 2006 and under SFAS 123 for year ended December 31,2005 and 2004:
| ** **                                    | ** ** | **Year Ended**   | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **December 31,** | ** ** |
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                  |       |   |   |   |   |
| Employee  stock—based compensation costs |       | $                     | 2,657,149  |   | $ | 978,208 |   | $ | 3,739,935 |   |
| Non-employee  stock-based compensation        |       | 568,359               |       | 404,270 |   | 3,319,146 |   |
|                                          |       | $                     | 3,225,508  |   | $ | 1,382,478 |   | $ | 7,059,081 |   |

 

**RestrictedStock Awards and Performance Shares**

TheCompany determines the fair value of restricted stock awards and performanceshares based on the market price of the Company’s common stock on the date ofgrant. Compensation cost for such awards is recognized on a straight-line basisover the vesting or service period, net of forfeitures; however, compensationcost related to performance shares will not be recorded or will be reversed ifthe Company does not believe it is probable that such performance criteria willbe met or if the service provider (employee or otherwise) fails to meet suchcriteria.

Asummary of the Company’s restricted stock award activity and relatedinformation is presented below:
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Non-vested  balance at December 31, 2004      |       | —             |       | $                   | —     |   |
| Granted                                       |       | 1,130,000          |       | $                   | 4.40       |   |
| Vested                                        |       | —             |       | $                   | —     |   |
| Forfeited                                     |       | —             |       | $                   | —     |   |
| Non-vested  balance at December 31, 2005 |       | 1,130,000          |       | $                   | 4.40       |   |
| Granted                                       |       | 301,500            |       | $                   | 3.44       |   |
| Vested                                        |       | (375,000           | )          | $                   | 4.40       |   |
| Forfeited                                     |       | (310,000           | )          | $                   | 4.40       |   |
| Non-vested balance at  December 31, 2006      |       | 746,500            |       | $                   | 4.01       |   |

 

Asof December 31, 2006, there was $2.4 million of total unrecognized compensationcost related to nonvested restricted stock awards, which is expected to be recognizedover a weighted-average period of 1.3 years.

Noperformance shares were outstanding as of December 31, 2006.

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**Stock Options**

Incentiveand non-qualified stock options issued to directors, officers, employees andconsultants are issued at an exercise price equal to the fair market value ofthe stock at the date of grant.  Themajority of the Company’s stock options vest pro-rata over two years from thegrant date and generally expire ten years from the date of grant.  Compensation cost related to stock options isrecognized on a straight-line basis over the vesting or service period and isnet of forfeitures.

Thefair value of each stock option granted is estimated on the date of grant usinga Black-Scholes option pricing model. The following table presents theweighted-average assumptions used in the option pricing model for optionsgranted during year ended December 31, 2006. During the year ended December 31,2005, no options were granted by the Company. The expected life of the optionsrepresents the period of time the options are expected to be outstanding. Forthe year ended December 31, 2006, the expected term of options granted wasderived based on a weighting between (a) the Company’s historical exercise andforfeiture activity and (b) the average midpoint between vesting and thecontractual term. In the future, as information regarding post-vestingtermination becomes more accessible, the Company may change the method ofderiving the expected term. This change could impact the fair value of optionsgranted in the future. The Company expects to refine the method of deriving theexpected term no later than January 1, 2008. For the year ended December 31, 2006, our expected volatility is basedon the historical volatility of our stock for a period approximating theexpected life.  The risk-free interestrate is based on the observed U.S. Treasury yield curve in effect at the timethe options were granted. The dividend yield is based on our history ofdividend payouts.
| ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 6        |       | 10       |       | 10       |       |
| Risk-free  interest rate                             |       | 4.9      | %          | 2.5      | %          | 2.5      | %          |
| Volatility                                           |       | 72.27    | %          | 76.12    | %          | 76.12    | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          | 0        | %          |
| Weighted-average fair  value per share at grant date |       | $        | 2.37       |     | $          | 1.30     |       | $ | 1.30 |   |
|                                                      |            |          |            |          |            |          |            |  |  |  |

 

A summary of ourstock option activity and related information is presented below:
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**      | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                                    | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                                    | ** ** | **Options**        | ** ** | **Per Option**     | ** ** |
| Non-vested  balance at December 31, 2003      |       | —             |       | $                       | —     |   |
| Granted                                       |       | 2,500,000          |       | $                       | 1.54       |   |
| Forfeited                                     |       | (2,000,000         | )          | $                       | 1.62       |   |
| Non-vested  balance at December 31, 2004      |       | 500,000            |       | $                       | 1.30       |   |
| Granted                                       |       | —             |       | $                       | —     |   |
| Vested                                        |       | —             |       | $                       | —     |   |
| Forfeited                                     |       | —             |       | $                       | —     |   |
| Non-vested  balance at December 31, 2005 |       | 500,000            |       | $                       | 1.30       |   |
| Granted                                       |       | 1,752,500          |       | $                       | 3.50       |   |
| Vested                                        |       | (100,000           | )          | $                       | 3.20       |   |
| Forfeited                                     |       | (50,000            | )          | $                       | 4.00       |   |
| Non-vested balance at  December 31, 2006      |       | 2,102,500          |       | $                       | 3.07       |   |

 

Nooptions were exercised during the year ended December 31, 2006. As of December31, 2006, there was $6.2 million of total unrecognized compensation costrelated to nonvested stock options which is expected to be recognized over aweighted-average period of 1.5 years.

Pursuantto a Settlement Agreement and Mutual Release entered into on May 19, 2006between the Company, Mr. McKowen and NFS, the vesting period related to the500,000 nonvested options outstanding as of December 31, 2005, which remainedunvested and outstanding as of December 31, 2006, was extended from September10, 2006 to one year following the effective date of the registration with theSEC of the shares NFS received in the Merger with Navidec. The registration of these shares became effectiveon December 15, 2006 and, as a result, the expiration date for the remainingoptions was extended to December 16, 2007.  The extension of the vesting period did notresult in a revaluation of these options, as the number of options that theCompany expects to vest did not change as a result of the modification.

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Thefollowing table summarizes information about stock options outstanding as ofDecember 31, 2006:
| ** **                                  | ** ** | **Outstanding**    | ** ** | **Exercisable**     | ** ** |
|---------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                  | ** ** | ** **         | ** ** | **Weighted-**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Average**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Remaining**       | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Contractual**     | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Life**            | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| **Range of Exercise Prices** | ** ** | **Options(1)**     | ** ** | **(In years)** | ** ** | **Price** | ** ** | **Options** | ** ** | **Per Option** | ** ** |
| 1.30                                        |       | 1,000,000          |       | 7.7                 |       | $ | 1.30 |   | 500,000 |   | $ | 1.30 |   |
| 2.00                                        |       | 1,225,000          |       | 7.7                 |       | $ | 2.00 |   | 1,225,000 |   | $ | 2.00 |   |
| 3.20                                        |       | 580,000            |       | 9.3                 |       | $ | 3.20 |   | 100,000 |   | $ | 3.20 |   |
| 3.35                                        |       | 750,000            |       | 9.5                 |       | $ | 3.35 |   | — |   | $ | — |   |
| 4.55                                        |       | 372,500            |       | 9.8                 |       | $ | 4.22 |   | — |   | $ | — |   |
| Total                                       |       | 3,927,500          |       | 8.5                 |       | $ | 2.47 |   | 1,825,000 |   | $ | 1.87 |   |

----

(1)             378,652outstanding options have been excluded from this total as they relate tooptions assumed in the Company’s Merger with Navidec. These options have noimpact on earnings.

Theaggregate intrinsic value of stock options outstanding at December 31, 2006 was$6.5 million, of which $4.1 million relates to awards vested andexercisable and $2.4 million relates to awards expected to vest. Theintrinsic value for stock options outstanding is calculated as the amount bywhich the quoted price of our common stock as of December 29, 2006 exceedsthe exercise price of the option.

**Warrants**

As of December 31, 2006,the Company had 250,000 warrants outstanding. For their role as placement agent, in connection with the privateplacement of 11,466,000 shares of common stock in July 2005, MorganKeegan & Company, Inc. received fully vested warrants to purchase100,000 shares of the Company’s common stock at an exercise price of $3.00 pershare. Such warrants expire on July 19, 2010. These warrants were valuedat $325,000 using the Black-Scholes model, which amount was treated asadditional non-cash stock offering costs.

Additionally, for theirfinancial advisory services, in connection with the private placement of4,482,000 shares of common stock in June 2006, Morgan Keegan &Company, Inc., received fully vested warrants to purchase 150,000 sharesof the Company’s common stock at an exercise price of $3.00 per share. Suchwarrants expire on June 30, 2011. These warrants were valued at $248,645 usingthe Black-Scholes model, which amount was treated as additional non-cash stockoffering costs.

All warrants issued werevalued using the Black-Scholes model, which amount was treated as additionalnon-cash stock offering costs.  Thefollowing table presents the weighted-average assumptions used in the optionpricing model for options granted during the year ended December 31, 2006 and2005.  The same methodologies applied todetermine the assumptions used to value the options noted above were also usedin valuing the warrants issued to Morgan Keegan & Company. No warrants wereissued during the year ended December 31, 2004.
| ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 1.6      |       | 1.9      |       |
| Risk-free  interest rate                             |       | 4.9      | %          | 2.50     | %          |
| Volatility                                           |       | 64.7     | %          | 76.12    | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average fair  value per share at grant date |       | $        | 1.66       |     | $          | 3.25 |   |
|                                                      |            |          |            |          |            |  |  |

 

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**Contingent Incentive Earn-Out Shares**

During 2005, the Company’s Board of Directors awardeda total of 485,000 shares of incentive stock awards to three of the Company’sofficers. The incentive stock awards vest and the earn-out shares are issuableonce the Company is entitled to receive as its proportionate share from grossproduction from any oil and gas wells owned or operated by the Company not lessthan 2,000 barrels of oil per day or its equivalent (approximately 12 millioncubic feet of gas per day) prior to December 28, 2007, the same targetapplicable to the Merger earn-out shares (see below).  However, one of the Company’s officersresigned from the Company and its subsidiaries effective June 15, 2006, and asa result 225,000 of the unvested contingent incentive stock awards,representing $990,000 of future possible compensation expense, wereforfeited.  Subsequently, 190,000 sharesof those 225,000 shares awarded to the former officer were reassigned to hisreplacement who was originally awarded 35,000. As of December 31, 2006, total outstanding awards related to theincentive stock awards  was 450,000shares with a combined future expense of $1,980,000.  Of this amount,$819,310 and $409,655 correspond to the year ended December 31, 2006 and thesame period ended December 31, 2005, respectively.  Since the Company has not yet obtained a firmfinancing commitment for its gas-to-power project, the Company does notconsider the achievement of this target to be probable for accounting purposesand is not currently accruing the associated stock-based compensation expense.

**Merger Earn-Out Shares**

Under the terms of the Merger Agreement, the Companycommitted to issue 18,000,000 shares to the former shareholders of BPZ-Texas ona contingent earn-out basis if the Company achieves certain reserve andproduction goals. The first earn-out target relating to reserves was achievedin December 2004 and 9,000,000 of the earn-out shares were issued. Theremaining 9,000,000 earn-out shares are issuable once the Company is entitledto receive as its proportionate share from gross production from any oil andgas wells owned or operated by the Company not less than 2,000 barrels of oilper day or its equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007.

For accounting purposes, the earn-out arrangement istreated as a stock dividend because the earn-out is payable to the shareholdersof the accounting acquirer, BPZ-Texas. Accordingly, except for a retroactiveincrease in the number of common shares outstanding for all periods presented,no accounting entry is required upon the issuance of the earn-out shares.

**Long-TermIncentive Compensation Plan**

The BPZ Energy, Inc. 2005 Long-Term IncentiveCompensation Plan (the “LTIP”) permits the Board of Directors to award eligibleemployees, directors and consultants with incentive-based andnon-incentive-based compensation. The maximum number of shares of stock of theCompany that may be subject to incentives under the LTIP, including withoutlimitation incentive options, is 4,000,000 shares, and such shares shall bereserved at all times until issued under the LTIP. Of such amount, no more than1,600,000 shares in the aggregate shall be eligible for the issuance ofperformance shares, stock grants, restricted stock grants and other stock-basedincentives. The LTIP will be administered and managed within the discretion of CompensationCommittee of the Company or, in the absence of such committee, by the Board ofDirectors. Incentives under the LTIP may be granted to eligible employees, directorsor consultants in any one or a combination of incentive options, non-statutorystock options, stock appreciation rights, restricted stock grants, stock grantsand performance shares.

**Note 11 — Affiliate andRelated Party Transactions**

As of December 31,2006 and December 31, 2005, the Company had no outstanding balances withaffiliates or related parties.

 

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**Note 12 — Income Taxes**

Therewas no income tax expense or benefit for the years ended December 31, 2006,2005 and 2004 as shown in the following table:
| ** **                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|--------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
|                                             |       |      |       |      |       |       |       |
| Benefit computed at the  expected statutory rate |       | $         | (5,242,737 | )         | $          | (2,178,376 | )          | $ | (182,131 | ) |
| Less: valuation  allowance                       |       | 5,242,737 |       | 2,178,376 |       | 182,131    |       |
| Income tax expense                               |       | $         | —     |      | $          | —     |       | $ | — |   |

 

Thetax effects of the temporary differences that gives rise to the significantportion of the deferred tax assets and liabilities are presented below: 
| ** **                 | ** ** | **2006**    | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|----------------------------|------------|-------------|------------|------------|------------|-----------|------------|
|                       |       |        |       |       |       |      |       |
| Net operating loss         |       | $           | 8,885,175  |       | $          | 4,716,112 |       | $ | 182,131 |   |
| Stock-based compensation   |       | 3,966,804   |       | 2,893,130  |       | —    |       |
|                       |       |        |       |       |       |      |       |
| Total deferred tax assets  |       | 12,851,979  |       | 7,609,242  |       | 182,131   |       |
|                       |       |        |       |       |       |      |       |
| Deferred tax  liabilities: |       |        |       |       |       |      |       |
| Asset basis difference     |       | —      |       | —     |       | —    |       |
|                       |       |        |       |       |       |      |       |
| Net deferred tax asset     |       | 12,851,979  |       | 7,609,242  |       | 182,131   |       |
| Less valuation allowance   |       | (12,851,979 | )          | (7,609,242 | )          | (182,131  | )          |
|                       |       | $           | —     |       | $          | —    |       | $ | — |   |

 

TheCompany recorded a valuation allowance for the full amount of the deferred taxasset resulting from the income tax benefit above, as it believes, based on theweight of available evidence, that it is more likely than not that the deferredtax asset will not be realized.

**Note13 — Commitments and Contingencies**

*Barge Incident*

Inearly August 2006, the Company incurred an operational delay of approximatelythree weeks resulting from a navigation incident which caused the BPZ-01 bargeto be grounded on a sand bank in Talara Bay in northwest Peru during the secondmobilization trip to the Corvina platform. No injuries were sustained by any ofthe Company’s staff, nor to any of the tug boat operator’s crew members. TheBPZ-01 is a U.S. flagged vessel and as such was inspected after the incident bythe U.S. Coast Guard, to its satisfaction. The barge resumed normal operationsimmediately thereafter. Based upon information currently available, the Companyestimates that total expenditures related to this incident will beapproximately $1.1 million. As of December 31, 2006, approximately$382,000 has been incurred for barge recovery and temporary repairs to thevessel.  In addition, the Company expectsto incur approximately $330,000 in permanent repairs to the barge andapproximately $432,000 of consequential damages, primarily stand-by charges.  As of the date of this filing, the Companyhas not presented a final claim to its insurance carrier for the barge repairsand is negotiating a settlement agreement with a third party for recovery ofany damages not covered through its insurance. The Company believes the majority of the costs associated with thisincident will be reimbursed through insurance or through a third party. Noassurances can be given, however, that any such recoveries will be sufficientto cover all costs associated with this incident or to the timing of any suchrecoveries. This incident is not expected to have a material impact on theCompany’s operations or business plan.

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*Transfer of NFS*

On September 9, 2004, theday prior to the effective date of the Merger, Navidec assigned all of itspre-merger business operations, assets and liabilities to NFS and all issuedand outstanding shares of NFS were subsequently transferred to the Navidecpre-merger shareholders of record as of September 9, 2004, for no cashconsideration.

The transfer of NFSshares was effected by NFS to the pre-merger Navidec shareholders of record asof September 9, 2004. Consistent with the terms of the Merger Agreement, theCompany had no control in the actions resulting in the transfer of the NFSshares and the Company believed, based on information provided by NFS and itsadvisors that NFS had undertaken the necessary actions to comply withapplicable registration requirements. However, because a registration of theNFS shares was not effective at the time of the transfer of the NFS shares, andhas still not become effective, it might be determined that the transfer of theNFS shares was made without full compliance with registration or qualificationrequirements under applicable securities laws. As a result, although theCompany took no actions in connection with the transfer, because the Company isa successor by merger to Navidec, Inc., if regulatory authorities determinethat the Company did not comply with applicable registration requirements inconnection with the transfers, fines or other sanctions could be imposed on theCompany with respect to the transaction.

While federal and stateregulators might conclude that the Company was subject to responsibility forregistration of the shares, the Company regards the possibility of liabilityarising from the distribution of the NFS shares as remote for the followingreasons:

The Company took noaction with respect to the transfer of NFS shares which, pursuant to the termsof the Merger Agreement, was agreed to be handled by NFS, including anynecessary qualifications or registrations under applicable securities laws.Further, the Company believed, based on information provided by NFS and itsadvisors, that NFS had undertaken to comply with all applicable registrationrequirements. Additionally, the transfer, which was tantamount to a stockdividend to the pre-merger shareholders of Navidec, Inc., did not involve cashconsideration, making a finding of any damage to shareholders unlikely.Finally, it is the Company’s understanding that NFS is taking action toregister the NFS shares and is communicating with the SEC to address this issueto the SEC’s satisfaction.

Although the Companyregards the possibility of liability resulting from the transfer of NFS asremote, the Company does recognize the risk of such liability, and thereforecautions current and prospective Company shareholders of such risk.

*Peru Properties*

As of December 31, 2006, in connection with our Peruproperties, we have deposited approximately $1.2 million as restrictedcash to collateralize two performance bonds which guarantee our variousobligations and commitments under one of our license contracts and anotheragreement. The performance bonds were issued by Peruvian banks and their termsare governed by the corresponding license contract or agreement.  We will be required to deposit approximately$1.0 million as restricted cash to collateralize a new performance bond inconnection with the beginning of the third exploration period under ourBlock Z-1 license contract, which begins in June 2007.  In addition, although we are stillnegotiating the terms of our commitments under our license contracts for BlocksXXII and XXIII, we anticipate having to deposit funds as restricted cash tocollateralize performance bonds to guarantee our obligations totaling approximately$1 million in late 2007.

In connection with our Block XIX license contract, we areobligated to shoot at least 100 kilometers of 2-D seismic during the first halfof 2007, unless an extension is requested and granted.  Depending on the results of this work, we mayelect to drill an exploratory well. We estimate the cost to acquire this seismic data to be approximately $3million.

The Company acquired fouroffshore platforms in connection with its Block Z-1 property. The Companyrecently completed the refurbishment of one of the offshore platforms andintends to maintain all of such platforms for use throughout the life of theBlock Z-1 contract. These platforms revert back to the Government of Peru atthe end of the contract, provided they are in good working condition, with nofurther obligation to the company to dismantle or remove them. The Company andits legal advisors have reviewed Peruvian law and existing regulations from thePeruvian Ministry of Energy and Mines in conjunction with the requirements ofSFAS 143 “Accounting for Asset Retirement Obligations” (“ARO”) as it applies totangible long lived assets and their future retirement and dismantlement. TheCompany has concluded there is no legal obligation to dismantle the platforms,as defined in SFAS 143, and therefore recognition of an ARO is not required.Accordingly, no such provision is reflected in the accompanying consolidatedfinancial statements. If, however, current laws or regulations were changed or theplatforms were no longer in good working order, the Company could be obligatedto dismantle and remove them. The current estimated cost to dismantle anoffshore platform is estimated to be approximately $2 million, depending uponthe condition of the platform and the depth of the water.

In December 2005,the Company signed a drilling contract with Petrex S.A., a subsidiary of SaipemSpA of Italy. Under the contract, Petrex S.A. will provide a platform rigcapable of drilling to 16,000 feet and upgrade the rig to meet the

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Company’s specifications. The Company intends toutilize the rig for the initial development of the Corvina gas field and mayalso utilize it for the expected development of the Albacora oil field, andpotential appraisal wells in the Piedra Redonda gas field. The Company hasagreed to pay a $5.5 million fee to mobilize and upgrade the rig. In exchange,the Company will receive a competitive fixed day rate and exclusive rights touse the rig, at its option, during the two-year period commencing in September,2006.

In December 2005,the Company notified Perupetro that it had decided to exercise its exclusiveoption to convert its technical evaluation agreement on Area VI, into a licensecontract.  The new area renamed as Block XXII,consists of approximately 948,000 acres and will encompass a significantportion of the Lancones basin.  Inconnection with this block, after the license contract has been signed, theCompany will be required to post a performance bond to guarantee certain obligationsand commitments. However, negotiations on the terms of the license contract arestill underway and the Company has not been officially awarded the licensecontract.  Accordingly, the Company doesnot have sufficient information to determine the timing, nor estimate the valueof the performance bond to be posted in connection with this property.

In July 2006, Perupetro informed the Company that itsproposal for Block XXIII, which consists of approximately 248,000 acres and islocated onshore in northwest Peru between the Company’s Blocks Z-1 and XIX, wasthe winning bid in the tender process. The Company has presented all necessary documentation to become thequalified operator of this new block under an exploration and productionlicense contract. The Company’s proposal covers only the exploration period andcommits the Company to drill a certain number of wells, acquire certain amountof either 2-D or 3-D seismic data and prepare an integrated geological,geochemical and reservoir engineering evaluation of the hydrocarbon prospectsin the block.  In connection with thisblock, after the license contract has been signed, the Company will be requiredto post a performance bond to guarantee certain obligations and commitments.However, negotiation on the terms of the license contract are still underway,and the Company has not been officially awarded the license contract.  The Company therefore does not havesufficient information to determine the timing, nor estimate the value of theperformance bond to be posted in connection with this property.

*Financing Activities*

On December 20, 2006, theInternational Finance Corporation’s (“IFC”) Board of Executive Directorsapproved a $120 million financial package.  IFC is the private sector armof the World Bank Group based in Washington, D.C.  As part of thefinancing, we completed a private placement of 6,500,000 shares of commonstock, no par value, to the IFC pursuant to a Subscription Agreement datedDecember 18, 2006.  The common stock was priced at $3.00 per shareresulting in proceeds to us of approximately $19.5 million.  The offeringwas placed directly by us and there were no placement fees.  The remaining$100.5 million portion of IFC financing consists of $30.5 million of debtfacilities for IFC’s own account and $70 million of debt facilities for theaccount of third-party financial institutions.  Syndication of thethird-party debt component is expected to take place during the second quarterof 2007.  The remaining debt portion of the financing is subject toidentification of the lending syndicate members and subsequent negotiation andapproval of the necessary loan documentation.

In connection with the July 19, 2005 private placement of 11,466,000 common shares, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days from July 19, 2005. The Registration Statement was not declared effective by the required date and the Company became liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $343,980, for each thirty day period until the Registration Statement is declared effective by the SEC. Certain of the private placement investors, totaling 79% of the aggregate private placement investment, agreed to accept common stock in lieu of cash for a maximum period of 90 days. The 90-day period ended on February 14, 2006 and the Company began paying the full amount of liquidating damages in cash.  A new agreement was entered into on April 17, 2006 with certain private placement investors, totaling 76% of the aggregate  private placement investment to accept common stock in lieu of cash until the Registration Statement on Form S-1 is declared effective by the SEC.  On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements.  As a result, the Company is no longer subject to the liquidated damages described above.

In connection with the March 10, 2006 private placement of 1,670,000 common shares, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days, from March 8, 2006.  The Registration Statement was not declared effective by the required date and the Company became liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,100, for each thirty day period until the Registration Statement is declared effective by the SEC.  Such liquidated damages are payable in common stock or cash at

59

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the Company’s discretion.  On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements.  As a result, the Company is no longer subject to the liquidated damages described above.

On December 20, 2006, the Company completed a privateplacement of 6,500,000 shares of common stock, no par value, to an accreditedinvestor pursuant to a Subscription Agreement dated December 18, 2006. The common stock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million.  No warrants or dilutive securities were issuedin connection with the offering.  Theoffering was placed directly by the Company and there were no placement fees.

The Company will continueto make commitments in the ordinary course of business as it pursues itsdevelopment plans for the properties.

**Note 14 — LegalProceedings**

*SECInquiry of Navidec*

Navidecwas advised in February 2004 that the SEC was conducting an informalinquiry to determine whether Navidec had violated federal securities laws.Based on the information made available to the Company,  it believes the SEC’s investigation relates,at least in part, to the restatement of Navidec’s reported earnings for thefirst and second quarters of 2003. This restatement was reported in Navidec’sForm 10-Q for the third quarter of 2003 filed on December 11, 2003.

InDecember 2004, the Company received notice that the SEC had issued anOrder Directing a Private Investigation and Designating Officers to TakeTestimony and would be conducting a formal investigation. Pursuant to theMerger Agreement, the Company has been indemnified by NFS for the costs of theSEC investigation, and NFS has borne the costs incurred to date. The Company isnot aware of the future actions, if any, which the SEC intends to pursue inthis matter, but no assurance can be given that the investigation has been andwill be resolved without negative consequences to the Company.

*Transferof Ownership in NFS*

OnJuly 8, 2004, Navidec and BPZ-Texas entered into a Merger Agreement whichwas consummated on September 10, 2004. The Merger Agreement provided thatall of the pre-merger business operations, assets and liabilities of Navidecwould be transferred to a wholly-owned subsidiary, Navidec FinancialServices, Inc. (“NFS”), followed by the transfer of NFS to the pre-mergershareholders of record as of September 9, 2004, the day prior to theconsummation of the Merger. See “*Businessand Properties—Navidec Merger Transaction*,” “*Risk Factors—Risk Relating to the Offering—Thetransfer of NFS could result in liability to us because the shares transferredwere not registered with the SEC,*” and Note 2 to the ConsolidatedFinancial Statements, included in this filing, for detailed discussionregarding the Merger.

TheMerger Agreement provided that the transfer of all of the pre-merger businessoperations, assets and liabilities of NFS was effective as of September 9,2004. Accordingly, the Company originally believed that it had no continuingownership of NFS and, therefore, did not account for the post-merger operationsof NFS in the presentation of its financial statements. After receipt ofcomments from the SEC in connection with its review of the Company’sregistration statement on Form SB-2 originally filed on July 27, 2005 andfurther review of this issue, the Company concluded it was the record, but notbeneficial, owner of NFS shares, and that any ownership interest was at mosttemporary.

Inpart because of difficulty obtaining necessary information from NFS to clarifythe ownership issue, the Company commenced an action against NFS (the “Action”)on or about February 13, 2006, in District Court, Arapahoe County,Colorado (the “Court”), seeking dissolution of NFS, the appointment of areceiver, and access to NFS corporate records. The Company commenced the Actionuncertain whether or when the required spin-off of NFS shares pursuant to theterms and conditions of the Merger had occurred under Colorado corporate law.The Company asserted in the Action that it believed it was a record shareholderof NFS as of the date of the request and had standing for the relief sought.NFS denied that the Company had standing to act as a shareholder and assertedthat the Company had not been a shareholder of NFS since September 9,2004. The Action was settled amongst the parties on May 19, 2006. Inconnection with the settlement, a Finding of Fact and Conclusions of Law (the “Order”)was issued by the Court stating that the Company was not a shareholder of NFSat any time after September 9, 2004.

**Note 15 — Minimum LeasePayments**

TheCompany leases office space in Houston, Texas under a five-year operatinglease.  We also have offices in Lima,Peru and Quito, Ecuador, both of which are under a month-to-month operatinglease. Total rent expense incurred for the

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years ended December 31,2006, 2005 and 2004 was approximately $252,000, $98,000 and $18,000,respectively.  Minimum non-cancelablelease commitments under these agreements for the years ending December 31are as follows:
| 2007                          |   | $       | 234,439 |   |
|-------------------------------|--------|---------|---------|--------|
| 2008                          |   | 321,442 |    |
| 2009                          |   | 184,514 |    |
| 2010                          |   | —  |    |
| 2011                          |   | —  |    |
| Thereafter                    |   | —  |    |
| Total minimum lease  payments |   | $       | 740,396 |   |

 

**Note 16 — SubsequentEvents**

InJuly 2004, the Company granted options to purchase 1,000,000 shares of commonstock at an exercise price of $1.30 per share to the former CEO of Navidec inconnection with his service as a director and financial consultant to theCompany. On the date of the Merger, 500,000 of such stock options became fullyvested. Vesting of the remaining 500,000 stock options is contingent upon thereceipt of additional investment proceeds totaling $6 million, includingproceeds from the exercise of outstanding warrants.  As of the date of this filing, Mr. McKowenhas fulfilled his obligation to raise $6,000,000 under the above agreement andas such, has vested in  the remaining500,000 stock options.

**Note 17 —**Supplemental Oil and Gas Disclosures(Unaudited)

**Oil and Natural Gas Producing Activities**

Thefollowing disclosures for the Company are made in accordance with SFASNo. 69, “Disclosures About Oil and Natural Gas Producing Activities (anamendment of FASB Statements 19, 25, 33 and 39)”. Users of this informationshould be aware that the process of estimating quantities of proved, proved developedand proved undeveloped crude oil and natural gas reserves is very complex,requiring significant subjective decisions in the evaluation of all availablegeological, engineering and economic data for each reservoir. The data for agiven reservoir may also change substantially over time as a result of numerousfactors including, but not limited to, additional development activity,evolving production history and continual reassessment of the viability ofproduction under varying economic conditions. Consequently, material revisionsto existing reserve estimates occur from time to time. Although everyreasonable effort is made to ensure that reserve estimates reported representthe most accurate assessments possible, the significance of the subjective decisionsrequired and variances in available data for various reservoirs make theseestimates generally less precise than other estimates presented in connectionwith financial statement disclosures.

Provedreserves represent estimated quantities of natural gas and crude oil thatgeological and engineering data demonstrate, with reasonable certainty, to berecoverable in future years from known reservoirs under economic and operatingconditions existing at the time the estimates were made.

Proveddeveloped reserves are proved reserves expected to be recovered, through wellsand equipment in place and under operating methods being utilized at the timethe estimates were made.

Provedundeveloped reserves are reserves that are expected to be recovered from newwells on undrilled acreage or from existing wells where a relatively majorexpenditure is required for recompletion. Reserves on undrilled acreage arelimited to those drilling units offsetting productive units that are reasonablycertain of production when drilled. Proved reserves for other undrilled unitscan be claimed only where it can be demonstrated with certainty that there iscontinuity of production from the existing productive formation. Estimates forproved undeveloped reserves are not attributed to any acreage for which anapplication of fluid injection or other improved recovery technique iscontemplated, unless such techniques have been proved effective by actual testsin the area and in the same reservoir.

Noassessment of proved or unproved reserves has been made to date.

Ourrelevant management controls over proved reserve attribution, estimation andevaluation include:

·                  controls overand processes for the collection and processing of all pertinent operating dataand documents needed by our independent reservoir engineers to estimate ourproved reserves; 

·                  engagement ofwell qualified and independent reservoir engineers for review of our operatingdata and documents and preparation of reserve reports annually in accordancewith all SEC reserve estimation guidelines; and 

61

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·                  review by oursenior reservoir engineer and his staff of the independent reservoir engineers’reserves reports for completion and accuracy. 

Marketprices as of each year-end will be used for future sales of natural gas, crudeoil and natural gas liquids. Future operating costs, production taxes andcapital costs will be based on current costs as of each year-end, with noescalation. There are numerous uncertainties inherent in estimating quantitiesof proved reserves and in projecting the future rates of production and timingof development expenditures. Reserve data represent estimates only and shouldnot be construed as being exact. Moreover, the standardized measure should notbe construed as the current market value of the proved oil and natural gasreserves or the costs that would be incurred to obtain equivalent reserves. Amarket value determination would include many additional factors including(a) anticipated future changes in natural gas and crude oil prices,production and development costs, (b) an allowance for return oninvestment, (c) the value of additional reserves, not considered proved atpresent, which may be recovered as a result of further exploration anddevelopment activities, and (d) other business risk.

***Capitalized Costs Relating to Oil and GasProducing Activities***

Thefollowing table sets forth the capitalized costs relating to the Company’snatural gas and crude oil producing activities at December 31, 2006 and2005:
| ** **                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ** **                       | ** ** | ** **            | ** ** | ** **            | ** ** |
| Acquisition  costs of properties |       |                  |       |                  |       |
| Proved                           |       | $                     | —     |                  | $          | — |   |
| Unproved                         |       | —                |       | —                |       |
|                             |       |                  |       |                  |       |
| Subtotal                         |       | —                |       | —                |       |
| Exploration  costs               |       | 24,568,302            |       | 1,190,707             |       |
| Development  costs               |       | 8,485,113             |       | 512,357               |       |
|                             |       |                  |       |                  |       |
| Total                            |       | $                     | 33,053,415 |                  | $          | 1,703,064 |   |

----

Pursuantto SFAS No. 143 “Accounting for Asset Retirement Obligations”, netcapitalized cost includes asset retirement cost.  However, due to the fact that we have not yetbegun operations, we do not have sufficient information to determine thetiming, nor calculate the present value of the obligation.

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***Costs Incurred in Oil and Natural GasProperty Acquisition, Exploration and Development Activities***

Thefollowing table sets forth costs incurred related to the Company’s oil andnatural gas activities for the year ended December 31, 2006 and 2005:
| ** **                                                                                                           | ** ** | **Continuing  Operations** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Year  Ended December 31, 2006:**                                                                              | ** ** | ** **                 | ** ** |
| Acquisition  costs of properties                                                                                     |       |                       |       |
| Proved                                                                                                               |       | $                          | —     |   |
| Unproved                                                                                                             |       | —                     |       |
| Subtotal                                                                                                             |       | —                     |       |
| Exploration  costs                                                                                                   |       | 26,421,288                 |       |
| Development  costs                                                                                                   |       | 8,495,113                  |       |
|                                                                                                                 |       |                       |       |
| Total                                                                                                                |       | $                          | 34,916,401 |   |
|                                                                                                                 |       |                       |       |
| Company’s share of cost method investees’ costs of  property acquisition, exploration and development (1)  |       | $                          | —     |   |
|                                                                                                                 |       |                       |       |
| **Year  Ended December 31, 2005:**                                                                              | ** ** | ** **                 | ** ** |
| Acquisition  costs of properties                                                                                     |       |                       |       |
| Proved                                                                                                               |       | $                          | —     |   |
| Unproved                                                                                                             |       | —                     |       |
|                                                                                                                 |       |                       |       |
| Subtotal                                                                                                             |       | —                     |       |
| Exploration  costs                                                                                                   |       | 2,188,838                  |       |
| Development  costs                                                                                                   |       | 512,357                    |       |
|                                                                                                                 |       |                       |       |
| Total                                                                                                                |       | $                          | 2,701,195  |   |
|                                                                                                                 |       |                       |       |
| Company’s share  of cost method investees’ costs of property acquisition, exploration and  development (1) |       | $                          | 1,112,500  |   |

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(1)    BPZ Energy purchased the Investmentin Ecuador Property in 2004.

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***Results of Operations for Oil and NaturalGas Producing Activities***

Theresults of operations for oil and natural gas producing activities excludeinterest charges and general and administrative expenses. Sales are based onmarket prices.
| ** **                                                                                             | ** ** | **Year**              | ** ** | **Year**              | ** ** | **Year**              | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                             | ** ** | **Ended**             | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| ** **                                                                                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                             | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Oil and natural  gas production revenues                                                               |       |                  |       |                  |       |                  |       |
| Third-party                                                                                            |       | $                     | —     |                  | $          | —                |       | $ | — |   |
| Affiliate                                                                                              |       | —                |       | —                |       | —                |       |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Total revenues                                                                                         |       | —                |       | —                |       | —                |       |
| Exploration expenses, including dry hole                                                               |       | 2,048,742             |       | 998,131               |       | 360,965               |       |
| Production costs                                                                                       |       | —                |       | —                |       | —                |       |
| Depreciation, depletion and amortization                                                               |       | —                |       | —                |       | —                |       |
| Oil and natural gas impairment                                                                         |       | —                |       | —                |       | —                |       |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Income (loss) before income taxes                                                                      |       | (2,048,742            | )          | (998,131              | )          | (360,965              | )          |
| Income tax provision (benefit)                                                                         |       | —                |       | —                |       | —                |       |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Results of continuing operations                                                                       |       | (2,048,742            | )          | (998,131              | )          | (360,965              | )          |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Company’s share  of cost method investees’ results of operations for producing activities(1) |       | $                     | 1,590,882  |                  | $          | 605,278               |       | $ | 190,621 |   |

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(1)    Investment in Ecuador Property

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***Net Proved and Proved Developed ReserveSummary***

The following table setsforth the Company’s net proved and proved developed reserves atDecember 31, 2006, 2005 and 2004, and the changes in the net provedreserves for each of the three years in the period then ended.

 
|                                                                                                                        | ** ** | **Continuing** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------|
| ** **                                                                                                             | ** ** | **Operations** |
| **Natural gas (Mcf)(1):**                                                                                              | ** ** | ** **     |
| Net proved  reserves at January 1, 2004                                                                           |       | —         |
| Revisions of previous estimates                                                                                        |       | —         |
| Purchases in place                                                                                                     |       | —         |
| Extensions, discoveries and other additions                                                                            |       | —         |
| Sales in place                                                                                                         |       | —         |
| Production                                                                                                             |       | —         |
| Net proved  reserves at December 31, 2004                                                                         |       | —         |
| Revisions of previous estimates                                                                                        |       | —         |
| Purchases in place                                                                                                     |       | —         |
| Extensions, discoveries and other additions                                                                            |       | —         |
| Sales in place                                                                                                         |       | —         |
| Production                                                                                                             |       | —         |
| Net proved  reserves at December 31, 2005                                                                         |       | —         |
| Revisions of previous estimates                                                                                        |       | —         |
| Purchases in place                                                                                                     |       | —         |
| Extensions, discoveries and other additions                                                                            |       | —         |
| Sales in place                                                                                                         |       | —         |
| Production                                                                                                             |       | —         |
| Other                                                                                                                  |       | —         |
| Net proved  reserves at December 31, 2006                                                                         |       | —         |
| Company’s proportional interest in reserves of  investees accounted for by the cost method—December 31, 2006 |       | —         |

 

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| **Natural gas liquids and crude oil (Bbl)(2)(3):**                                                                          | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Net proved  reserves at January 1, 2004                                                                                |       | —     |
| Revisions of previous estimates                                                                                             |       | —     |
| Purchases in place                                                                                                          |       | —     |
| Extensions, discoveries and other additions                                                                                 |       | —     |
| Sales in place                                                                                                              |       | —     |
| Production                                                                                                                  |       | —     |
| Net proved  reserves at December 31, 2004                                                                              |       | —     |
| Revisions of previous estimates                                                                                             |       | —     |
| Purchases in place                                                                                                          |       | —     |
| Extensions, discoveries and other additions                                                                                 |       | —     |
| Sales in place                                                                                                              |       | —     |
| Production                                                                                                                  |       | —     |
| Net proved  reserves at December 31, 2005                                                                              |       | —     |
| Revisions of previous estimates                                                                                             |       | —     |
| Purchases in place                                                                                                          |       | —     |
| Extensions, discoveries and other additions                                                                                 |       | —     |
| Sales in place                                                                                                              |       | —     |
| Production                                                                                                                  |       | —     |
| Other                                                                                                                       |       | —     |
| Net proved  reserves at December 31, 2006                                                                              |       | —     |
| Company’s proportional interest in reserves of  investees accounted for by the cost method—December 31, 2006 |       | 443,808    |
| **(Bbl)(2)  equivalents(4):**                                                                                               | ** ** | ** ** |
| Net proved  reserves at January 1, 2004                                                                                |       | —     |
| Revisions of previous estimates                                                                                             |       | —     |
| Purchases in place                                                                                                          |       | —     |
| Extensions, discoveries and other additions                                                                                 |       | —     |
| Sales in place                                                                                                              |       | —     |
| Production                                                                                                                  |       | —     |
| Net proved  reserves at December 31, 2004                                                                              |       | —     |
| Revisions of previous estimates                                                                                             |       | —     |
| Purchases in place                                                                                                          |       | —     |
| Extensions, discoveries and other additions                                                                                 |       | —     |
| Sales in place                                                                                                              |       | —     |
| Production                                                                                                                  |       | —     |
| Net proved  reserves at December 31, 2005                                                                              |       | —     |
| Revisions of previous estimates                                                                                             |       | —     |
| Purchases in place                                                                                                          |       | —     |
| Extensions, discoveries and other additions                                                                                 |       | —     |
| Sales in place                                                                                                              |       | —     |
| Production                                                                                                                  |       | —     |
| Other                                                                                                                       |       | —     |
| Net proved reserves  at December 31, 2006                                                                              |       | —     |
| Company’s proportional interest in reserves of  investees accounted for by the cost method—December 31, 2006 |       | 443,808    |

----

(1)             Thousands of cubicfeet.

(2)             Barrels. 

(3)             Includes crude oil,condensate and natural gas liquids. 

(4)             Naturalgas volumes have been converted to equivalent natural gas liquids and crude oilvolumes using a conversion factor of six thousand cubic feet of natural gas toone barrel of natural gas liquids and crude oil. 

 

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***Standardized Measure of Discounted FutureNet Cash Flows Relating to Proved Oil and Natural Gas Reserves***

The following informationhas been developed utilizing procedures prescribed by SFAS No. 69 andbased on natural gas and crude oil reserve and production volumes estimated bythe independent petroleum reservoir engineers. This information may be usefulfor certain comparison purposes but should not be solely relied upon inevaluating the Company or its performance. Further, information contained inthe following table should not be considered as representative of realisticassessments of future cash flows, nor should the standardized measure ofdiscounted future net cash flows be viewed as representative of the currentvalue of the Company’s oil and natural gas assets.

The future cash flows presented below are based onsales prices, cost rates and statutory income tax rates in existence as of thedate of the projections. It is expected that material revisions to someestimates of natural gas and crude oil reserves may occur in the future,development and production of the reserves may occur in periods other thanthose assumed, and actual prices realized and costs incurred may varysignificantly from those used. Income tax expense has been computed usingexpected future tax rates and giving effect to tax deductions and creditsavailable, under current laws, and which relate to oil and natural gasproducing activities.

Management does not rely upon the followinginformation in making investment and operating decisions. Such decisions are basedupon a wide range of factors, including estimates of probable as well as provedreserves and varying price and cost assumptions considered more representativeof a range of possible economic conditions that may be anticipated.

The following table sets forth the standardizedmeasure of discounted future net cash flows from projected production of theCompany’s natural gas and crude oil reserves for the years endedDecember 31, 2006, 2005 and 2004:

 
| December 31, 2006                                                                                                                              | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Future cash inflows                                                                                                                                 |       | $          | — |
| Future production costs                                                                                                                             |       | —     |
| Future development costs                                                                                                                            |       | —     |
| Future net cash flows before income taxes                                                                                                           |       | —     |
| Future income taxes                                                                                                                                 |       | —     |
| Future net cash flows                                                                                                                               |       | —     |
| Discount to present value at 10% annual rate                                                                                                        |       | —     |
| Standardized measure of discounted future net cash  flows relating to proved     natural gas, natural gas liquids and  crude oil reserves |       | $          | — |
| Company’s share of cost method investees’ standardized  measure of discounted future net cash flows (1)                                   |       | $          | 4,191,079 |

 

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| December 31, 2005                                                                                                                              | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Future cash inflows                                                                                                                                 |       | $          | — |
| Future production costs                                                                                                                             |       | —     |
| Future development costs                                                                                                                            |       | —     |
| Future net cash flows before income taxes                                                                                                           |       | —     |
| Future income taxes                                                                                                                                 |       | —     |
| Future net cash flows                                                                                                                               |       | —     |
| Discount to present value at 10% annual rate                                                                                                        |       | —     |
| Standardized measure of discounted future net cash  flows relating to proved natural gas, natural gas liquids and crude oil  reserves               |       | $          | — |
| Company’s share of cost method investees’  standardized measure of discounted future net cash flows (1)                                   |       | $          | 2,165,389 |
| **December 31,  2004**                                                                                                                         | ** ** | ** ** |
| Future cash inflows                                                                                                                                 |       | $          | — |
| Future production costs                                                                                                                             |       | —     |
| Future development costs                                                                                                                            |       | —     |
| Future net cash flows before income taxes                                                                                                           |       | —     |
| Future income taxes                                                                                                                                 |       | —     |
| Future net cash flows                                                                                                                               |       | —     |
| Discount to present value at 10% annual rate                                                                                                        |       | —     |
| Standardized measure of discounted future net cash  flows relating to proved     natural gas, natural gas liquids and  crude oil reserves |       | $          | — |
| Company’s share of cost method investees’  standardized measure of discounted     future net cash flows (1)                     |       | $          | 2,732,337 |

----

(1)             Investmentin Ecuador Property

*** ***

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**Note 18 — QuarterlyResults of Operations**
|                                           | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2006**                                  |       |                             |       |   |   |   |   |   |   |
| Revenue                                   |       | $                                | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Operating loss                            |       | (2,621,926                       | )          | (3,126,947 | ) | (3,955,706 | ) | (4,089,842 | ) |
| Other income (expense)                    |       | (616,740                         | )          | (512,866 | ) | (608,100 | ) | 44,668 |   |
| Net loss                                  |       | $                                | (3,238,666 | ) | $ | (3,639,813 | ) | $ | (4,563,806 | ) | $ | (4,045,174 | ) |
| Basic and diluted net  loss per share     |       | $                                | (0.08      | ) | $ | (0.09 | ) | $ | (0.10 | ) | $ | (0.08 | ) |
| Weighted average common share outstanding |       | 40,845,270                       |       | 42,470,985 |   | 47,320,202 |   | 48,188,441 |   |

 
|                                           | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2005**                                  |       |                             |       |   |   |   |   |   |   |
| Revenue                                   |       | $                                | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Operating loss                            |       | (1,174,504                       | )          | (1,396,238 | ) | (1,527,988 | ) | (2,734,265 | ) |
| Other income (expense)                    |       | 61,655                           |       | 48,070 |   | 385,396 |   | (69,115 | ) |
| Net loss                                  |       | $                                | (1,112,849 | ) | $ | (1,348,168 | ) | $ | (1,142,592 | ) | $ | (2,803,380 | ) |
| Basic and diluted net  loss per share     |       | $                                | (0.04      | ) | $ | (0.05 | ) | $ | (0.03 | ) | $ | (0.07 | ) |
| Weighted average common share outstanding |       | 25,752,217                       |       | 25,960,796 |   | 35,635,687 |   | 40,050,282 |   |

*** ***

**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURES**

None.

**ITEM9A. CONTROLS AND PROCEDURES**

**(a)  Evaluation of Disclosure Controls and Procedures**

We performed an evaluation,under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our principalexecutive officer and principal financial officer have concluded that as ofDecember 31, 2006 our disclosure controls and procedures are effective to ensurethat information we are required to disclose in the reports we file or submitunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

**(b)  Changes in Internal Control Over FinancialReporting**

There was no change in theCompany’s internal control over financial reporting during the quarter endedDecember 31, 2006 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

**(c)Management’s Report on Internal Control over Financial Reporting and Report ofIndependent Registered Public Accounting Firm on Internal Control overFinancial Reporting**

Management of theCompany, including our principal executive officer and principal financialofficer, is responsible for establishing and maintaining adequate internalcontrols over financial reporting, as defined in Rule  13a-15(f) of the 

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Securities Exchange Actof 1934, as amended. Our internal controls are designed to provide reasonableassurance as to the reliability of our financial reporting and the preparationand presentation of the consolidated financial statements for external purposesin accordance with accounting principles generally accepted in the UnitedStates, as well as to safeguard assets from unauthorized use or disposition.

Managementconducted an evaluation of the effectiveness of our internal controls overfinancial reporting based on the framework in *InternalControl — Integrated Framework*issued by the Committee ofSponsoring Organizations of the Treadway Commission. This evaluation includedreview of the documentation of controls, evaluation of the design effectivenessof controls, testing of the operating effectiveness of controls and aconclusion on this evaluation. We did not identify any material weaknesses inour internal controls as a result of this evaluation. Based on this evaluation,management has concluded that our internal controls over financial reportingwere effective as of December 31, 2006.

Johnson Miller& Co., CPA’s PC, the independent registered public accounting firm who alsoaudited our Consolidated Financial Statements, has issued an attestation reporton management’s assessment of the effectiveness of internal control overfinancial reporting as of December 31, 2006, which is set forth below under “AttestationReport”.

**(d)Attestation Report**

Report of Independent Registered Public AccountingFirm on Internal Control over Financial Reporting

To the Board of DirectorsBPZ Energy, Inc. and Subsidiaries (An Exploration Stage Company)

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control Over Financial Reporting, that BPZ Energy, Inc. andSubsidiaries (An Exploration Stage Company)(the “Company”) maintained effectiveinternal control over financial reporting as of December 31, 2006, basedon criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria) *.*The Company’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In our opinion,management’s assessment that the Company maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on the COSO criteria.

 

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     Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofthe Company as of December 31, 2006 and 2005, and the related consolidatedstatements of operations, stockholders’ equity (deficit), and cash flows foreach of the three years in the period ended December 31, 2006, and for theperiod from August 20, 2001 (Inception) through December 31, 2006, and ourreport dated March 14, 2007, expressed an unqualified opinion.

/s/ Johnson Miller &Co., CPA’s PC

Midland, Texas March 14, 2007

**ITEM 9B. OTHER INFORMATION**

None.

**PART III**

**ITEM10.  DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

The informationrequired by this item is incorporated by reference from our definitive proxystatement to be filed with the SEC within 120 days after the end of our fiscalyear covered by this Annual Report on Form 10-K and to the information setforth in Item 1 of this report

**ITEM 11.  EXECUTIVE COMPENSATION**

Theinformation required by this item is incorporated by reference from ourdefinitive proxy statement to be filed with the SEC within 120 days after theend of our fiscal year covered by this Annual Report on Form 10-K.

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

Theinformation required by this item is incorporated by reference from ourdefinitive proxy statement to be filed with the SEC within 120 days after theend of our fiscal year covered by this Annual Report on Form 10-K.

**ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**

**Theinformation required by this item is incorporated by reference from ourdefinitive proxy statement to be filed with the SEC within 120 days after theend of our fiscal year covered by this Annual Report on Form 10-K.**

**ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 The information required by this item isincorporated by reference from our definitive proxy statement to be filed withthe SEC within 120 days after the end of our fiscal year covered by this AnnualReport on Form 10-K.

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**PART IV**

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

(a)The following documents are filed as part of this report:

**1.****                   ****Financial Statements.**
| ** ** | **Our consolidated financial statements are included in Part II, Item 8  of this report:** |       |       |
|------------|--------------------------------------------------------------------------------------------|------------|------------|
| ** ** | ** **                                                                                 |       |       |
|       | Report of  Independent Registered Public Accounting Firm                                   | ** ** | ** ** |
|       |                                                                                       | ** ** | ** ** |
|       | Consolidated Balance  Sheets                                                               | ** ** | ** ** |
|       |                                                                                       | ** ** | ** ** |
|       | Consolidated Statements of  Operations                                                     | ** ** | ** ** |
|       |                                                                                       | ** ** | ** ** |
|       | Consolidated  Statements of Stockholders’ Equity (Deficit)                            | ** ** | ** ** |
|       |                                                                                       | ** ** | ** ** |
|       | Consolidated Statements of  Cash Flows                                                     | ** ** | ** ** |
|       |                                                                                       | ** ** | ** ** |
|       | Notes to the Consolidated Financial Statements                                             | ** ** | ** ** |
|       |                                                                                       | ** ** | ** ** |
|       | Management’s  Report on Internal Control Over Financial Reporting                     | ** ** | ** ** |
|       |                                                                                       | ** ** | ** ** |
|       | Report of  Independent Registered Public Accounting Firm                                   | ** ** | ** ** |

** **

**2.****                       ****Financial Statements Schedulesand supplementary information required to be submitted:**

None.

**3.****                   ****Exhibits**

Alist of the exhibits filed or furnished with this report on Form 10-K ( orincorporated by reference to exhibits previously filed or furnished by us) isprovided in the Exhibit Index beginning on page 84 of this report.  Those exhibits incorporated by referenceherein are indicated as such by the information supplied in the parentheticalthereafter.  Otherwise, the exhibits arefiled herewith.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on March 16, 2007.
|        |   | BPZ Energy, Inc. |                                    |   |
|--------|--------|------------------|-----------------------------------------|--------|
|   |   |             |                                    |   |
|   |   | By:              | */s/ Manuel Pablo Zuniga-Pflucker*      |
|   |   |             | Manuel Pablo Zuniga-Pflucker            |
|   |   |             | President & Chief Executive Officer |
|        |        |                  |                                         |        |  |

 

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Pursuant to the requirements ofthe Securities Act of 1934, this registration statement was signed by thefollowing persons in the capacities and on the dates indicated.

 
| /s/  MANUEL PABLO  ZÚÑIGA-PFLÜCKER |     | /s/  EDWARD G. CAMINOS                            |
|-------------------------------------------------------------|----------|-------------------------------------------------------------|
| Manuel Pablo  Zúñiga-Pflücker                |     | Edward G. Caminos                                           |
| *President,  Chief Executive Officer and Director*          | * * | *Vice President—Finance and Chief Accounting  Officer* |
| March 16, 2007                                              | * * | *(Principal Accounting and Financial Officer)*              |
|                                                        |     | March 16, 2007                                              |
|                                                        |     |                                                        |
| /s/  DR.  FERNANDO ZÚÑIGA Y RIVERO      |     | /s/  GORDON GRAY                                  |
| Dr. Fernando  Zúñiga y Rivero                     |     | Gordon Gray                                                 |
| *Director  and Chairman of the Board*                       | * * | *Director*                                                  |
| March 16, 2007                                              |     | March 16, 2007                                              |
|                                                        |     |                                                        |
| /s/  E.  BARGER MILLER III                        |     | /s/  JOHN J. LENDRUM, III                         |
| E. Barger Miller  III                                       |     | John J. Lendrum, III                                        |
| *Director*                                                  | * * | *Director*                                                  |
| March 16, 2007                                              |     | March 16, 2007                                              |
|                                                        |     |                                                        |
| /s/  DENNIS  G. STRAUCH                           |     |                                                        |
| Dennis G.  Strauch                                          |     |                                                        |
| *Director*                                                  |     |                                                        |
| March 16, 2007                                              |     |                                                        |

** **

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**INDEX OF EXHIBITS**
| Exhibit Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                            |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1            |       | Third Amended and Restated Articles of Incorporation  of BPZ Energy, Inc. (incorporated by reference to Exhibit 3.1 to  BPZ Energy, Inc.’s Registration Statement on Form SB-2 Amendment  No. 2 (SEC File No. 333-122816)).                                                                                  |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 3.2            |       | Amended and Restated Bylaws (incorporated by  reference to Exhibit 3.2 to the Company’s Form SB-2 (SEC File  No. 333-14497) filed on October 18, 1996).                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 3.3            |       | Amendment to Second Amended and Restated Articles of  Incorporation of Navidec, Inc. (incorporated by reference to  Exhibit 3.4 to the Company’s Form SB-2 (SEC File No. 333-122816)  filed on February 14, 2005).                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.1            |       | Form of Certificate for Common Stock of BPZ  Energy, Inc., a Colorado corporation (incorporated by reference to  Exhibit 4.1 to the Company’s Form SB-2 (SEC File No. 333-122816)  filed on February 14, 2005).                                                                                         |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.2            |       | BPZ Energy, Inc. 2005 Long-Term Incentive  Compensation Plan (incorporated by reference to Exhibit 4.1 to the Company’s  Form S-8 (SEC File No. 333- 126388) filed on July 5, 2005).                                                                                                                                             |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.1           |       | Merger Agreement between Navidec, Inc. and  BPZ, Inc. dated July 8, 2004 (incorporated by reference to  Exhibit 10.1 from the Company’s Form 8-K filed July 13,  2004).                                                                                                                                 |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.2           |       | Closing Agreement between Navidec, Inc. and  BPZ, Inc. dated September 8, 2004(incorporated by reference to  Exhibit 10.1 from the Company’s Form 8-K filed  September 14, 2004).                                                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.3           |       | Business Consulting Agreement dated July 8,  2004 by and between BPZ Energy, Inc., a Colorado corporation, and Navidec  Financial Services, Inc., a Colorado corporation (incorporated by  reference to Exhibit 10.3 to the Company’s Form SB-2 (SEC  File No. 333-122816) filed on February 14, 2005). |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.4           |       | License Contract from the Government of Peru for  Block Z-1 dated November 30, 2001 (incorporated by reference to  Exhibit 10.5 to the Company’s Form SB-2 (SEC File  No. 333-122816) filed on February 14, 2005).                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.5           |       | Amendment to License Contract from the Government of  Peru for Block Z-1 dated February 3, 2005 (incorporated by  reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-KSB  for the year ended December 31, 2004).                                                                                 |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.6           |       | License Contract from the Government of Peru for  Block XIX dated December 12, 2003 (incorporated by reference to  Exhibit 10.6 to the Company’s Form SB-2 (SEC File No. 333-122816)  filed on February 14, 2005).                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.7           |       | Technical Evaluation Agreement from the Government  of Peru for Area VI dated December 12, 2003 (incorporated by reference  to Exhibit 10.7 to the Company’s Form SB-2 (SEC File  No. 333-122816) filed on February 14, 2005).                                                                               |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 10.8           |       | Promotional Technical Evaluation Agreement from the  Government of Peru for Area XVI dated December 12, 2003 (incorporated by  reference to Exhibit 10.8 to the Company’s Form SB-2 (SEC  File No. 333-122816) filed on February 14, 2005).                                                                  |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 14.1           |       | Code of Ethics for Executive Officers (incorporated  by reference to Exhibit 14.1 to Form 10-KSB/A filed on September 26, 2006).                                                                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 21.1           |       | Subsidiaries of the Registrant (filed herewith).                                                                                                                                                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                       |
| 23.1           |       | Consent of Independent Registered Public Accounting  Firm (filed herewith).                                                                                                                                                                                                                                                                |
| 31.1           |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed  herewith).                                                                                                                                                                                                           |
| 31.2           |       | Certification of the Vice President — Finance and  Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (filed herewith).                                                                                                                                                                        |

 

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| 32.1   |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith).                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                    |
| 32.2   |   | Certification of the Vice President — Finance and  Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed  herewith). |

 

 

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