**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**Form 10-KSB**

 
| **ý**                                                                                                                                                                                                        | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**     | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                                                              |
| **For the fiscal year ended December 31, 2004**                                                                                                                                                              |
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| **Or**                                                                                                                                                                                                            |
|                                                                                                                                                                                                              |
| **o**                                                                                                                                                                                                             | **TRANSISTION REPORT PURSUANT TO SECTION 13  OR 15(d)  OF THE SECURITIES EXHANGE ACT OF 1934** | ** ** |
| ** **                                                                                                                                                                                                        |
| **For the transition period from                  to               ** |
| ** **                                                                                                                                                                                                        |
| **Commission File Number: 000-29098**                                                                                                                                                                             |

 

**BPZ Energy, Inc.**

(Exact name of registrant asspecified in its charter) 

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

 

**11999Katy Freeway, Suite 560****Houston, Texas 77079**(Address of principal executive office)

 

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

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act: **Common Stock, Without Par Value**

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actduring the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.              Yes ýNo o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-B 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-KSB or any amendment tothis Form 10-KSB.           o

 

Registrantdid not earn revenues for the fiscal year ended December 31, 2004.

 

Thenumber of shares of Common Stock held by non-affiliates, as of March 31,2005 was 8,015,515 shares, all of one class of common stock, no par value,having an aggregate market value of approximately $ 49,696,193 based upon theclosing price of Registrant’s common stock on such date of $6.20 per share****as quoted****on the Electronic Over-the-Counter Bulletin Board (“OTCBB”).

 

Asof March 31, 2005, BPZ Energy, Inc. had outstanding 16,891,237 shares ofits common stock.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the registrant’s Proxy Statement for the 2005 AnnualMeeting of Shareholders to be filed no later than April 30, 2005 areincorporated by reference in Part III****ofthis Form 10-KSB.

 

Transitional Small Business Disclosure Format (check one): Yes o   No ý

 

 

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**TABLEOF CONTENTS**

 
| **PART I**     |                                                                                            |   |
|----------------|-------------------------------------------------------------------------------------------------|--------|
|           |                                                                                            |   |
| Item 1.        | Description of Business                                                                         |   |
| Item 2.        | Description of Property                                                                         |   |
| Item 3.        | Legal Proceedings                                                                               |   |
| Item 4.        | Submission of Matters to a Vote of Security  Holders                                            |   |
|           |                                                                                            |   |
| **PART II**    |                                                                                            |   |
| Item 5.        | Market for Common Equity and Related  Stockholder Matters                                       |   |
| Item 6.        | Management’s Discussion and Analysis or  Plan of Operation                                 |   |
| Item 7.        | Financial Statements and Supplementary Data                                                     |   |
| Item 8.        | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosures          |   |
| Item 8A.       | Controls and Procedures                                                                         |   |
| Item 8B.       | Other Information                                                                               |   |
|           |                                                                                            |   |
| **PART III**   |                                                                                            |   |
| Item 9.        | Directors and Executive Officers of the  Registrant                                             |   |
| Item 10.       | Executive Compensation                                                                          |   |
| Item 11.       | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
| Item 12.       | Certain Relationships and Related  Transactions                                                 |   |
| Item 13.       | Exhibits                                                                                        |   |
| Item 14.       | Principal Accountant Fees and Services                                                          |   |
|           |                                                                                            |   |
| **SIGNATURES** |                                                                                            |
|           |                                                                                            |   |
| Certifications |                                                                                            |

 

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# **PART I**

 

*BPZ Energy, Inc. (“BPZ” or the “Company”)cautions that this document contains forward-looking statements within themeaning of Section 27A of the Securities Act and Section 21E of the ExchangeAct.  All statements, other thanstatements of historical facts, included in or incorporated by reference intothis Form 10-KSB 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 certain assumptions and analyses made bythe management of BPZ in light of its experience and its perception ofhistorical trends, current conditions and expected future developments as wellas other factors it believes are appropriate in 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 “Risk Factors” included in Item 1 -Description of the Business of this Form 10-KSB.*

 

**Item 1.  Description ofBusiness**

 

**General**

 

BPZEnergy, Inc. (“BPZ”), a Colorado corporation, formerly known as Navidec, Inc. (“Navidec”),was incorporated in 1993.  On September 10,2004, BPZ Energy, Inc., a Texas corporation, engaged in oil and gas explorationand production, consummated a reverse merger with Navidec whereby BPZ became awholly owned subsidiary of Navidec (the “Merger”).  BPZ was treated, for accounting purposes, asthe acquiring entity.  See “Navidec MergerTransaction” below and Note 2 to the Consolidated Financial Statements fordetailed discussion regarding the Merger. On February 4, 2005, the Company changed its name to “BPZEnergy, Inc.”  Though the Company’sname has been changed, the pre-merger company may be referred to as Navidec inthis filing to avoid confusion.   

 

BPZ,based in Houston, Texas, is an international energy company with properties inSouth America, specifically northwest Peru and southwest Ecuador.  The Company is focused on the development andproduction of oil and natural gas reserves and the complementary development ofgas-fired power generation. 

 

In 2001, BPZestablished a registered branch in Peru, officially designated as “BPZEnergy, Inc. Sucursal Peru.” Currently, we have exclusive rights and license agreements for oil andgas exploration and production covering a total of approximately 2.76 millionacres in northwest Peru.  BPZ acquired a minorityworking interest in the license contract for Block Z-1 in November 2001and subsequently acquired 100% ownership of the block in November 2004.  In addition, BPZ acquired a 100% workinginterest in the license contract for Block XIX in December 2003.  Generally, the term of a license contract inPeru is 40 years for gas exploration, development and production and 30 yearsfor oil exploration, development and production.  In December 2003 the Company alsoentered into a Technical Evaluation Agreement for Area VI and a PromotionalTechnical Evaluation Agreement for Area XVI. These latter two Agreements give BPZ the right to conduct technicalevaluations of those areas over a 24-month period and the preferential right toenter into license contracts if the evaluations indicate the potential forprofitable operations. 

 

To date ouractivities in Peru have been limited to analysis and evaluation of technicaldata on the properties and preparation of the development plans for theproperties.  We have not drilled anywells or recognized any revenues from our operations and do not anticipategenerating significant revenues from our properties prior to mid-2006.  

 

In June 2004,BPZ acquired all of the capital stock of SMC Ecuador, Inc. (“SMC”), aDelaware corporation which owns a 10% interest in certain non-operated oil andgas producing properties located in the southwest region of the Republic ofEcuador (the “Santa Elena Properties”). SMC has had its interest in the Santa Elena Properties for the pasteight years, and the license agreement has been respected during this time.

 

**NavidecMerger Transaction**

 

On July 8,2004, BPZ and Navidec entered into a Merger Agreement (the “Merger Agreement”)providing for the acquisition of BPZ as a wholly owned subsidiary of Navidec,in a transaction intended to qualify as a tax free share exchange. The Mergerwas consummated on September 10, 2004. 

 

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The MergerAgreement provided for the immediate issuance by Navidec of 9,000,000 shares ofits common stock to the shareholders of BPZ and the future issuance of anadditional 18,000,000 shares on an earn-out basis if BPZ achieves certainreserve and production goals.  The firstearn-out target, relating to 9,000,000 shares, was achieved in December 2004.  At present, Navidec has only 20,000,000common shares authorized for issuance. The earn-out shares cannot be issued until the Company amends itsArticles of Incorporation to increase the number of authorized shares, whichwill require shareholder approval. Should all of the earn-out shares be earned, the shareholders of BPZwould receive, in the aggregate, 27,000,000 shares of common stock ofNavidec.  Upon completion of the Merger,the officers and directors of Navidec resigned, except John R. McKowen, whoremains a director, and the new directors and management of the Company becamethat of the acquired entity BPZ.  Navidecchanged its name to BPZ Energy, Inc. on February 4, 2005. 

 

As of the effectivedate of the merger, Navidec was owned approximately 18.9% by the new investorsin the Company who acquired their shares in a $6 million private placement ofthe Company’s common stock which was consummated as of September 30, 2004,24.4% by the legacy Navidec shareholders, and approximately 56.7% by the BPZshareholders.  Assuming the pro formaissuance of the entire 18,000,000 shares of Navidec common stock subject to theearn-out, the post-merger Navidec would be owned approximately 8.9% by the newprivate placement investors, 11.4% by the legacy Navidec shareholders, andapproximately 79.7% by the BPZ shareholders. In addition, as of the Merger date, the Company assumed or granted4,961,076 dilutive securities, consisting of warrants and stock options.  See Note 2 of the Notes to ConsolidatedFinancial Statement for the nature and terms of these dilutive securities.

 

The MergerAgreement provided that all of the business assets and liabilities of Navidecwould be assigned to and assumed by Navidec Financial Services, Inc., (“NFS”) awholly owned subsidiary of Navidec, and spun-off to the shareholders of recordof Navidec as of September 9, 2004. All of the shares of NFS were distributed on February 3, 2005,though this transaction was deemed effective on a pre-merger basis under theterms of the Merger Agreement.  This “spinoff” transaction requires registration with the Securities and ExchangeCommission (“SEC”), and a registration statement on Form 10-SB was filed by NFSwith the SEC for this purpose on January 31, 2005.  This registration statement is subject to SECreview and approval.  The distribution ofthe NFS shares will not be deemed registered shares until the application forregistration becomes effective with the SEC and, thus, until such effectiveness,the NFS shares must be treated as restricted securities, which may not be soldwithout an applicable exemption from federal and state securities registrationrequirements. 

 

As part of themerger transaction, Navidec agreed to provide through a private placement notless than $3 million nor more than $6 million in additional equity capital forBPZ’s operations and working capital needs. As of September 30, 2004, this private placement was closed at$6.0 million of total gross proceeds. Net proceeds of approximately $5.5 million became available for useby us in connection with the business operations of BPZ. 

 

**AvailableInformation**

 

The Company files annual, quarterlyand current reports, proxy statements and other documents with the Securitiesand Exchange Commission (“SEC”) under the Securities Act of 1934.  The public may read and copy any materialsthat we file with the SEC at the SEC’s Public Reference Room at 450 FifthStreet, NW, Washington, DC 20549.  Thepublic may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330.  Also,the SEC maintains an Internet website that contains reports, proxy andinformation statements, and other information regarding issuers, including us,that file electronically with the SEC. The public can obtain any documents that we file electronically with theSEC at http://www.sec.gov.  In addition,the Company has recently developed a website (http://www.bpzenergy.com), onwhich we also make available, free of charge, all of the Company’s abovementioned filings with the SEC, including Forms 3, 4 and 5 filed with respectto our equity securities under Section 16(a) of the Securities Act of1934.  These filings will be available assoon as reasonably practicable after we electronically file such material with,or furnish it to, the SEC.

 

**Competition**

 

There is intensecompetition in the oil and gas industry with respect to the acquisition ofproducing properties, undeveloped acreage, and rights to explore for theseproperties.  Many major and independentoil and gas

 

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companies activelypursue and bid for the mineral rights of desirable properties, and manycompanies have been actively engaged in acquiring oil and gas properties inPeru and Ecuador.

 

We believe that ourearly efforts and knowledge of our targeted areas have given us a competitiveadvantage in Peru, and to a lesser extent, in Ecuador.  Although there are unleased tracts within ourtarget area, we believe that these properties may be less attractive to othercompanies because it will be difficult for them to obtain a significant amountof contiguous mineral acres.  Thisresults in part from our significant holdings in the vincinity of theseunleased tracts. However, increased demand for license rights in surroundingareas may impact our ability to expand and grow in the future, particularlybecause many of our competitors have substantially greater financial and otherresources, better name recognition and longer operating histories.  As a result, we may not be able to acquireadditional oil and gas properties in desirable locations.

 

There is alsointense competition in the oil and gas industry for access to contractdrillers, geologists, and others needed to drill and complete wells.  Current demand for drilling and contractservices in our target area appears to be reasonably stable, and we believe ourearly entry will allow us to build the relationships necessary for oursuccess.  We do not anticipate thatcompetition in this area will dramatically affect our plan of operation.  However, increased future demand for drillersand contractors may limit our ability to expand in a timely manner and maynegatively impact our ability to grow.

 

**Regulation**

 

***General***

 

Various aspects ofour oil and natural gas operations are currently or will be subject to variousforeign laws and governmental regulations. These regulations may be changedfrom time to time in response to economic 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 manycollective decades of experience in dealing directly with the Peruviangovernment on energy projects and in some cases have been directly involved inthe drafting and promulgation of petroleum legislation.  Therefore we believe we are in a uniqueposition to understand and comply with all local rules and regulations.  In management’s experience, owning andexploiting petroleum properties in certain foreign countries is lesscomplicated than in the U.S., because existing legislation in such countries favorsinvestments by foreign companies, particularly those owned by U.S.-basedorganizations.  However, our currentpermits and authorizations and our ability to obtain future permits andauthorizations may, over time, be susceptible to increased scrutiny and greatercomplexity which could result in increased costs or delays in receivingappropriate authorizations.

 

***Peru***

 

***Peruvian hydrocarbon legislation.******* Peru’s hydrocarbon legislation, which includesthe Organic Hydrocarbon Law No. 26221 and the regulations thereunder (the “OrganicHydrocarbon Law”), governs our operations in Peru. This legislation covers theentire range of petroleum operations, defines the roles of Peruvian governmentagencies which regulate and interact with the oil gas industry, requires thatinvestments in the petroleum sector be undertaken solely by private investors(either national or foreign), and provides for the promotion of the developmentof hydrocarbon 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 activities are to be freely operated and are subjectonly to local and international safety and environment standards.

 

Under this legalsystem, Peru is the owner of the hydrocarbons located below the surface in its nationalterritory. However, Peru has given the ownership right to extractedhydrocarbons to Perupetro, a state company that is responsible for promotingand overseeing the investment of hydrocarbon exploration and exploitationactivities 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 governmentalso plays an active role in petroleum operations through the involvement ofthe Ministry of Energy and Mines, the specialized government department incharge of devising energy, mining and environmental protection policies,enacting the rules applicable to all these sectors and supervising compliancewith such policies and rules.  Within theMinistry of Energy and Mines, the Supervising Office for Investments in Energy(“OSINERG”) is the body charged with economic and technical supervision.  We are subject to the laws and regulations ofall of these entities and agencies.

 

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Perupetro generallyenters into either License Contracts or Service Contracts for hydrocarbonexploration and exploitation. Peru’s laws also allow for other contract models,but the investor must propose contract terms that are compatible with Peru’sinterests.  A company must be qualifiedby Perupetro to enter into hydrocarbon exploration and exploitation contractsin Peru.  In order to qualify, thecompany must meet the standards under the Regulations Governing theQualifications of Oil Companies.  Thesequalifications generally require the company to have the technical, legal,economic and financial capacity to comply with all obligations it will assumeunder the contract based on the characteristics of the area requested, thepossible investments and the environmental protection rules governing theperformance of its operations.  When acontractor is a foreign investor, it is expected to incorporate a subsidiarycompany or registered branch in accordance with Peru’s municipal laws andappoint representatives who will interact with Perupetro.

 

Our Peruvianbranch, BPZ Energy, Inc., Sucursal Peru, has been qualified by Perupetrowith respect to our current contracts. However, Perupetro reviews the qualification for each specific contractto be signed by a company. Additionally, the qualification for foreigncompanies is granted in favor of the home office or corporation, which is jointlyand severally liable at all times for the technical, legal, economic andfinancial capacity of the Peruvian branch.

 

When operatingunder a License Contract, the licensee is the owner of the hydrocarbonsextracted from the contract area during the performance of operations, and paysroyalties which are collected by Perupetro. The licensee can dispose of the petroleum in any manner whatsoever,subject to a limitation in the case of natural emergencies where the lawstipulates the manner of disposal.

 

Licensees areobligated to submit quarterly reports to the Petroleum Bureau (DirecciónGeneral de Hidrocarburos). Licensees must also submit a monthly economic reportto the Central Bank of Peru. These reports are generally combined and deliveredtogether with other operating reports required to be submitted to Perupetro.

 

Previously, all LicenseContracts were granted by the Ministry of Energy and Mines.  The change to Perupetro as the License Contractgrantor subjects all License Contracts to a new legal framework.  There is limited precedent for these newlicensing procedures and there is some uncertainly as to exactly how thelicensing procedure will function in the future.

 

Under ServiceContracts, the ownership of all of the extracted petroleum is vested inPerupetro and the company will receive compensation agreed to by the parties.However, Perupetro is granted the power to remunerate the investor either incash or in kind, depending on the level of investment and the volume ofproduction.

 

The duration of thecontracts is based on the nature of the hydrocarbons discovered.  The contract duration for crude oil is thirtyyears, while the contract duration for natural gas and condensates is fortyyears.  The periods commence on an agreeddate and are determined based on location of the contract area, season of theyear in which exploration commences, 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 threeextensions of one year each.  There isalso a potential 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, and each period includes a minimum workprogram. The fulfillment of work programs must be supported by an irrevocablebank guaranty, usually in the amount of thirty to forty percent of theestimated value of the minimum work program.

 

Perupetro alsogrants Technical Evaluation Agreements. These agreements give the contractorthe right to conduct technical evaluations of the areas under such agreementsand to enter into License Contracts if the evaluations indicate the potentialfor profitable operations. The Technical Evaluation Agreement is generally fora period of twenty-four months, depending upon the volume and nature of thework to be carried out.

 

We currently havetwo License Contracts and two Technical Evaluation Agreements. We have executedcertain letters of guaranty to guarantee our performance under the LicenseContracts and Technical Evaluation Agreements, including a $1.3 millionbond posted in January 2005 to secure part of our obligations under theLicense Contract for Block Z-1. This bond was secured by the deposit ofrestricted cash with the financial institution which issued the bond.  Should we fail to fulfill our obligationsunder the License Contracts, without technical justification or other goodcause, Perupetro could seek recourse to the bond or terminate the license.

 

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***Peruvian fiscal regime.***  Peru’s fiscal regime determines the levels ofthe government’s entitlement from petroleum activities. This regime is subjectto change, which could negatively impact our business.

 

Contractors underlicense agreements are subject to royalty payments, which are usually a fixedpercentage of the actual production sold. The taxing regulations stipulate aminimum royalty payment of fifteen percent. A contractor is sometimes grantedthe right to pay less based on the circumstances.  Under a Service Contract, Perupetro receivesall of the petroleum produced on behalf of Peru and the contractor isremunerated for the volume produced as stipulated under the contract.

 

The OrganicHydrocarbon Law and the Regulations Governing the Tax Stability Guaranty and OtherTax Rules of the Organic Hydrocarbon Law provide that the tax regime in forceon the date of signing a contract will remain unchanged during the term of thecontract.  Therefore, any change to thetax regime, which results in either an increase or decrease in the tax burden,will not affect the contractor.

 

At the explorationphase, contractors are exempt from import duties and other forms of taxationapplicable to goods intended for exploration activities. Exemptions arewithdrawn at the production phase. In certain instances, the contractor isentitled to import goods tax-free for a two-year period.

 

Income tax islevied on the income of the contractor based upon the current legal corporatetax rate in effect at the date the contract was signed. Contractors engaged inthe exploration and production of crude oil, natural gas and condensates mustdetermine their taxable income separately for each of these activities.  Where a contractor carries out theseactivities in more than one area under different individual contracts, it mayconsolidate all costs and expenses incurred in overall operations for purposesof determining the corporate income tax.

 

***Peruvian labor and safety legislation.***  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 specifically related to theexploration phase, which is our current phase of operations, are also containedin the regulations and include safety measures in camps, medical assistance,food conditions, and handling of explosives. Additional safety regulations mayalso apply as we expand and develop our operations.

 

***Peruvian electric power legislation.***  Our business plan envisions the generation ofelectricity and the sale of such electric power in Peru. The basic laws in Perugoverning electric power, which will apply to our future operations, are theLaw of Electric Power Concessions and the Regulations for the EnvironmentalProtection of Electric Power Activities, the corresponding regulations foreach, as well as additional related laws and regulations including alllegislation regarding Electric Power Tariffs and all regulations and technicalnorms created by the National Commission of Electric Power Tariffs.

 

***Peruvian environmental regulation.***  Our operations are subject to numerous andfrequently changing laws and regulations governing the discharge of materialsinto the environment or otherwise relating to environmental protection. Peruhas enacted specific environmental regulations applicable to the petroleumindustry. The Code on the Environment and the Natural Resources establishes aframework within which all specific laws and regulations applicable to eachsector of the economy are to be developed. These laws and regulations are designed to ensure the continual balanceof environmental and petroleum interests. The regulations stipulate certain environmental standards expected fromcontractors.  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 Energy is charged with the responsibility ofissuing the applicable standards. OSINERG is responsible for enforcingcompliance with applicable environmental rules against companies engaged inhydrocarbon activities.

 

The OrganicHydrocarbon Law also addresses the environmental regulatory regime inPeru.  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 theseobligations as we conduct our business on an ongoing basis.  The

 

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EnvironmentalRegulations for Hydrocarbon Activities provide that companies participating inthe implementation of projects, performance of work and operation of facilitiesrelated to hydrocarbon activities are responsible for the emission, dischargeand disposal of wastes into the environment. Companies must annually file a report corresponding to the previousyear describing the company’s compliance with the environmental legislation inforce.

 

Companies involvedin hydrocarbon activities must also prepare and file an Environmental ImpactStudy (“EIS”) with the General Hydrocarbons Bureau, which is part of theMinistry of Energy and Mines, in order for the relevant activities to complywith the maximum permissible emission limits set forth by the Ministry ofEnergy and Mines.  An EIS must beprepared for each project to be carried out. All of these proposals must be approved by the General EnvironmentalBureau, which is also part of the Ministry of Energy and Mines.

 

In addition, anyparty responsible for hydrocarbon activities must file an “Oil Spill andEmergency Contingency Plan” with the General Hydrocarbons Bureau. The plan mustbe updated at least once a year and must contain information regarding themeasures to be taken in the event of spills, 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.

 

Any failure tocomply with environmental protection rules, the import of contaminatedproducts, or the company’s failure to keep a monitoring register or sendreports to the General Hydrocarbons Bureau in a timely fashion, could subjectthe Company to fines. In addition, the General Hydrocarbons Bureau may considerimposing a prohibition or restriction of the relevant activity, an obligationto compensate the aggrieved parties and/or an obligation to immediately restorethe area.  The company responsible forany default can also be subject to a suspension of operations for a term ofone, two or three months, or indefinitely. Furthermore, any contract signedwith the Peruvian government, the implementation of which jeopardizes orendangers the protection or conservation of protected natural areas, can beterminated.

 

Our Company issubject to all Peruvian environmental regulations now in existence and thoseexisting in the future. The enactment and enforcement of environmental laws andregulations in Peru is relatively new. We are therefore uncertain how Peruvian authorities will enforce andsupervise environmental compliance and standards. Further, we cannot predictany future regulation or the cost associated with future compliance.

 

Although we believethat our operations are in substantial compliance with existing environmentalrequirements, our ability to conduct continued operations is subject tosatisfying applicable regulations. Our current permits and authorizations andability to obtain future permits and authorizations may be susceptible, on agoing forward basis, to increased scrutiny, greater complexity resulting inincreased costs, or delays in receiving appropriate authorizations. Inparticular, we may experience in the future delays in obtaining permits andauthorizations in Peru necessary for our operations. We are required to obtainan environmental permit or approval from the government in Peru prior toconducting any seismic operations, drilling a well or constructing a pipelinein Peruvian territory, including the waters in offshore Peru where we intend toconduct oil and gas operations.

 

***Compliance with Existing Legislation in Peru***

 

Although we believethat our operations are and will be in substantial compliance with existinglegislation and requirements of Peruvian governmental bodies, our ability toconduct continued operations is subject to satisfying applicable regulatory andpermitting controls.  As noted above, ourprincipals have many collective decades of experience in dealing directly withthe Peruvian government on energy projects and in some past cases have beendirectly involved in the drafting and promulgation of petroleum legislation.  Therefore we believe we are in a uniqueposition to understand and comply with all local rules and regulations.

 

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***Ecuador***

 

SMCEcuador, Inc. has had its interest in the Santa Elena oil fields for thepast eight years, and the license agreement has been respected throughout thistime.  As a non-operator, we are notdirectly subject to the laws and regulations of Ecuador covering the oil andgas industry and the environment.  However,if we begin operating activities in Ecuador, we will be directly subject to suchlaws and regulations.

 

**EnvironmentalCompliance and Risks**

 

As an owner or lessee and operatorof oil and gas properties throughout South America, we are subject to variousnational, state and local laws and regulations relating to discharge ofmaterials into, and protection 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 suspension orcessation of operations in affected areas.

 

We do not presently maintainenvironmental insurance coverage, because, in management’s best judgment, suchcoverage is not necessary at this time in view of our limited activities.  However, we may acquire such insurancecoverage in the future based on our assessment of the risks of our operationsand the costs of such coverage.  No suchcoverage can insure us fully against all environmental risks. We are not awareof any environmental claims existing which would have a material impact uponour financial position or results of operations.

 

We have made and will continue ourefforts to comply with these requirements, which we believe are necessary tosuccessful long-term operations in the oil and gas industry.  We have established policies for continuingcompliance with environmental laws and regulations.  The costs incurred by these policies andprocedures are inextricably connected to normal operating expenses such that weare unable to separate the expenses related to environmental matters; however,we do not believe any such additional expenses are material to our financialposition or results of operations.

 

We do not believe that compliancewith federal, state or local provisions regulating the discharge of materialsinto the environment, or otherwise relating to the protection of theenvironment, will have a material adverse effect upon the capital expenditures,earnings or competitive position of 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.

 

**OperationalHazards and Insurance**

 

Our operations willbe subject to the usual hazards incident to the drilling and production of oiland gas, such as blowouts, cratering, explosions, uncontrollable flows of oil,gas or well fluids, fires, pollution, releases of toxic gas and other environmentalhazards and risks.  These hazards cancause personal injury and loss of life, severe damage to and destruction ofproperty and equipment, pollution or environmental damage and suspension ofoperations.

 

We will evaluatewhether to obtain general liability insurance and in what amounts based onwhether we believe the terms and costs are reasonable for our operations.  Such insurance will not cover every potentialrisk associated with the drilling, production and processing of oil and gas. Inparticular, coverage is not obtainable for all types of environmentalhazards.  The occurrence of a significantadverse event, the risks of which are not fully covered by insurance, couldhave a material adverse effect on our financial condition and results of operations.Moreover, no assurance can be given that we will be able to obtain or maintainadequate insurance at rates we consider reasonable.

 

**Researchand Development**

 

BPZ seeks to use advancedtechnologies in the evaluation of its oil and gas properties and newopportunities.  The Company generallydoes not develop such technologies internally, but its technical team workswith outside vendors to test and utilize these technologies to the fullestpractical extent, particularly in the application of geophysical andexploration software.  In certain cases,the collaboration of the Company has aided the development of thesetechnologies.  The Company does notbelieve it has incurred any quantifiable incremental costs in research anddevelopment activities.

 

9

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**Offices andEmployees**

 

Our corporateheadquarters office is in Houston, Texas, where we lease approximately 4,000square feet of office space under a twelve-month renewable lease.  We also maintain an administrative office inLima, Peru under a month-to-month lease. 

 

As of December 31,2004, we employed 9 full-time employees (of which 3 are executive officers) inthe Houston office, and 2 full-time employees and 1 part-time employee in thePeru office. BPZ believes that its relationship with its employees issatisfactory. None of the employees are represented by a union.

 

**RISKFACTORS**

 

***Risks Relating to the Oil and Natural GasIndustry and Our Business.***

 

***We have a limited operating history and have only engaged in start-upactivities.***  Although BPZ wasformed in 2001, we are in a formative stage because we have not had significantbusiness operations since formation and have generated no revenues from theproduction of oil or gas from our properties. We are also subject to all of therisks inherent in attempting to expand a relatively new business venture.  Such risks include, but are not limited to,the possible inability to profitably operate our existing properties orproperties to be acquired in the future, our possible inability to fund therequirements of such properties and our possible inability to acquireadditional properties that will have a positive effect on our operations. Therecan be no assurance that we will achieve a level of profitability that willprovide a return on invested capital or that will result in an increase in themarket value of the Company’s securities.

 

***We own rights to oil and gas properties that have not yet beendeveloped.***  We own rights tooil and gas properties that have limited or no development. There are noguarantees that our properties will be developed profitably or that thepotential oil and gas resources on the property will produce as expected ifthey are developed.

 

***We require significant additional financing for the exploration anddevelopment of our foreign oil and gas properties, which may not be available.***  We currently have limited working capital.With the net proceeds from a recently completed $6 million privateoffering limited to accredited investors completed on September 30, 2004,we have begun to implement our plans to develop our existing oil and gasproperties, but we do not have sufficient funds required to bring ourexploration, development and acquisition activities to profitability.  We anticipate that full and profitabledevelopment of our existing and future oil and gas discoveries and prospects inSouth America may take several years and will require significant additionalcapital expenditures that we will not be able to fund from operations.  If we are unable to timely obtain adequatefunds to finance these expenditures, our ability to develop our oil and gasreserves may be severely limited or substantially delayed.  Such limitations or delay would likely resultin substantial financial losses and the potential loss of our oil and gasleases.

 

We anticipate thatamounts required to fund our foreign activities will be funded from debtfinancing, sale of equity interests in the Company, joint venture arrangements,the sale of oil and gas interests, and/or future cash flows fromoperations.  The exact nature and termsof such funding sources is unknown at this time, and there can be no assurancethat we will obtain such funding or have adequate fund available to finance ouroperations in Peru.

 

***Our future operating revenue is dependent upon the performance of ourproperties.***  Our futureoperating revenue depends upon our ability to profitably operate our existingproperties by drilling and completing wells that produce commercial quantitiesof gas and to expand our operations through the successful implementation ofour plans to explore and acquire additional properties. The successfuldevelopment of oil and gas properties requires an assessment of recoverablereserves, future oil and gas prices, operating costs, potential environmentaland other liabilities and other factors. Such assessments are necessarily inexact.  There can be no assurances that once inoperation we can produce sufficient operating revenue to operate our existingproperties or acquire additional oil and gas producing properties andleases.  We may not discover anyrecoverable reserves, or we may not be able to make a profit from the reservesthat we discover.  In the event that weare unable to produce sufficient operating revenue to fund our futureoperations, we will be forced to seek additional, third-party funding, if suchfinding can be obtained.  Such optionswould include debt financing, sale of equity interests in the Company, jointventure arrangements, or the sale of oil and gas interests.  If we are unable to secure such alternativefinancing on a timely basis we could be required to delay or scale back ouroperations.  If such unavailability of fundscontinues for any extended period of time, this could result in the terminationof our operations and the loss of an investor’s entire investment.

 

***Our business involves many uncertainties and operating risks that mayprevent us from realizing profits***

 

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***and can cause substantial losses.***  Our development activities may beunsuccessful for many reasons, including weather (such as the effects of “ElNino” off the coasts of Peru and Ecuador), the drilling of dry holes, costoverruns, equipment shortages and mechanical difficulties. Moreover, thesuccessful drilling of a natural gas or oil well does not ensure we willrealize a profit on our investment. A variety of factors, both geological andmarket-related, can cause a well to become uneconomical or only marginallyeconomical. Our business involves a variety of operating risks, including:

 

•                  fires;

•                  explosions;

•                  blow-outs and surfacecratering;

•                  uncontrollable flows ofnatural gas, oil and formation water;

•                  natural disasters, such ashurricanes and other adverse weather conditions;

•                  pipe, cement, subsea well orpipeline failures;

•                  casing collapses;

•                  mechanical difficulties,such as lost or stuck oil field drilling and service tools;

•                  abnormally pressuredformations;

•                  environmental hazards, suchas natural gas leaks, oil spills, pipeline ruptures and discharges of toxicgases.

 

If we experienceany of these problems, any well bores, platforms, gathering systems andprocessing facilities could be affected, which could adversely affect anydrilling operations we may commence. We could also incur substantial losses asa result of:

 

•                  environmental hazards, suchas natural gas leaks, oil spills, pipeline ruptures and discharges of toxicgases;

•                  injury or loss of life;

•                  severe damage to anddestruction of property, natural resources and equipment;

•                  pollution and otherenvironmental damage;

•                  clean-up responsibilities;

•                  regulatory investigation andpenalties;

•                  suspension of ouroperations; and

•                  repairs to resumeoperations.

 

If any of theserisks occur, and our resulting losses are significant, we may have to curtailor suspend any drilling operation we may eventually commence.

 

***We plan to conduct offshore exploration, exploitation and productionoperations off the coast of northwest Peru, all of which are also subject to avariety of operating risks peculiar to the marine environment.***  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.

 

***The geographic concentration of our properties in northwest Peru andsouthwest Ecuador subjects us to an increased risk of loss of revenue orcurtailment of production from factors affecting that region 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 experience:

 

•                  severe weather;

•                  delays or decreases inproduction, the availability of equipment, facilities or services;

•                  delays or decreases in theavailability of capacity to transport, gather or process production; or

•                  changes in the regulatoryenvironment.

 

Because all ourproperties could experience the same condition at the same time, theseconditions could have a relatively greater impact on our results of operationsthan they might have on other operators who have properties over a widergeographic area.

 

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***Instability of International Operations.***  Presently, substantially all of our oil andgas properties are located in South America, specifically Peru and Ecuador. Thesuccess and profitability of our international operations may be adverselyaffected by risks associated with international activities, including economicand labor 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 in laws, expenses ofoperations and fluctuations in exchange rates may make our assumptions aboutthe economic viability of our oil and gas properties incorrect.  If these assumptions are incorrect, we maynot be able to earn sufficient revenue to cover our costs of operations.

 

***Our operations in Peru and Ecuador involve substantial costs and aresubject to certain risks because the oil and gas industry in Peru and Ecuadoris less developed than in the United States.***  The oil and gas industries in Peru andEcuador are not as developed as the oil and gas industry in the United States.As a result, our drilling and development operations in many instances willtake longer to complete and may cost more than similar operations in the UnitedStates. The availability of technical expertise, specific equipment andsupplies may be more limited in Peru and Ecuador than in the United States.Further, once oil and natural gas production is recovered, there are fewer waysto transport it to market for sale. Pipeline and trucking operations aresubject to uncertainty and lack of availability. Oil and natural gas pipelinesand truck transport travel through miles of territory and are subject to therisk of diversion, destruction or delay. We expect that such factors willcontinue to subject our international operations to economic and operatingrisks that companies with domestic operations do not experience.

 

***The unavailability or high cost of drilling rigs, equipment, supplies,personnel and oil field services could adversely affect our ability to executeour exploration and exploitation plans on a timely basis and within our budget.***  Shortages or the high cost of drilling rigs,equipment, supplies or personnel could delay or adversely affect ourexploitation and exploration operations, which could have a material adverseeffect on our business, financial condition or results of operations.  If the unavailability or high cost of rigs,equipment, supplies or personnel were particularly severe in Peru and Ecuador,we could be materially and adversely affected because our operations andproperties are concentrated in those areas.

 

***We are subject to numerous foreign laws and regulations of the oil andnatural gas industry that can adversely affect the cost, manner or feasibilityof doing business.***  Our operations aresubject to extensive foreign laws and regulations relating to the explorationfor and the development, production and transportation of oil and natural gas.Future laws or regulations, any adverse change in the interpretation ofexisting laws or our failure to comply with existing legal requirements mayharm our business results of operations and financial condition. We may berequired to make large and unanticipated capital expenditures to comply withgovernmental regulations, such as:

 

•                  work program guarantees andother financial responsibility requirements;

•                  taxation;

•                  royalty requirements;

•                  customer requirements;

•                  operational reporting; and

•                  safety requirements.

 

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

 

•                  personal injuries; and

•                  property and naturalresource damages; and governmental infringements and sanctions.

 

***If we fail to comply with the terms of certain contracts related to ourforeign operations, we could lose our rights under each of those contracts.***  The terms of each of our contracts with thegovernment of Peru, including our Peruvian License Contracts and TechnicalEvaluation Agreements, require that we perform certain activities, such asseismic interpretations and the drilling of required wells in accordance withthose contracts and agreements. Our failure to timely perform those activitiesas required could result in the loss of our rights under a particular contractor the loss of the amounts we have posted as a guaranty for the performance ofsuch activities, which would likely result in a significant loss to us. As of December 31,2004, we believe we were in compliance with all of the material requirements ofeach of such contracts.

 

***We are subject to complex environmental regulatory and permitting lawsand regulations that can adversely affect the cost, manner and feasibility ofour planned operations.***  The development,production and sale of oil

 

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and gas in SouthAmerica are subject to extensive environmental laws and regulations.  Our ability to conduct continued operationsis subject to satisfying applicable regulatory 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. Failure to comply with these laws and regulations also may result in thesuspension or termination of our planned drilling operations and subject us toadministrative, civil and criminal penalties.

 

Our current permitsand authorizations and our ability to get future permits and authorizations may,over time, be susceptible to increased scrutiny, resulting in increased costs,or delays in receiving appropriate authorizations. In particular, we mayexperience delays in obtaining permits and authorizations in Peru and Ecuadornecessary for our operations. Compliance with these laws and regulations mayincrease our costs of operations, as well as further restrict our foreignoperations.  Moreover, these laws andregulations could change in ways that substantially increase our costs. Theselaws and regulations have changed frequently 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 that unanticipateddevelopments could cause us to make environmental expenditures that aresignificantly different from those we currently anticipate, thereby increasingour overall costs. Failure to comply with new regulations could cause us tosuspend or terminate certain operations or subject us to administrative, civiland criminal penalties.  Any of theseliabilities, penalties, suspensions, terminations or regulatory changes couldmaterially adversely affect our financial condition and our ability toimplement our plan of operation. 

 

***Compliance with, or breach of, laws relating to the discharge ofmaterials into, and the protection of the environment, can be costly and couldlimit our operations.***  As an owner orlessee and operator of oil and gas properties throughout 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 establishedpractices for continued compliance with environmental laws and regulations. Webelieve the costs incurred by these policies and procedures are necessarybusiness costs in the oil and gas industry. There is no assurance that changesin or additions to laws or regulations regarding the protection of theenvironment will not increase such compliance costs, or have a material adverseeffect upon our capital expenditures, earnings or competitive position.

 

***Our oil and gas operations involve substantial costs and are subject tovarious economic risks.***  Our oil and gasoperations 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 are less than anticipated, thatwe will not have sufficient funds to drill on the property, that we will not beable to market the oil and/or gas due to a lack of a market and thatfluctuations in the prices of oil and/or gas will make development of thoseleases uneconomical. This could result in a total loss of our investment. Inaddition, the cost and timing of drilling, completing and operating wells isoften uncertain.

 

***Competition for oil and natural gas properties and prospects isintense; some of our competitors have larger financial, technical and personnelresources that give them an advantage in evaluating and obtaining propertiesand prospects.***  We operate in ahighly competitive environment for reviewing prospects, acquiring properties,marketing oil and natural gas and securing trained personnel and equipment. Inaddition, changes in Peruvian government regulation have enabled multinationaland regional companies to enter the Peruvian energy market. Competition in ourbusiness activities has increased and will increase further, as existing andnew participants expand their activities as a result of these regulatorychanges. Many of our competitors possess and employ financial resources thatallow them to obtain substantially greater technical and personnel resourcesthan we have. We actively compete with other companies in our industry whenacquiring new leases or oil and gas properties. For example, Perupetro maychoose to call for bids, either through international competitive biddings orthrough private bidding processes by invitation, if several companies areinterested in an area, and award the

 

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contract to thehighest bidder. These additional resources can be particularly important inreviewing prospects and purchasing properties. Our competitors may be able toevaluate, bid for and purchase a greater number of properties and prospectsthan our financial or personnel resources permit. Our competitors may also beable to pay more for productive oil and natural gas properties and exploratoryprospects than we are able or willing to pay. On the acquisition opportunitiesmade available to us, we compete with other companies in our industry forproperties operated by third parties through a private bidding process, directnegotiations or some combination thereof. Our ability to acquire additionalprospects and to find and develop reserves in the future will depend on ourability to evaluate and select suitable properties and to consummatetransactions in a highly competitive environment. If we are unable to competesuccessfully in these areas in the future, our future revenues and growth maybe diminished or restricted. The availability of properties for acquisitiondepends largely on the divesting practices of other oil and natural gascompanies, commodity prices, general economic conditions and other factors wecannot control or influence.

 

***The loss of senior management or key technical personnel couldadversely affect us.***  Certain members ofmanagement who have substantial expertise in the type of endeavors presentlyconducted by us, have been engaged by the Company. We do not maintain any lifeinsurance against the loss of any of these individuals. To the extent thattheir services become unavailable, we will be required to retain otherqualified personnel. There can be no assurance that we will be able to recruitand hire qualified persons upon acceptable terms.

 

Similarly, the oiland gas exploration industry requires the use of personnel with substantialtechnical 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 given that we will beable to recruit and hire such persons on acceptable terms.

 

***Insurance does not cover all risks.***  Exploration for and production of oil andnatural gas can be hazardous, involving unforeseen occurrences such asblowouts, cratering, fires and loss of well control, which can result in damageto or destruction of wells or production facilities, formations, injury topersons, loss of life, or damage to property or the environment. Even if we areable to secure additional financing, we may not have sufficient capital toestablish any reserves for contingent liabilities or workovers. We do notpresently maintain insurance against losses or liabilities arising from ouroperations or for environmental coverage. We will evaluate whether we willobtain insurance coverage and in what amounts, consistent with our businessactivities in the future, should our management determine that we havesufficient funds to do so. No such insurance coverage can insure for all operationalor environmental risks. The occurrence of an event that is not insured or notfully insured could result in losses to us. For example, uninsuredenvironmental damages, property damages or damages related to personal injuriescould divert capital needed to implement our plan of operation. If any suchuninsured losses are significant, we may have to curtail or suspend ourdrilling operations until such time as replacement capital is obtained, ifever.

 

***A substantial or extended decline in oil and natural gas prices mayadversely affect our business, financial condition, cash flow, liquidity orresults of operations and our ability to meet our capital expenditureobligations and financial commitments to implement our business plan.***  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 that are beyond our control. Those factors include:

 

•                  international politicalconditions (including wars and civil unrest),

•                  the domestic and foreignsupply of oil and gas,

•                  the level of consumerdemand,

•                  weather conditions,

•                  domestic and foreigngovernmental regulations and other actions,

•                  actions taken by theOrganization of Petroleum Exporting Countries (OPEC),

•                  the price and availabilityof alternative fuels, and

•                  overall economic conditions.

 

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Lower oil and natural gas prices may not only decrease our revenues ona per unit basis, but may also reduce the amount of oil and natural gas we canproduce economically, if any. A substantial or extended decline in oil andnatural gas prices may materially affect our future business, financialcondition, results of operations, liquidity and borrowing capacity we may haveand may require a reduction in the carrying value of our oil and gasproperties.

 

***We may not be able to develop a proven reserve base.***  Our future success will depend upon ourability to find, acquire and develop oil and gas reserves that are economicallyrecoverable.  Any reserves we developwill decline as they are produced, except to the extent that we conductsuccessful revitalization activities, or are able to acquire propertiescontaining proven reserves, or both.  Todevelop reserves and 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 thanourselves. Moreover, even if desirable properties are available to us, we maynot have sufficient funds with which to acquire additional leases. While our revenuesmay increase if prevailing oil and gas prices increase significantly,exploration costs for additional reserves may also increase.

 

**Item 2.  Description of Properties**

 

**BPZ’sProperties in Peru**

 

The Companycurrently owns a 100% working interest in license contracts for Block Z-1 andBlock XIX.  We have also entered into aTechnical Evaluation Agreement for Area VI and a Promotional TechnicalEvaluation Agreement for Area XVI.  Theselatter two Agreements give us the right to conduct technical evaluations ofthose areas over a 24-month period and the preferential right to enter intolicense contracts if the evaluations indicate the potential for profitableoperations.  These four blocks occupy acombined area of approximately 2.76 million acres.  The term of a license contract in Peru isgenerally 40 years for gas exploration, development and production and30 years for oil exploration, development and production. 

 

**BPZ’S EXPLORATION PROJECTS INNORTHWEST PERU**

 
| **CONTRACT /  AGREEMENT** | ** ** | **BASIN**              | ** ** | **AREA (c)**  | ** ** | **BPZ’s  Participation** | ** ** |
|---------------------------|------------|------------------------|------------|---------------|------------|-------------------------------|------------|
| ** **                | ** ** | ** **             | ** ** | **(acres)**   | ** ** | **(%)**                       | ** ** |
| **Block  Z-1 (a)**        |       | Tumbes                 |       | 739,205       |       | 100                           | %          |
| **Block  XIX (a)**        |       | Tumbes/Talara          |       | 472,860       |       | 100                           | %          |
| **Area  XVI (b)**         |       | Talara                 |       | 107,095       |       | 100                           | %          |
| **Area  VI (b)**          |       | Lancones               |       | 1,443,561     |       | 100                           | %          |
| ** **                | ** ** | **TOTAL ===>** | ** ** | **2,762,721** |       |                          |       |

 

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**(a)License Contract**

**(b)Technical Evaluation Agreement**

**(c)All acreage is considered undeveloped**

** **

**Descriptionof Block Z-1 and License Contract**

 

Block Z-1, acoastal offshore area encompassing 739,205 acres, is situated at the southernend of the Gulf of Guayaquil in northwest Peru. Geologically, the block lies within the Tumbes basin.  From the coastline, water depths increasegradually.  The average water depth ofthe area is approximately 200 feet and only 10% of the area has depths greaterthan 500 feet.  There are four structureswhich were drilled in the 1970’s and 1980’s by previous operators, includingTenneco, Inc. and Belco Oil and Gas Corporation.  These structures are known as the Albacora,Corvina, Delfin and Piedra Redonda fields. Wells drilled in each of these structures encountered hydrocarbons,principally natural gas, while drilling at depths ranging from 6,000 to 12,000feet.  However, at the time the wellswere drilled, it was not considered economic to produce and sell natural gasfrom the fields.  Accordingly, the wellswere either suspended or abandoned.  

 

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BPZ originallyacquired its initial interest in Block Z-1 in a joint venture with SyntroleumCorporation, under an exploration and production license contract dated November 30,2001, with an effective date of January 29, 2002.  Under the original contract, BPZ owned a 5%non-operating working interest in the block. Syntroleum later transferred its interest to Nuevo Energy, Inc.  Subsequent to the merger of Nuevo Energy,Inc. and Plains Exploration and Production Company, Nuevo Energy, Inc.relinquished its interest in Block Z-1 and BPZ assumed this interest and theremaining obligations under the contract. Perupetro approved the assumption of Nuevo’s interest by BPZ and thedesignation of BPZ as a qualified operator under the contract in November 2004.  Such action was subject to officialratification and issuance of a Supreme Decree by the government of Peru, whichwas received in February 2005.  Accordingly,an amended contract was signed with Perupetro, which named BPZ as the owner of100% of the participation under the license contract.  The Block Z-1 contract term is 30 years fromthe effective date for oil production and 40 years for gas production.  Royalties under the contract vary from 5% to20% based on production volumes.

 

The licensecontract provides for an initial exploration period of seven years, which isdivided into four periods, and can be extended under certain circumstances foran additional three years.  Each periodhas a commitment for exploration activities and requires a financial guaranteeto secure the performance of the work commitment during such period.  Block Z-1 is currently in the secondexploration period which will last for up to 18 months, ending in July 2006.  During the second exploration period, theCompany must drill at least one exploratory well or acquire 300 squarekilometers of seismic data.  The Companyposted a $1.3 million performance bond in January 2005 in connection withthe second exploration period.  The thirdexploration period is scheduled to begin in July 2006 and expire in January 2008and will require the drilling of an additional exploratory well or otherequivalent work commitments and will require a performance bond of $1.0million.  The fourth and finalexploration period is scheduled to begin in January 2008 and expire in January 2009.  It will also require the drilling of anadditional exploratory well or other equivalent work commitments and willrequire a performance bond of $1.0 million. The performance bond amounts are not cumulative, and are released assoon as the work commitment for that exploration period has beensatisfied.  In addition, BPZ is requiredto make technology transfer payments, related to training costs of Perupetroprofessional staff, during the exploration phase of $50,000 per year.

 

The exploitation,or development, period of the contract will commence as soon as the Companydeclares a commercial discovery and receives approval for a field developmentplan.  The Company must declare acommercial discovery no later than the end of the last exploration period,including any extensions or deferments. Under the terms of the contract, oil production can continue for a totalof 30 years from the effective date of the contract, and gas production cancontinue for 40 years.

 

**Descriptionof Block XIX**

 

Block XIX coversapproximately 472,860 acres, lying entirely onshore and adjacent to Block Z 1in northwest Peru.  Geologically, the blocklies primarily within the Tumbes basin of Oligocene-Neogene age, but alsocovers part of the Talara Basin to the south.

 

In February 2003,BPZ entered into a Technical Evaluation Agreement with Perupetro for BlockXIX.  In December 2003, the Company signeda license contract whereby it acquired a 100% interest in Block XIX.  The term for the exploration period is sevenyears and can be extended under certain circumstances for an additional periodof up to three years.  If a commercialdiscovery is made during the exploration period, the contract will allow forthe production of oil for a period of 30 years from the effective date and theproduction of gas for a period of 40 years. Royalties under the contract vary from 5% to 20% based on production volumes.

 

The seven yearexploration phase is divided into 5 periods of 18 months, 24 months, 15 months,15 months and 12 months, respectively. BPZ is currently in the first exploration period which is scheduled toend in June 2005 unless an extension is requested.  In connection with the second explorationperiod, the Company will be obligated to post a $350,000 performance bond inMay 2005.  The third exploration periodis schedule to begin in July 2007 and will require a performance bondof $585,000.  The fourth explorationperiod is scheduled to begin in October 2008 and will require aperformance bond of $585,000.  The fifthand final exploration period is scheduled to begin in January 2009 andwill require a performance bond of $585,000. The performance bond amounts are not cumulative, and are released assoon as the work commitment for that exploration period has beensatisfied.  In addition, BPZ is requiredto make technology transfer payments, related to training costs of Perupetroprofessional staff, during the exploration phase of $5,000 per year.

 

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The exploitation,or development, period of the contract will commence as soon as the Companydeclares a commercial discovery and receives approval for a field developmentplan.  The Company must declare acommercial discovery no later than the end of the last exploration period,including any extensions or deferments.  

 

**Descriptionof Area XVI**

 

Area XVI is locatedonshore in northwest Peru, in the prolific oil-bearing Talara Basin, and coversan area of approximately 107,095 acres. Area XVI lies about 85 kilometers northeast of the city of Talara, andimmediately to the east of Block X, currently operated by Petrobras EnergíaS.A.  Block X is one of the mostproductive blocks in the Talara Basin.  

 

In December 2003,BPZ entered into a Technical Evaluation and Promotion Agreement for AreaXVI.  The purpose of the agreement is toenable BPZ to perform technical studies based on existing information, applyingnew concepts, new interpretations and new exploration models, with theobjective of obtaining evidence of potential exploratory success under alicense contract.  The agreement covers aperiod of 24 months.  At the end of thisperiod, the Company has the preferential right to obtain a license contractcovering the area.  In connection withthe signing of this Agreement, the Company posted a $20,000 performancebond.  In addition, BPZ is obligated toarrange for technology transfer to Perupetro professional staff.  The costs associated with this training areexpected to be less than $5,000.

 

**Descriptionof Area VI**

 

Area VI is locatedonshore in northwest Peru, within the Lancones Basin of Cretaceous – UpperEocene Age, and covers an area of approximately 1,443,561 acres.  The Lancones Basin is primarily anexploratory area and has had limited drilling activity to date.

 

In December 2003,BPZ entered into a Technical Evaluation and Promotion Agreement for AreaVI.  The purpose of the agreement is toenable BPZ to perform technical studies based on existing information, applyingnew concepts, new interpretations and new exploration models, with theobjective of obtaining evidence of potential exploratory success under alicense contract.  The agreement covers aperiod of 24 months.  At the end of thisperiod, the Company has the preferential right to obtain a license contractcovering the area.  In connection withthe signing of this Agreement, the Company posted a $20,000 performancebond.  In addition, BPZ is obligated toarrange for technology transfer to Perupetro professional staff.  The costs associated with this training areexpected to be less than $10,000.

 

**Oiland Gas Resources**

 

During 2004, the Company retainedGaffney Cline & Associates, Inc. (“GCA”), an internationally recognized firmof independent reserve engineers, to evaluate the oil and gas resourcepotential of the Corvina and Piedra Redonda Fields in the Block Z-1 licensecontract area.  GCA focused itsevaluation on the wells which were drilled by previous operators of Block Z-1,and the seismic and other geological and geophysical data available on theblock.

 

In the Corvina Field, five wellswere drilled, including two wells drilled by Tenneco, Inc. in the mid-1970’sand three wells drilled by Belco Oil and Gas Corporation (“Belco”) in the early1980’s.  Two existing drilling andproduction platforms were set during this period and are still in place in theCorvina Field.  The platforms need to berepaired and refurbished, but are structurally sound and believed to besuitable for the Company’s future operations. Four of the five wells in the Corvina Field encountered hydrocarbons andapparent reservoir-quality formations. One of the wells, the CX11-16X, produced natural gas at rates of 16.6million cubic feet of gas per day (“MMcf/d”). This well was completed and successfully tested over an extended periodand was later temporarily abandoned.  TheCompany believes this well can be reestablished as a producing well.

 

In the Piedra Redonda Field, twowells were drilled by Belco in the late 1970’s and early 1980’s.  Hydrocarbons were present in both wells.  One well was completed, while the other wellencountered high pressures and was abandoned prior to reaching the intendedtotal depth.  As in the Corvina Field,there is a drilling and production platform in place in the Piedra RedondaField.  The completed well in the PiedraRedonda Field, the C18X, produced natural gas at rates of 8.3 MMcf/d and was alsosuccessfully tested over an extended period.

 

GCA reviewed all availabletechnical data, including a large volume of 2-D seismic data, well logs,drilling and completion reports, well test information, and other geologicaland geophysical data and analysis.  Basedon this

 

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data, GCA concluded that oil andgas resources existed in the Corvina and Piedra Redonda Fields that could beconsidered proved from a geological and engineering standpoint.  The Company intends to move forward with thedevelopment of these resources as discussed in Item 6 – Management’s Discussionand Analysis of Financial Condition and Plan of Operation of this Form10-KSB.  However, as discussed in Item 6,the development of these resources will require a significant financialinvestment which is estimated at $90.0 million. The Company does not currently have the financial capacity orcommitments for a development program of this magnitude.  Accordingly, the Company is not disclosingproved reserves in this Form 10-KSB filing. At such time as the Company has obtained sufficient financialcommitments to proceed with the full development of Block Z-1, it expects torecord SEC proved reserves and disclose such reserves in its SEC filings.

 

**BPZ’sProperties in Ecuador**

 

In June 2004,BPZ acquired 100% of the common stock of SMC Ecuador, Inc., a Delawarecorporation (“SMC”), and the owner of a 10% interest in certain non-operatedoil and gas energy producing properties located in the Republic of Ecuador (the“Santa Elena Property”).  In order tofinance the acquisition, BPZ entered into a debt arrangement in the amount of$1,375,000 (the “Loan”) with an individual (the “Lender”).  The Loan was to be repaid in 36 equalinstallments, paid monthly, bearing interest at 15%.  The Lender held a first lien on the commonstock of SMC as collateral.  Upon fullrepayment of the Loan by BPZ, the Lender was entitled to receive beneficialownership of 40% of the interests of SMC in the Santa Elena Property (or a 4%derivative working interest in the Santa Elena Property).

 

In September 2004,BPZ reached an agreement with the Lender to cancel the above agreement andenter into a new agreement whereby BPZ converted $1,000,000 of the principalbalance of the Loan, plus $20,529 of accrued interest, into 500,000 shares ofCompany stock.  The remaining balance ofthe Loan, or $293,136, will be payable in 10 equal monthly installments withinterest imputed at 15%.  The agreementto convey beneficial ownership of a 4% derivative working interest in the SantaElena Property was also accelerated to the date of the agreement.  Accordingly, BPZ now owns a 6% effectiveworking interest in the Santa Elena Property.

 

The Santa ElenaProperty is located approximately 90 miles west of the city of Guayaquil alongthe coast of Ecuador.  Pacifpetrol, anEcuadorian oil and gas company owns the remaining 90% of the workinginterest.  The mineral interest owner isEscuela Superior Politecnica del Litoral (ESPOL).  The contract with ESPOL provides forroyalties payments equal to 23% of production and expires at the end of theyear 2016.  There have been almost 3,000wells drilled in the field since production began in the 1920’s.  Currently, there are approximately 1,258active wells which produce approximately 2,000 barrels of oil per day.  The majority of the wells produceintermittently by gas lift, mechanical pump or swabbing techniques.  Crude oil is gathered in holding tanks andpumped via a pipeline to an oil refinery in the city of Libertad, Ecuador.

 

**Item 3.  Legal Proceedings**

 

Navidec, Inc. was advised in aletter dated February 24, 2004 that the SEC was conducting an informalinquiry to determine whether Navidec, Inc. had violated federal securitieslaws.  The SEC made an informal requestthat Navidec voluntarily produce certain documents, which were provided to theSEC in May 2004.  Based on the inquiriesmade and the information requested, the Company believes that the SEC’sinvestigation relates, at least in part, to the restatement of reportedearnings for the first and second quarters of 2003 by Navidec, Inc.  This restatement was reported in Navidec,Inc.’s Form 10-Q for the third quarter of 2003 filed on December 11, 2003.

 

On December 22, 2004, theCompany received notice that the SEC had issued an Order Directing a PrivateInvestigation and Designating Officers to take Testimony, and would beconducting a formal investigation.  Weare cooperating fully with the SEC and are in discussions with the Commissionregarding this matter.  Although weintend to work to bring this matter to a prompt conclusion, we cannot make anyassurance that the investigation will be solved positively or that it will nothave negative effects on our limited resources or our ability to raise capitalduring the period of the investigation.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

Therewere no matters submitted during the fourth quarter of the fiscal year coveredby this Report to a vote of stockholders, through the solicitation of proxies,or otherwise.

 

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Subsequentto year end, the Company held a special meeting of shareholders on February 4,2005, the purpose of which was to amend the Company’s articles of incorporationto change the name of the Company to BPZ Energy, Inc.  The matter passed with 64.2% of the votes infavor of the name change as detailed in the table below:

 
| ** **       | ** ** | **Outstanding**    | ** ** | ** ** | ** ** |
|------------------|------------|--------------------|------------|------------|------------|
| **Type of vote** | ** ** | **Voting  Shares** | ** ** | **%**      | ** ** |
|             |       |               |       |       |       |
| For              |       | 10,604,322         |       | 64.2       | %          |
| Against          |       | 15,057             |       | 0.1        | %          |
| Abstain          |       | —             |       | 0.0        | %          |
| Did not vote     |       | 5,906,469          |       | 35.7       | %          |
| Total Shares     |       | 16,525,848         |       | 100.0      | %          |

 

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# **PART II**

 

**Item 5.Market for Common Equity and Related Stockholder Matters**

 

**Descriptionof Securities – Common Stock**

 

Our common stock, no par value pershare, has been traded on the OTC Bulletin Board since August 18,2003.  Prior to that date, it was tradedon the Nasdaq Small Cap Market. Effective February 7, 2005, the stock began trading under thesymbol “BPZI”.  Prior to that date, the stocktraded under the symbol “NVDC”.

 

There are 20,000,000 sharesauthorized.  As of December 31,2004, we had 16,529,848 shares issued and outstanding.  The following table sets forth the high andlow quarterly closing prices for our common stock as reported by the OTCBulletin Board or the Nasdaq Small Cap Market. Such market prices reflect inter-dealer prices, without retail mark-up,mark-down or commissions, and may not represent actual transactions.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2004**       |       |     |       |    |       |
| Fourth quarter |       | 5.25     |       | 3.30    |       |
| Third quarter  |       | 3.65     |       | 1.25    |       |
| Second quarter |       | 2.05     |       | 1.30    |       |
| First quarter  |       | 1.20     |       | 0.98    |       |
|           |       |     |       |    |       |
| **2003**       |       |     |       |    |       |
| Fourth quarter |       | 1.26     |       | 1.03    |       |
| Third quarter  |       | 3.20     |       | 1.05    |       |
| Second quarter |       | 3.10     |       | 1.91    |       |
| First quarter  |       | 2.55     |       | 1.90    |       |

 

**Holders**

 

As of December 31, 2004, wehad approximately 300 shareholders of record, plus an estimated 2,500beneficial owners of our common stock.

 

**DividendPolicy on Common Stock**

 

We have never paidcash dividends on our stock.  For theforeseeable future, we intend to retain earnings, if any, to meet our workingcapital requirements and to finance future operations.  Accordingly, we do not plan to declare ordistribute cash dividends to the holders of our common stock in the foreseeablefuture.

 

**RecentSales of Unregistered Securities**

 

On September 2,2003, the Company began a private placement offering of up to 1,250,000 unitsat $1, each unit consisting of one common share, one ‘‘A’’ Warrant and one ‘‘B’’Warrant.  The ‘‘A’’ Warrant isexercisable at $2.00 until August 31, 2005.  The Company has the right to call the ‘‘A’’warrant if the trading price of the Company common stock is above $2.00 formore than 10 consecutive trading days. The ‘‘B’’ Warrant is exercisable at $4.00 and expires on August 31,2005.  The Company has the right to callthe warrant if the trading price of the Company common stock is above $4.00 formore than 10 consecutive trading days. The Company closed the private placement on January 30, 2004.  The Company sold a total of 564,500 units forgross proceeds of $564,000, of which $215,000 was received in the first quarterof 2004.

 

In connection with the Merger ofthe Company and BPZ Energy, Inc. (the “Merger”), the Company issued 9,000,000shares of common stock in a stock for stock exchange to the shareholders of BPZEnergy, Inc.  This transaction is morefully discussed in Note 2 of the Notes to Consolidated Financial Statements.

 

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In connection with the Merger, theCompany issued 604,246 shares of common stock to Navidec Financial Services (“NFS”),a wholly-owned subsidiary of the Company. Pursuant to the terms of the Merger agreement, NFS will be spun off tothe shareholders of record of Navidec, Inc. immediately prior to theconsummation of the Merger.

 

On September 29, 2004, theCompany issued 500,000 shares of common stock to an individual in exchange forthe retirement of $1,020,529 of debt and accrued interest.

 

As of September 30, 2004, theCompany closed a private placement of common stock for cash that began on July 27,2004.  The offering raised a total of$6,000,000 in gross proceeds through the sale of 3,000,000 common shares at aprice of $2.00 per share to a total of 89 accredited investors.  The Company intends to use the net proceedsof this offering to develop its existing oil and gas properties, to acquire newproperties, and for general working capital purposes, as management deemsappropriate.  The net proceeds of theoffering were approximately $5,507,000 after deducting placement agent fees of$360,000 and other offering costs.

 

The shares of common stock issuedduring the period were exempted from registration in reliance upon Section 4(2)of the Securities Act of 1933, as amended (the “Securities Act”), andRegulation D promulgated thereunder. Shares in the private placement were only offered to select accreditedinvestors (as such term is defined in Rule 501(a) of Regulation D under theSecurities Act).

 

**Item  6. Management’s Discussion and Analysis or Plan of Operation**

 

***SEE - RISK FACTORS IN ITEM 1 “DESCRIPTION OF BUSINESS” OF THIS ANNUALREPORT FORM 10-KSB***

 

**Resultsof Operations**

 

We are in the earlystage of developing our properties in Peru and do not currently have anyproduction or revenues from these properties. Our operations to date have been limited to technical evaluation of theproperties and the design of development plans to exploit the oil and gasresources on those properties.

 

Our operating andadministrative expenses to date have consisted principally of general andadministrative costs and geological, geophysical and engineering costs.  These general and administrative costs haveincreased significantly from $96,067 in 2003 to $1,170,536 in 2004 as ouractivity levels have increased.  We alsoincurred $360,965 of geological, geophysical and engineering costs in 2004,compared to no costs in this category in 2003. We expect both of these costs to increase as we proceed with ourdevelopment plans.

 

In connection withthe Merger, we recorded a charge in the amount of approximately$16.3 million. This charge is discussed in detail in Note 2 of theNotes to the Consolidated Financial Statements.

 

We also incurredinterest expense of $66,959 and amortization of debt financing costs of $360,439in 2004, principally from the financing of the acquisition of the Santa ElenaProperty in June 2004.  Thisproperty generated net cash distributions of $190,621 during the last half of2004.

 

The Companyrealized a net loss of approximately $18.0 million, or $2.08 per share, for theyear ended December 31, 2004, the majority of which is attributable to theapproximately $16.3 million of non-cash equity-related costs incurred inconnection reverse merger with Navidec.

 

**Planof Operation**

 

Our plan ofoperation for the next twelve months is focused primarily on exploiting theresource opportunities in the offshore Block Z-1 in northwestPeru.  To achieve our objectives, we mustobtain significant financing from external sources.  We are working to develop external financingoptions, but we do not currently have sufficient capital resources, nor do wecurrently have firm commitments from external sources to allow us to undertakeall of the operations envisioned in this plan.

 

Our plan ofoperation envisions the installation of a 140 megawatt (‘‘MW’’) gas-firedelectric generation complex near the town of Caleta Cruz, in northwestPeru.  This power plant will initiallyuse gas from the Corvina Field in Block Z-1, which is located approximately 10miles offshore from the power plant site. The Corvina Field has an existing

 

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platform which willbe refurbished to make it suitable for drilling operations.  There is also a shut-in gas well which weintend to recomplete and utilize for gas production.  Our initial plans call for the drilling ofsix additional wells from the existing platform.  We are working to have the environmental anddrilling permits and platform refurbishment completed by October 2005 andwe expect to commence workover and drilling operations at that time.  The drilling of the additional six wells willextend into 2006.

 

We must construct a10 mile natural gas pipeline to transport natural gas from the Corvina Field tothe power plant site at Caleta Cruz.  Thepower plant site has an existing substation and power transmission lines thatwith certain upgrades are capable of handling up to 300 MW of power.  Our plan is to own 100% of the powerplant.  Accordingly, our revenues fromthe natural gas delivered to the power plant will be derived from the sale ofelectricity.  

 

In order to supportour proposed electric generation project, we recently commissioned anindependent power market analysis for the region.  The Peruvian electricity market isderegulated and power is transportable on an interconnected national gridmanaged by the Committee for Economic Dispatching of Electricity (known as “COES”).  Based on this study, we are confident that wewill be able to sell economic quantities of electricity from our initial 140 MWpower plant at Caleta Cruz.  We believethere may be an opportunity in the future to generate and profitably sell up to600 MW of power into the Peruvian and Ecuadorian power markets.  Our goal is to commence initial sales ofelectricity by July 2006.  

 

The environmentalstudies for the operations needed to develop and transport natural gas from theCorvina Field to the power plant site and construct the power plant wereinitiated during the first quarter of 2005. These studies must be completed and approved before the gas pipeline andpower plants may be built. 

 

In addition to thelocal power market targeted by our project in Peru, we intend to simultaneouslydevelop a gas-power strategy in nearby Ecuador to capitalize on what we believeto be the large upside gas potential of the Corvina and Piedra Redonda Fieldslocated in Block Z-1, as well as the potentially significant natural gasresources in the adjacent onshore Block XIX. These areas are within 30 miles of the Ecuadorian border and can bedeveloped for export sales of either raw gas or power generation via connectionto the transmission system of Ecuador. Our initial plan of operation calls for the Company to construct a40-mile pipeline from Caleta Cruz, the terminal point of our offshore pipelinefrom the Corvina Field, to Arenillas, Ecuador. We intend to sell gas for the generation of electricity by third partypower producers in the local market in Ecuador. We have negotiated three preliminary agreements for delivery ofgas.  We are planning to have thispipeline completed for first sales by October 2006, though no assurancecan be given that we can meet this schedule.

 

We have secured theenvironmental permits and other authorizations to shoot seismic in Block Z-1and Block XIX.  However, our primary goalis development of the gas production from Block Z-1 to supply the proposedpower plant at Caleta Cruz.  Accordingly,seismic acquisition may be deferred until such time as we have sufficientfinancial and technical resources available for that project.

 

Our other twoexploration areas in Peru, Area VI and Area XVI, which are held by BPZ underexclusive Technical Evaluation Agreements, will undergo geochemical studiesduring calendar year 2005.  Whilerelatively inexpensive, these geochemical studies, when integrated withpreviously acquired geophysical and geological data, should provide us with anindication of the exploration and development potential of these areas. 

 

We are currentlydeveloping engineering plans and designs for the various components of our planof operation.  We have not obtainedoutside bids for all of the major equipment components, shipping andinstallation and associated services. Such bids and estimates, when obtained, will be subject to change andcontingencies.  Accordingly, we do nothave a complete estimate of the total costs of the initial phases of theproject.  However, based on our currentestimates, we expect that the initial phases of the project, including the costof the natural gas pipeline to Arenillas, Ecuador, will require total capitalexpenditures on the order of $90.0 million. 

 

We are seekingfinancing for the natural gas exploitation and power development projectthrough a combination of leasing, debt and/or equity funding.  The timing of this project is dependent on avariety of factors, including technical design of facilities, permitting,availability of equipment, delivery lead times, execution by contractors, andavailability of financing, many of which are outside the control of the Company.  While we believe we have adequate capital onhand to begin implementing the ongoing gas-power strategy, our plan ofoperation will require substantial financing for the Corvina Field development,gas pipeline and power plant installation, for which no firm commitments havebeen received.  We cannot provideassurance that the Company will be successful in obtaining this financing.

 

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**Liquidity,Capital Resources and Capital Expenditures**

 

Prior to the Merger,the Company primarily used debt financing to fund its operations. In connectionwith the Merger, the Company received total net proceeds of approximately$5.5 million from a private placement of its common stock.  The cash on hand at December 31, 2004 ofapproximately $4.0 million is expected to be sufficient to cover the generaland administrative overhead of the Company for the next twelve months and alsopermit limited expenditures to advance the project, such as environmental andengineering studies and other design expenditures.  However, we will require significantadditional financing (currently estimated to be on the order of$90 million) to develop our properties and begin producing meaningfulrevenues.  As discussed above in our planof operation, we are seeking financing through a combination of leasing, debtand/or equity financing.  We will bedependent on the capital markets for these funds and there can be no assurancethat we will be successful in our efforts to secure such additional capital.

 

**Off-BalanceSheet Arrangements**

 

As of December 31,2004, we had no transactions, agreements or other contractual arrangements withunconsolidated entities or financial partnerships, often referred to as specialpurpose entities (“SPEs”), which generally are established for the purpose offacilitating off-balance sheet arrangements. 

 

**CriticalAccounting Policies and Recent Accounting Pronouncements**

 

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles (“GAAP”).  Management uses estimates and assumptions inpreparing the consolidated financial statements in accordance with GAAP.  Those estimates and assumptions affect thereported amounts of assets, liabilities, revenues and expenses in theconsolidated financial statements, and the disclosure of contingent assets andliabilities.  We have identified thefollowing as critical accounting policies as directly related to our businessand its operations, and the understanding of our financial statements.  The impact of these policies and associatedrisks, as they affect our reported and/or expected financial results, arediscussed throughout Management’s Discussion and Analysis.  A complete discussion of our accountingpolicies is included in Note 1 of the Notes to Consolidated FinancialStatements.

 

***Successful Efforts Method of Accounting***

 

We follow thesuccessful efforts method of accounting for our investments in oil and gasproperties.  Under this method, oil andgas lease acquisition costs and intangible drilling costs associated withexploration efforts that result in the discovery of proved reserves and costsassociated with development drilling, whether or not successful, arecapitalized when incurred.  Certain costsof exploratory wells are capitalized pending determinations that provedreserves have been found.  If thedetermination is dependent upon the results of planned additional wells andrequired capital expenditures to produce the reserves found, the drilling costswill be capitalized 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 to unsuccessful exploratory wells are expensed whensuch wells are determined to be non-productive or at the one year anniversaryof completion of the well if proved reserves have not been attributed andcapital expenditures as describe in the preceding sentence are notrequired.  We assess our capitalizedexploratory wells pending evaluation each quarter to determine whether costsshould remain capitalized or should be charged to earnings.  Other exploration costs, including geologicaland geophysical costs, are expensed as incurred.  We will recognize gains or losses on the saleof properties, should they occur, on a field-by-field basis.

 

The application ofthe successful efforts method of accounting requires management’s judgment todetermine the proper designation of wells as either developmental orexploratory, which will ultimately determine the proper accounting treatment ofthe costs incurred.  The results from adrilling operation can take considerable time to analyze, and the determinationthat commercial reserves have been discovered requires both judgment andapplication of industry experience. Wells may be completed that are assumed to be productive and actuallydeliver oil and gas in quantities insufficient to be economic, which may resultin the abandonment of the wells at a later date.  Seismic costs incurred to select developmentlocations within a productive oil and gas field are typically treated asdevelopment costs and capitalized.  Judgmentis required to determine when the seismic programs are not within provedreserve areas and therefore would be charged to expense as exploratory.  The

 

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evaluations of oiland gas leasehold acquisition costs requires management’s judgment to estimatethe fair value of exploratory costs related to drilling activity in a givenarea.

 

The successfulefforts method of accounting can have a significant impact on the operationalresults reported when we enter a new exploratory area in hopes of finding oiland gas reserves.  Seismic costs can besubstantial which will result in additional exploration expenses whenincurred.  The initial exploratory wellsmay be unsuccessful and the associated costs will then be expensed as dry holecosts and any associated leasehold costs may be impaired.  

 

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

 

We periodicallyevaluate the recoverability of the carrying value of its long-lived assets andidentifiable intangibles by monitoring and evaluating changes in circumstancesthat may indicate that the carrying amount of the asset may not berecoverable.  Examples of events orchanges in circumstances that indicate that the recoverability of the carryingamount of an asset should be assessed include but are not limited to thefollowing:  a significant decrease in themarket value of an asset, a significant change in the extent or matter 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.

 

We considerhistorical performance and anticipated future results in its evaluation ofpotential impairment.  Accordingly, whenindicators or impairment are present, we evaluate the carrying value of theseassets in reaction to the operating performance of the business and futurediscounted and non-discounted cash flows expected to result from the use ofthese assets.  Impairment losses arerecognized when the expected future cash flows from an asset are less itscarrying value.

 

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

 

The accounting forfuture development and abandonment costs changed on January 1, 2003, withthe issuance of Statement of Financial Accounting Standards (“SFAS”) No. 143 “Accountingfor Asset Retirement Obligation” (“ARO”), which requires the fair value of aliability for an asset retirement obligation to be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  The accrual is based on estimates of thesecosts for each of our properties based upon the type of production structure,reservoir characteristics, depth of the reservoir, market demand for equipment,currently available procedures and consultations with construction andengineering consultants.  Because thesecosts typically extend many years into the future, estimating these costs isdifficult and requires management to make estimates and judgments that aresubject to future revisions based on numerous factors, including changingtechnology, the political and regulatory environment and estimates as to theproper discount rate to use and timing of abandonment.

 

Our plan ofoperations entails the drilling of wells and the construction of an electricpower generation plant.  We will berequired to plug and abandon those wells and restore the well site and powergeneration site upon completion of their production.  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.  Therefore, no such provision is reflected inthe accompanying consolidated financial statements. 

 

***Stock Based Compensation***

 

As permitted under SFASNo. 123, “Accounting for Stock-Based Compensation,” the Company accounts forits stock-based compensation for options issued to employees in accordance withthe provisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”). As such, for options granted to employees and directors, compensationexpense is recorded on a straight-line basis over the shorter of the periodthat the services are provided or the vesting period, only if the currentmarket price of the underlying stock exceeds the exercise price.  Certain pro forma net income and earnings pershare disclosures for employee stock option grants are also included in thenotes to the financial statements as if the fair value method as defined inSFAS 123 had been applied.

 

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Transactions inequity instruments with non-employees for goods or services are accounted forby the fair value method.

 

***Recent Accounting Pronouncements***

 

In December 2004,the FASB issued SFAS No. 123(R) Share-Based Payment, which supersedes SFAS No.148 “Accounting for Stock-Based Compensation – Transition and Disclosure” anamendment to SFAS No. 123.  SFAS 123(R)establishes standards for transactions in which an entity exchanges its equityinstruments for goods or services.  Thisstandard requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award.  This eliminatesthe exception to account for such awards using the intrinsic method previouslyallowable under APB Opinion No. 25.  SFASNo. 123(R) also requires a public entity to present its cash flows provided bytax benefits from stock options exercised in the Financing Cash Flows section ofthe Statement of Cash Flows.  Publiccompanies with a calendar year-end will be required to adopt the provisions ofthe standard effective for periods beginning on or after June 15,2005.  As we intend to use stock-basedcompensation in the future as a component of employee compensation, and we havepreviously followed the intrinsic method, the implementation of thispronouncement will reduce our future earnings or increase our futurelosses.  The amount of such reductionsmay be significant, but cannot be quantified at this time.

 

For further discussion on RecentAccounting Pronouncements, see Note 1 of the Notes to Consolidated FinancialStatements.

 

**ForeignExchange**

 

The U.S. Dollar isthe functional currency for our operations in both Peru and Ecuador.  Ecuador has adopted the U.S. Dollar as itsofficial currency.  Peru, however, stilluses its local currency, Nuevo Soles, in addition to the U.S. Dollar andtherefore our financial results are subject to favorable or unfavorablefluctuations in the exchange 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 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 or losses resultingfrom such translation are included in other income and expense in theconsolidated statements of operations. Due to the relatively low level of activity to-date and the relativelysteady exchange rate in Peru, translation differences, if any, are consideredto be immaterial.

 

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**Item 7.****                                ****Financial Statements**

 

BPZ Energy, Inc.

Index to Consolidated Financial Statements

 
|   |   | Report  of Independent Registered Public Accounting Firm                                                             |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                 |   |
|   |   | Consolidated Balance  Sheets as of December 31, 2004 and 2003                                                   |   |
|   |   |                                                                                                                 |   |
|   |   | Consolidated  Statements of Operations for the Years Ended December 31, 2004 and 2003                           |   |
|   |   |                                                                                                                 |   |
|   |   | Consolidated Statements  of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2004  and 2003 |   |
|   |   |                                                                                                                 |   |
|   |   | Consolidated Statements of  Cash Flows for the Years Ended December 30, 2004 and 2003                           |   |
|   |   |                                                                                                                 |   |
|   |   | Notes to  Consolidated Financial Statements                                                                          |   |

 

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Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors

BPZ Energy, Inc.

 

We have audited the consolidated balance sheets of BPZ Energy, Inc. andSubsidiaries, as of December 31, 2004 and 2003, and the related consolidatedstatements of operations, stockholders’ equity (deficit) and cash flows for theyears then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free from material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of BPZ Energy,Inc. as of December 31, 2004 and 2003, and the results of its operations andits cash flows for the years then ended, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

Johnson, Miller & Co.

Midland, Texas

April 11, 2005

 

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**BPZ Energy, Inc. and Subsidiaries**

**Consolidated BalanceSheets**

As of December 31, 2004 and2003

 
| ** **                                                                                                                                                                     | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                                                                                                     | ** ** | ** **  | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                     |       |        |       |       |       |
|                                                                                                                                                                           |       |        |       |       |       |
| Current assets:                                                                                                                                                                |       |        |       |       |       |
| Cash and cash equivalents                                                                                                                                                      |       | $           | 4,014,191  |       | $          | 8,156 |   |
| Restricted cash                                                                                                                                                                |       | 100,000     |       | —     |       |
| Other                                                                                                                                                                          |       | 72,159      |       | 4,180      |       |
| Total current assets                                                                                                                                                           |       | 4,186,350   |       | 12,336     |       |
|                                                                                                                                                                           |       |        |       |       |       |
| Property and equipment:                                                                                                                                                        |       |        |       |       |       |
| Office equipment                                                                                                                                                               |       | 5,662       |       | —     |       |
| Less accumulated depreciation                                                                                                                                                  |       | 157         |       | —     |       |
| Net property and equipment                                                                                                                                                     |       | 5,505       |       | —     |       |
|                                                                                                                                                                           |       |        |       |       |       |
| Advances to affiliate                                                                                                                                                          |       | —      |       | 162,890    |       |
| Other assets                                                                                                                                                                   |       | —      |       | 240,000    |       |
| Investment in SMC Ecuador                                                                                                                                                      |       | 642,000     |       | —     |       |
|                                                                                                                                                                           |       |        |       |       |       |
| Total assets                                                                                                                                                                   |       | $           | 4,833,855  |       | $          | 415,226 |   |
|                                                                                                                                                                           |       |        |       |       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                       |       |        |       |       |       |
|                                                                                                                                                                           |       |        |       |       |       |
| Current liabilities:                                                                                                                                                           |       |        |       |       |       |
| Accounts payable                                                                                                                                                               |       | $           | 311,612    |       | $          | 10,475 |   |
| Notes payable                                                                                                                                                                  |       | 208,986     |       | —     |       |
| Accrued liabilities                                                                                                                                                            |       | 54,342      |       | 14,650     |       |
| Total current liabilities                                                                                                                                                      |       | 574,940     |       | 25,125     |       |
|                                                                                                                                                                           |       |        |       |       |       |
| Long-term debt                                                                                                                                                                 |       | —      |       | 755,000    |       |
|                                                                                                                                                                           |       |        |       |       |       |
| Stockholders’ equity (deficit):                                                                                                                                           |       |        |       |       |       |
| Common stock, no par value, 20,000,000  authorized; 16,529,848 and 4,103,454 shares issued and outstanding at  December 31, 2004 and December 31, 2003, respectively |       | 13,393,286  |       | 1,000      |       |
| Additional paid in capital – warrants and  stock options                                                                                                                  |       | 9,502,625   |       | —     |       |
| Stock subscription receivable                                                                                                                                                  |       | (230,825    | )          |       |       |
| Accumulated deficit                                                                                                                                                            |       | (18,406,171 | )          | (365,899   | )          |
|                                                                                                                                                                           |       |        |       |       |       |
| Total stockholders’ equity (deficit)                                                                                                                                      |       | 4,258,915   |       | (364,899   | )          |
|                                                                                                                                                                           |       |        |       |       |       |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                     |       | $           | 4,833,855  |       | $          | 415,226 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

28

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**BPZ Energy,Inc. and Subsidiaries**

**ConsolidatedStatements of Operations**

**Yearsended December 31, 2004 and 2003**

 
| ** **                               | ** ** | **2004**    | ** **  | **2003**   | ** ** |
|------------------------------------------|------------|-------------|-------------|------------|------------|
| ** **                               | ** ** | ** **  | ** **  | ** ** | ** ** |
| Revenue                                  |       | $           | —      |       | $          | — |   |
|                                     |       |        |        |       |       |
| Operating and administrative expenses:   |       |        |        |       |       |
| General and administrative               |       | 1,170,536   |        | 96,067     |       |
| Geological, geophysical and engineering  |       | 360,965     |        | —     |       |
| Depreciation expense                     |       | 157         |        | —     |       |
|                                     |       |        |        |       |       |
| Total operating expenses                 |       | 1,531,658   |        | 96,067     |       |
|                                     |       |        |        |       |       |
| Operating loss                           |       | (1,531,658  | )           | (96,067    | )          |
|                                     |       |        |        |       |       |
| Other income (expense):                  |       |        |        |       |       |
| Investment income in SMC Ecuador         |       | 190,621     |        | —     |       |
| Interest expense                         |       | (66,959     | )           | —     |       |
| Amortization of deferred financing costs |       | (360,439    | )           |       |       |
| Merger costs                             |       | (16,284,966 | )           | —     |       |
| Miscellaneous income                     |       | 13,129      |        | 1,445      |       |
|                                     |       |        |        |       |       |
| Total other income (expense)             |       | (16,508,614 | )           | 1,445      |       |
|                                     |       |        |        |       |       |
| Loss before income taxes                 |       | (18,040,272 | )           | (94,622    | )          |
|                                     |       |        |        |       |       |
| Income taxes                             |       | —      |        | —     |       |
|                                     |       |        |        |       |       |
| Net loss                                 |       | $           | (18,040,272 | )          | $          | (94,622 | ) |
|                                     |       |        |        |       |       |
| Net loss per share:                      |       |        |        |       |       |
| Primary                                  |       | $           | (2.08       | )          | $          | (0.02 | ) |
| Fully Diluted                            |       | $           | (2.08       | )          | $          | (0.02 | ) |
|                                     |       |        |        |       |       |
| Weighted Average Shares Outstanding:     |       |        |        |       |       |
| Primary                                  |       | 8,689,988   |        | 4,103,454  |       |
| Fully Diluted                            |       | 8,689,988   |        | 4,103,454  |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

29

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**BPZ Energy, Inc. and Subsidiaries**

# **Consolidated Statements of Stockholders’ Equity (Deficit)**

**Years ended December 31, 2004 and 2003**

 
| ** **                                                       | ** ** | ** **        | ** ** | ** ** | ** ** | **Additional  Paid** | ** ** | **Stock**       | ** ** | ** **  | ** ** | ** **  | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|------------|------------|----------------------|------------|-----------------|------------|-------------|------------|-------------|------------|
| ** **                                                       | ** ** | **Common  Stock** | ** ** | **in**     | ** ** | **Subscription**     | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                       | ** ** | **Shares**        | ** ** | **Amount** | ** ** | **Capital**          | ** ** | **Receivable**  | ** ** | **Deficit** | ** ** | **Total**   | ** ** |
|                                                             |       |              |       |       |       |                 |       |            |       |        |       |        |       |
| Balance, December  31, 2002                                      |       | 4,103,454         |       | $          | 1,000      |                 | $          | —          |       | $           | —     |        | $          | (271,277 | ) | $ | (270,277 | ) |
|                                                             |       |              |       |       |       |                 |       |            |       |        |       |        |       |
| Net loss for the  year                                           |       |              |       |       |       |                 |       |            |       | (94,622     | )          | (94,622     | )          |
|                                                             |       |              |       |       |       |                 |       |            |       |        |       |        |       |
| Balance, December  31, 2003                                      |       | 4,103,454         |       | 1,000      |       | —               |       | —          |       | (365,899    | )          | (364,899    | )          |
|                                                             |       |              |       |       |       |                 |       |            |       |        |       |        |       |
| Reorganization of  BPZ & Associates                          |       | —            |       | (952,391   | )          | —               |       |            |       | —      |       | (952,391    | )          |
| Common stock  issued for services                                |       | 3,057,642         |       | 4,322,935  |       | —               |       |            |       | —      |       | 4,322,935   |       |
| 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     |       |
| Common stock  deemed issued for the acquisition of Navidec, Inc. |       | 4,742,178         |       | 2,972,689  |       | —               |       |            |       | —      |       | 2,972,689   |       |
| Assumption of  stock options outstanding                         |       |              |       |       |       | 4,275,964            |       |            |       | —      |       | 4,275,964   |       |
| Exercise of stock  options assumed at acquisition                |       | 161,924           |       | 519,776    |       | (519,776             | )          |            |       | —      |       | —      |       |
| Assumption of  warrants outstanding                              |       |              |       |       |       | 1,405,605            |       |            |       | —      |       | 1,405,605   |       |
| Common stock  issued to related party in the merger              |       | 604,246           |       | 1,939,630  |       | —               |       |            |       | —      |       | 1,939,630   |       |
| Warrants issued  in connection with services                     |       |              |       |       |       | 2,820,000            |       |            |       | —      |       | 2,820,000   |       |
| Stock options  granted for services                              |       |              |       |       |       | 1,520,832            |       |            |       | —      |       | 1,520,832   |       |
| Common stock sold  for cash, net of offering costs               |       | 1,321,500         |       | 2,534,118  |       | —               |       |            |       | —      |       | 2,534,118   |       |
| Conversion of  notes payable to common stock                     |       | 500,000           |       | 1,020,529  |       | —               |       |            |       | —      |       | 1,020,529   |       |
|                                                             |       |              |       |       |       |                 |       |            |       |        |       |        |       |
| Net loss for the  year                                           |       | —            |       | —     |       | —               |       |            |       | (18,040,272 | )          | (18,040,272 | )          |
| Balance, December  31, 2004                                      |       | 16,529,848        |       | $          | 13,393,286 |                 | $          | 9,502,625       |       | $           | (230,825   | )           | $          | (18,406,171 | ) | $ | 4,258,915 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**BPZ Energy,Inc. and Subsidiaries**

**Consolidated Statements of CashFlows**

**Years ended December 31,2004 and 2003**

 
| ** **                                                                   | ** ** | **2004**   | ** **  | **2003** | ** ** |
|------------------------------------------------------------------------------|------------|------------|-------------|----------|------------|
| Cash flows from operating activities:                                        |       |       |        |     |       |
| Net loss                                                                     |       | $          | (18,040,272 | )        | $          | (94,622 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |       |        |     |       |
| Depreciation expense                                                         |       | 157        |        |     |       |
| Amortization of deferred financing fees                                      |       | 360,439    |        |     |       |
| Merger equity transaction costs                                              |       | 16,284,966 |        | —   |       |
| Changes in operating assets and  liabilities:                                |       |       |        |     |       |
| Other current assets                                                         |       | (418       | )           | —   |       |
| Accounts payable                                                             |       | 301,137    |        | 4,616    |       |
| Accrued liabilities                                                          |       | 39,693     |        | 10,470   |       |
|                                                                         |       |       |        |     |       |
| Net cash used by operating activities                                        |       | (1,054,298 | )           | (79,536  | )          |
|                                                                         |       |       |        |     |       |
| Cash flows from investing activities:                                        |       |       |        |     |       |
| Property and equipment additions                                             |       | (5,662     | )           | —   |       |
| Investment in SMC Ecuador                                                    |       | (1,070,000 | )           | —   |       |
| Other assets                                                                 |       | 140,000    |        | (240,000 | )          |
|                                                                         |       |       |        |     |       |
| Net cash used by investing activities                                        |       | (935,662   | )           | (240,000 | )          |
|                                                                         |       |       |        |     |       |
| Cash flows from financing activities:                                        |       |       |        |     |       |
| Borrowings                                                                   |       | 1,895,000  |        | 755,000  |       |
| Payments on borrowings                                                       |       | (616,311   | )           | —   |       |
| Private placement proceeds, net                                              |       | 2,534,118  |        | —   |       |
| Cash acquired in merger transaction                                          |       | 2,972,689  |        | —   |       |
| Advances to affiliates                                                       |       | (789,501   | )           | (449,270 | )          |
|                                                                         |       |       |        |     |       |
| Net cash provided by financing activities                                    |       | 5,995,995  |        | 305,730  |       |
|                                                                         |       |       |        |     |       |
| Net increase (decrease) in cash and cash  equivalents                        |       | 4,006,035  |        | (13,806  | )          |
|                                                                         |       |       |        |     |       |
| Cash and cash equivalents at beginning of  period                            |       | 8,156      |        | 21,962   |       |
|                                                                         |       |       |        |     |       |
| Cash and cash equivalents at end of period                                   |       | $          | 4,014,191   |     | $          | 8,156 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**BPZ Energy,Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows – SupplementalInformation**

**Years Ended December 31,2004 and 2003**

 
| ** **                                                                 | ** ** | **2004**  | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| **Cash paid for:**                                                         |       |      |       |     |       |
| ** **                                                                 |       |      |       |     |       |
| Interest                                                                   |       | $         | 63,943     |     | $          | — |   |
|                                                                       |       |      |       |     |       |
| **Non-cash transactions:**                                                 |       |      |       |     |       |
| ** **                                                                 |       |      |       |     |       |
| Assumption of outstanding stock options                                    |       | $         | 4,275,964  |     | $          | — |   |
|                                                                       |       |      |       |     |       |
| Assumption of outstanding warrants                                         |       | 1,405,605 |       | —   |       |
|                                                                       |       |      |       |     |       |
| Issuance of common stock to related party                                  |       | 1,939,630 |       | —   |       |
|                                                                       |       |      |       |     |       |
| Issuance of warrants to related party                                      |       | 2,820,000 |       | —   |       |
|                                                                       |       |      |       |     |       |
| Grant of stock options to the former CEO of  Navidec, Inc.                 |       | 1,520,832 |       | —   |       |
|                                                                       |       |      |       |     |       |
| Issuance of common stock for financial  advisory services                  |       | 1,258,000 |       | —   |       |
|                                                                       |       |      |       |     |       |
| Issuance of common stock as compensation  for past services                |       | 3,064,935 |       | —   |       |
|                                                                       |       |      |       |     |       |
| Conversion of note payable to common stock                                 |       | 1,020,529 |       | —   |       |
|                                                                       |       |      |       |     |       |
| Issuance of common stock for subscription  receivable                      |       | 230,825   |       | —   |       |
|                                                                       |       |      |       |     |       |
| Forgiveness of inter-company advances as  part of corporate reorganization |       | 952,391   |       | —   |       |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

32

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**BPZ Energy,Inc and Subsidiaries**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**December 31, 2004 and 2003**

 

**Note1 – Basis of Presentation and Significant Accounting Policies**

** **

**Organization and Basis of Presentation**

 

BPZ Energy, Inc.(“BPZ” or the “Company”), a Colorado corporation, wasincorporated in 1993. On September 10, 2004, the Company, at that timeknown as Navidec, Inc., consummated a reverse merger with BPZ Energy, Inc., aTexas corporation (“BPZ-Texas”) established in 2001 as an oil and gasexploration and production (E&P) company whereby BPZ-Texas became a whollyowned subsidiary of the Navidec (see Note 2 to the Consolidated FinancialStatements for detailed discussion regarding the Merger).  For accounting purposes, the merger wastreated as an acquisition of Navidec, Inc. by BPZ-Texas.  In connection with the merger, we changed ourname to “BPZ Energy, Inc.” on February 4, 2005.  BPZ is headquartered in Houston, Texas andmaintains an office in Lima, Peru.

 

Our current business is to develop, own and operate prospects andenergy projects in South America.  In2001, BPZ registered a branch in Peru, officially designated “BPZEnergy, Inc. Sucursal Peru.” Presently, the Company has exclusive rights and licensing agreements foroil and gas exploration and production covering a total of approximately2.76 million acres in four blocks in northwest Peru; Block Z-1, Block XIX,Area VI and Area XVI.  In addition, inJune 2004, BPZ acquired all of the capital stock of SMCEcuador, Inc., a Delaware corporation which owns a 10% non-operated workinginterest in certain producing properties in southwest Ecuador.

 

Though its name has been changed, Navidec, Inc. may be referred to in the discussion contained in this filing by its former name to avoid confusion.

 

**Principles of Consolidation**

 

The consolidated financial statements includethe accounts of the Company and its wholly owned subsidiaries and branchoffices.  The Company’s accounting policy regarding partnership or joint ventureinterests in oil and gas properties is to consolidate such interests on apro-rata basis in accordance with accepted practice in the oil and gasindustry.  However, the Company has notbeen able to receive timely information to allow it to proportionatelyconsolidate the 10% non-operated working interest owned by SMC Ecuador Inc.(see Note 5 to the Consolidated Financial Statements for detailed discussionregarding the Investment in SMC Ecuador). Accordingly, the Company has made an election to account for thisinvestment under the cost method.  Assuch, the Company will record its share of cash received or paid attributableto this investment as other income or expense. All intercompany balances and transactions have been eliminated.

 

**Reporting and Functional Currency**

 

The U.S. Dollar is the functional currency for our operations in bothPeru and Ecuador.  Ecuador has adoptedthe U.S. Dollar as its official currency. Peru, however, uses its local currency, Nuevo Soles, in addition to theU.S. Dollar and therefore our financial results are subject to favorable orunfavorable fluctuations in the exchange rate and inflation of thatcountry.  We have adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”,which requires that the translation of the applicable foreign currency into U.S.dollars be performed for balance sheet monetary accounts using current exchangerates in effect at the balance sheet date, non-monetary accounts usinghistorical exchange rates in effect at the time the transaction occurs, and forrevenue and expense accounts using a weighted average exchange rate during theperiod reported.  Accordingly, the gainsor losses resulting from such translation are included in other income and

 

33

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expense in the consolidated statements of operations.  Due to the relatively low level of activityto-date and the relatively steady exchange rate in Peru, translationdifferences, if any, are considered to be immaterial.

 

**Use of Estimates**

 

Managementuses estimates and assumptions in preparing the consolidated financialstatements in accordance with U.S. generally accepted accountingprinciples.  Those estimates andassumptions affect the reported amounts of assets, liabilities, revenues andexpenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities. Actual results could differ materially from these estimates.

 

**Reclassifications**

 

Certain prior period amounts have been reclassified to conform to the currentfinancial statement presentation.

 

**Cash and Cash Equivalents**

 

The Company considers cash on hand, cash ondeposit in banks, money market mutual funds and highly liquid debt instrumentspurchased with a maturity of three months or less to be cash equivalents.  Certain of the Company’s cash balances aremaintained in foreign banks which are not covered by deposit insurance.  The cash balance in the Company’s U.S. bankaccounts may exceed federally insured limits.

 

****RestrictedCash****

 

As discussed in Note 6 to the ConsolidatedFinancial Statements, the Company has secured various performance bonds,collateralized by certificates of deposit, to guarantee its obligations andcommitments in connection with its exploratory properties in Peru.  All of the performance bonds have been issuedby Peruvian banks and their terms are dictated by the corresponding LicenseContract or Technical Evaluation Agreement.

 

**DebtFinancing Costs**

 

As discussed in Note 4 to the ConsolidatedFinancial Statements, certain financing costs related to the acquisition of SMCEcuador, Inc. have been capitalized. The deferred debt financing costs are being amortized over the term ofthe financing.

 

****Property andEquipment****

 

TheCompany follows the “successful efforts” method of accounting of its costs ofacquisition, exploration and development 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 exploratorywells are capitalized pending determinations that proved reserves have beenfound.  If the determination is dependentupon the results of planned additional wells and required capital expendituresto produce the reserves found, the drilling costs will be capitalized as longas sufficient reserves have been found to justify completion of the exploratorywell and additional wells are underway or firmly planned to complete theevaluation of the well.  All costsrelated to unsuccessful exploratory wells are expensed when such 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 describe in the preceding sentence are not required.  We assess our capitalized exploratory wellspending evaluation each quarter to determine whether costs should remaincapitalized or should be charged to earnings. Other exploration costs, including geological and geophysical costs, areexpensed as incurred.  Seismic costsincurred to select development locations within a productive oil and gas fieldare typically treated as development costs and capitalized.  Judgment is required to determine when theseismic programs are not within proved

 

34

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reserveareas and therefore would be charged to expense as exploratory.  We recognize gains or losses on the sale ofproperties, should they occur, on a field-by-field basis.

 

As ofDecember 31, 2004, property and equipment consists only of office equipmentwhich is stated at cost and is depreciated on a straight-line basis over theestimated 3 year useful life of the assets. Maintenance and repairs are expensed as incurred.  Replacements, upgrades or expenditures whichimprove and extend the life of the assets are capitalized.  When assets are sold, retired or otherwisedisposed, the applicable costs and accumulated depreciation and amortizationare removed from the appropriate accounts and the resulting gain or loss isrecorded.

 

**Impairment ofLong-Lived Assets**

 

TheCompany periodically evaluates the recoverability of the carrying value of itslong-lived assets and identifiable intangibles by monitoring and evaluatingchanges in circumstances that may indicate that the carrying amount of theasset may not be recoverable.  Examplesof events or changes in circumstances that indicate that the recoverability ofthe carrying amount of an asset should be assessed include but are not limitedto the following:  a significant decreasein the market value of an asset, a significant change in the extent or mannerin which an asset is used or a significant physical change in an asset, asignificant adverse change in legal factors or in the business climate thatcould affect the value of an asset or an adverse action or assessment by aregulator, an accumulation of costs significantly in excess of the amountoriginally expected to acquire or construct an asset, and/or a current periodoperating or cash flow loss combined with a history of operating or cash flowlosses or a projection or forecast that demonstrates continuing lossesassociated with an asset used for the purpose of producing revenue.

 

TheCompany considers historical performance and anticipated future results in itsevaluation of potential impairment. Accordingly, when indicators or impairment are present, the Companyevaluates the carrying value of these assets in reaction to the operating performanceof the business and future discounted and non-discounted cash flows expected toresult from the use of these assets. Impairment losses are recognized when the expected future cash flowsfrom an asset are less its carrying value.

 

**Start-up Costs**

 

Start-up costs, including organizational restructuring expenses, areexpensed as incurred.

 

**Stock Based Compensation**

 

Aspermitted under SFAS 123, “Accounting for Stock-Based Compensation,” theCompany accounts for its stock-based compensation for options issued toemployees in accordance with the provisions of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).  As such, for options granted to employees anddirectors, compensation expense is recorded on a straight-line basis over theshorter of the period that the services are provided or the vesting period,only if the current market price of the underlying stock exceeds the exerciseprice.  Transactions in equity instrumentswith non-employees for goods or services are accounted for by the fair valuemethod.

 

**Income Taxes**

 

TheCompany accounts for income taxes using the liability method.  Under this method, deferred tax assets andliabilities 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 areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized.

 

35

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**Environmental**

 

TheCompany is subject to environmental laws and regulations of variousinternational, U.S. and foreign jurisdictions. These laws, which are constantly changing, regulate the discharge ofmaterials into the environment and may require the Company to remove ormitigate the environmental effects of the disposal or release of petroleum orchemical substances at various sites.

 

Environmentalcosts that relate to current operations are expensed or capitalized asappropriate.  Costs are expensed whenthey relate to an existing condition caused by past operations and will notcontribute to current or future revenue generation.  Liabilities related to environmental assessmentsand/or remedial efforts are accrued when property or services are provided orcan be reasonably estimated.

 

**Loss per Common Share**

 

In accordance with provisions of SFAS No. 128, Earnings per Share,basic earnings per share is computed on the basis of the weighted-averagenumber of common shares outstanding 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.  Diluted earnings per share equals basicearnings per share for the periods presented because the effects of potentiallydilutive securities are antidilutive.

 

**New Accounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123(R) “Share-Based Payment”, which supersedes SFAS No. 148 “Accountingfor Stock-Based Compensation – Transition and Disclosure” an amendment to SAFSNo. 123.  SFAS 123(R) establishesstandards for transactions in which an entity exchanges its equity instrumentsfor goods or services.  This standardrequires a public entity to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award.  This eliminates theexception to account for such awards using the intrinsic method previouslyallowable under APB 25.  SFAS No. 123(R)also requires a public entity to present its cash flows provided by taxbenefits from stock options exercised in the Financing Cash Flows section ofthe Statement of Cash Flows.  Publiccompanies with a calendar year-end will be required to adopt the provisions ofthe standard effective for periods beginning on or after June 15, 2005.  As we intend to use stock-based compensationin the future as a component of employee compensation, and we have previouslyfollowed the intrinsic method, the implementation of this pronouncement willreduce our future earnings or increase our future losses.  The amount of such reductions may be significant,but cannot be quantified at this time.

 

In December 2004, the FASB issued SFAS No. 153 “Exchanges ofNon-monetary Assets”, an amendment of APB Opinion 29, for non-monetaryexchanges of similar productive assets. SFAS No. 153 replaces this exception with a general exception from fairvalue measurement for exchanges of non-monetary assets that do not havecommercial substance.  A non-monetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  SFAS No. 153 is not expected to effect ourconsolidated financial statements.

 

In September 2004, the Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin (“SAB”) 106 which provides guidance regardingthe interaction of SFAS No. 143 with the calculation of depletion and the fullcost ceiling test of oil and gas properties under the full cost accountingrules of the SEC.  The guidance providedin SAB 106 is not expected to have a material effect on our consolidatedfinancial position, results of operations or cash flows.

 

36

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**Note 2 – Merger and Merger Costs**

 

As discussed in Note 1 of the Notes to Consolidated Financial Statements, pursuant to a merger agreement dated as of July 8, 2004 (the “Merger Agreement”), BPZ became a wholly-owned subsidiary of Navidec, Inc. effective September 10, 2004.  Under the terms of the Merger Agreement, Navidec, Inc. issued 9,000,000 shares of the Company’s common stock to the shareholders of BPZ and committed to issue an additional 18,000,000 shares to the shareholders of BPZ on a contingent earn-out basis if BPZ is able to achieve certain reserve and production goals.  Such contingent earn-out shares can only be issued after the shareholders have approved an increase in the number of authorized shares of the Company.  As a result of the issuance of the 9,000,000 shares of the Company’s common stock to the shareholders of BPZ, the former shareholders of BPZ acquired a controlling interest in the Company.

 

37

 

The Merger Agreement also provided that all of the pre-Merger business operations, assets and liabilities of the Company be transferred to a wholly-owned subsidiary, Navidec Financial Services, Inc. (“NFS”), to be followed by the spin-off of NFS to the shareholders of record as of September 9, 2004.  All of the shares of NFS were distributed on February 3, 2005, though this transaction was deemed effective on a pre-merger basis under the terms of the Merger Agreement.  This “spin-off” transaction requires registration with the SEC, and a registration statement on Form 10-SB was filed with the SEC by NFS for this purpose on January 31, 2005.

 

With the exclusion of NFS, the only asset of Navidec, Inc. at the date of the reverse merger was cash in the amount of $2,882,689.  This cash represented the net proceeds received prior to the closing of the Merger from the Private Placement discussed in Note 8 of the Notes to Consolidated Financial Statements.  Accordingly, the issuance of 4,742,178 common shares which were deemed for accounting purposes to have been issued by BPZ to the pre-Merger shareholders of Navidec, Inc. was treated as a capital transaction in exchange for the net cash received in the Merger.

 

The Merger Agreement also contained certain other key terms, which are summarized below:

 

1)              BPZ, as the accounting acquirer, assumed options to purchase 1,332,076 shares of Navidec, Inc. common stock, which had previously been issued to employees, directors and consultants of Navidec, Inc. and were outstanding on the date of the Merger.  These options have exercise prices ranging from $1.30 to $2.00 per share.  Such options were fully vested upon consummation of the Merger and may be exercised by the optionees at any time prior to September 10, 2007.  Under the terms of the Merger Agreement, all proceeds received from the exercise of these stock options will be payable to NFS.  As such, BPZ will be obligated to issue up to 1,332,076 additional shares but will not receive any cash proceeds from such issuances.

 

2)              BPZ, as the accounting acquirer, assumed outstanding warrants to purchase 1,129,000 shares of Navidec, Inc. common stock.  Of such warrants, 564,500 shares have an exercise price of $2.00 per share and 564,500 shares have an exercise price of $4.00 per share.  All of such warrants expire on August 31, 2005.  The proceeds of such warrants, if and when exercised, will be received by BPZ.

 

3)              BPZ, as the accounting acquirer, issued 604,246 shares of common stock in the Merger to NFS.

 

4)              In connection with the Merger, BPZ entered into a Business Consulting Agreement with NFS under which NFS will provide investor relations, public relations and other financial advisory services to BPZ.  Under this agreement, BPZ was obligated to pay NFS fees of $30,000 per month for period of twelve months ending on July 31, 2005.  Such agreement was cancelable upon thirty days notice at any time after October 31, 2004.  Additionally, BPZ agreed to grant to NFS fully vested warrants to purchase 1,500,000 shares of Navidec, Inc. common stock at an exercise price of $2.00 per share at any time prior to July 31, 2006.  Pursuant to an agreement between the parties, NFS will discontinue services under the Business Consulting Agreement after May 6, 2005.

 

5)              In connection with the Merger and the Private Placement (as discussed in Note 8 of the Notes to Consolidated Financial Statements), BPZ granted options to purchase 1,000,000 shares of Navidec, Inc. common stock to the Chief Executive Officer of Navidec, Inc. prior to the Merger, at an exercise price of $1.30 per share.  Of such option shares, 500,000 became vested upon the closing of the Private Placement with gross proceeds of at least $6,000,000.  The remaining 500,000 option shares will vest upon the receipt of additional investment proceeds totaling $6,000,000, including proceeds from the exercise of outstanding warrants, provided such funding is received no later than

 

38

 

September 10, 2006.  Such options, when vested, expire 10 years from the date of grant.

 

6)              In connection with the Merger and/or financial advisory services prior to the Merger, BPZ and Navidec, Inc. issued 700,000 shares of common stock as compensation for services.

 

7)              Prior to the Merger, BPZ issued 2,357,642 shares of common stock to directors, officers, employees and consultants of BPZ Energy, Inc. as compensation for past services to BPZ Energy, Inc. and BPZ & Associates, Inc.

 

The above transactions were deemed to be costs of the Merger, and resulted in a charge to the income statement which is summarized below.  For valuation purposes, all stock options and warrants were measured by the Black Scholes method utilizing market prices on the date of grant or assumption, historical volatilities of Navidec, Inc. common stock of 87%, a risk-free rate of 2.5% and no dividends.  All of such options and warrants were required to be accounted for under SFAS No. 123 as they did not qualify for treatment under APB 25.  All common shares issued prior to the Merger were valued at the closing price of Navidec, Inc. common stock on the date of the Merger Agreement and all common shares which were issued on the effective date of the Merger were valued at the closing price of Navidec, Inc. common stock on such date.

 
| 1)     |   | Assumption  of outstanding stock options                    |   | $         | 4,275,964  |   |
|--------|--------|-------------------------------------------------------------|--------|-----------|------------|--------|
| 2)     |   | Assumption  of outstanding warrants                         |   | 1,405,605 |       |
| 3)     |   | Issuance of  common stock to related party                  |   | 1,939,630 |       |
| 4)     |   | Issuance of  warrants to related party                      |   | 2,820,000 |       |
| 5)     |   | Grant of  stock options to former CEO of Navidec, Inc. (a)  |   | 1,520,832 |       |
| 6)     |   | Issuance of  common stock for financial advisory services   |   | 1,258,000 |       |
| 7)     |   | Issuance of  common stock as compensation for past services |   | 3,064,935 |       |
|   |   | Total merger costs                                          |   | $         | 16,284,966 |   |

 

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(a)  Such options also have future compensationexpense of $1,399,168, which will be recognized over the remaining 23 monthvesting period unless the Company concludes that such options are no longerprobable of vesting.

 

**Note 3 – Reorganization of BPZ Energy, Inc. and BPZ& Associates, Inc.**

 

Prior to the execution of the Merger Agreement onJuly 8, 2004, BPZ Energy, Inc. was a wholly-owned subsidiary of BPZ &Associates, Inc.  Immediately prior tothe date of the Merger Agreement, BPZ & Associates, Inc. reorganized itscapital structure to distribute shares of BPZ Energy, Inc. to certainshareholders of BPZ & Associates, Inc. and to provide that BPZ Energy, Inc.would forgive intercompany advances, which totaled $952,391, immediately priorto the Merger.  This reorganization isreflected as a capital transaction in the accompanying consolidated financialstatements.

 

**Note 4 – Other Current Assets**

 

As of December 31, 2004, other current assetsof $72,159 consisted primarily of capitalized financing costs related to theacquisition of SMC Ecuador, Inc. The Company is amortizing these costs to expense over the term of thefinancing.  In addition, the Companyexpensed $360,438 of

 

39

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deferred financing costs pursuant to theconversion of part of the note payable to common stock, as discussed in Note 5of the Notes to Consolidated Financial Statements.

 

**Note 5 – Investment in SMC Ecuador and Notes Payable**

 

In June 2004, BPZ acquired 100% of the common stock ofSMC Ecuador, Inc., a Delaware corporation (“SMC”), and the owner of a 10%interest in certain non-operated oil and gas energy producing propertieslocated in the Republic of Ecuador (the “Santa Elena Properties”).  The Santa Elena Properties currently produceapproximately 2,000 barrels of oil per day. In order to finance the acquisition, BPZ entered into a debt arrangementin the amount of $1,375,000 (the “Loan”) with an individual (the “Lender”).  The Loan was to be repaid in 36 equalinstallments, paid monthly, bearing an effective interest rate of 15%.  Theproceeds of the debt financing were used to pay for the cost of the acquisitionof $1,070,000 plus $69,670 of transaction costs.  The remainder of the borrowings, or $235,330,was used for general corporate purposes.  The Lender held a firstlien on the common stock of SMC as collateral. Upon full repayment of the Loan by BPZ, the Lender was entitled toreceive ownership of forty percent (40%) of the interests of SMC in the SantaElena Properties (or a 4% derivative working interest in the Santa ElenaProperties).  Accordingly, 40% of the acquisition cost, or $428,000 is considered asadditional financing costs and were capitalized.

 

In September 2004, BPZ reached an agreement withthe Lender to cancel the above agreement and enter into a new agreement wherebyBPZ converted $1,000,000 of the principal balance of the Loan, plus $20,529 ofaccrued interest, into 500,000 shares of Company stock.  The remaining balance of the Loan, or$293,136 will be payable in 10 equal monthly installments with interest imputedat 15%.  The agreement to conveybeneficial ownership of a 4% derivative working interest in the Santa ElenaProperties was also accelerated to the date of the agreement.  Accordingly, BPZ now owns a 6% effectiveworking interest in the Santa Elena Properties.

 

As of December 31, 2004, the remaining balance of the note payable, or$208,986 will be payable in 7 equal monthly installments with interest imputedat 15%.

 

The Company’saccounting policy regarding partnership or joint venture interests in oil andgas properties is to consolidate such interests on a pro-rata basis inaccordance with accepted practice in the oil and gas industry.  However, the Company has not been able toreceive timely information to allow it to consolidate the 10% non-operatedworking interest owned by SMC, which is effectively a 6% net working interest.  Accordingly, the Company has made an electionto account for this investment under the cost method.  As such, the Company will record its share ofcash received or paid attributable to this investment as other income orexpense.

 

###### **Note6–Restricted Cash and Other Assets**

###### ** **

As of December 31 2004, the Company, in connectionwith its exploratory properties in Peru, has obtained various performance bondstotaling $340,000, of which $100,000 is collateralized by a restricted cashdeposit, to guarantee its obligations and commitments.  The $100,000 deposit is classified as acurrent asset as the associated performance bond expires in March 2005.  The remaining $240,000 obligation hasbeen guaranteed by two individual shareholders of the Company in amounts of$200,000 and $40,000.

 

40

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As of December 31, 2003 the Company hadsecured various performance bonds totaling $240,000, of which $200,000 wascollateralized by a deposit, to guarantee its obligations and commitments.

 

All of the performance bonds were issued byPeruvian banks and their terms are dictated by the corresponding licensecontract or technical evaluation agreement.

 

###### **Note7– Long-Term Debt**

###### ** **

At December 31, 2003, the Company hadlong-term debt of $755,000, consisting of two unsecured notes payable toindividuals.  Both notes had similarterms, bearing interest at 7%, with payments of interest due on a monthly basisand the principal balance due at maturity in February 2006.  During 2004, the Company made additional borrowings of $520,000 underterms similar to the previous borrowings. Of such amount, $240,000 was used to replace previous borrowings.  Prior to the Merger, all of the outstandinglong-term debt obligations of the Company were converted to common stock undernegotiated agreements.  There was no long-term debtoutstanding at December 31, 2004.

 

**Note 8 – Stockholders’ Equity**

 

**Private Placement of Common Stock**

 

In connection with the Merger, Navidec, Inc. was obligated to complete a private placement of common stock, the proceeds of which are intended to be used in the business operations of BPZ Energy, Inc. and for general corporate purposes.  The offering covered a minimum of 1,500,000 shares and a maximum of 3,000,000 shares at an offering price of $2.00 per share before placement agent fees and other offering costs.  It was a requirement that the offering achieve at least the minimum number of shares prior to consummation of the Merger.

 

As of September 10, 2004, Navidec, Inc. had received gross cash proceeds of $3,357,000 ($2,882,689 net of offering costs) from the sale of 1,678,500 shares of common stock in the private placement and the Merger was consummated.  Subsequent to the consummation of the Merger, the Company sold the remaining 1,321,500 shares for gross cash proceeds of $2,643,000 ($2,534,118 net of offering costs).

 

**Stock Options**

 

The Company does not currentlyhave any stock option or stock compensation plans.  The Company assumed stock options outstandingunder the previous Navidec stock option plan, but no future options will beissued under this plan.  All optionsoutstanding under the plan were fully vested on the date of the Merger andexpire on September 10, 2007.  There wereno options granted, expired or forfeited during the period.

 

During the period between the Merger andDecember 31, 2004, stock options representing 161,924 shares of commonstock were exercised.  As discussed inNote 2 of the Notes to Consolidated Financial Statements, 1,332,076 stockoptions were outstanding at the date of the Merger and were assumed by thecombined company in connection with the Merger. However, under the terms of the Merger Agreement, the Company does notreceive any of the proceeds from the exercise of these stock options.  Pursuant to the Merger Agreement, NFS isentitled to receive all proceeds from the exercise of these options.  As of December 31, 2004, there were 2,170,152of these stock options outstanding, including 1,000,000 shares issued to theformer CEO of Navidec, Inc. in connection with the Merger at an exercise priceof $1.30 per share as discussed in Note 2 of the Notes to ConsolidatedFinancial Statements.  All of such stockoptions were recorded at fair market value as of the date of the Merger.  Accordingly, no disclosures of pro formaresults of operations under SFAS No. 123 are required.

 

**Warrants Outstanding**

 

In connection with the Merger, BPZ, as theaccounting acquirer, assumed outstanding warrants to purchase 1,129,000 sharesof Navidec, Inc. common stock.  Of suchwarrants, 564,500 shares

 

41

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have an exercise price of $2.00 per share and564,500 shares have an exercise price of $4.00 per share.  All of such warrants expire on August 31,2005, unless there are delays in obtaining the effectiveness of a registrationstatement which includes the warrants. The warrants are callable if the stock trades at or above the exerciseprice for a period of 10 consecutive days and there is an effectiveregistration statement which includes the warrants.

 

At December 31, 2004, the Company had outstandingwarrants to purchase 1,500,000 shares of common stock at an exercise price of$2.00 per share.  Such shares were issuedto NFS in connection with a Business Consulting Agreement as more fullydiscussed in Note 2 of the Notes to Consolidated Financial Statements.

 

**Merger Earn-Out Shares**

 

Under the terms of the Merger Agreement, the Companyis committed to issue an additional 18,000,000 shares to the shareholders ofBPZ on a contingent earn-out basis if BPZ is able to achieve certain reserveand production goals.  The first earn-outtarget relating to reserves was achieved in December 2004 and 9,000,000 of theearn-out shares are issuable at this time. However, the contingent earn-out shares can only be issued after theshareholders have approved an increase in the number of authorized shares ofthe Company.  Accordingly the 9,000,000shares which have been earned are not recorded as outstanding of December 31,2004.  The remaining 9,000,000 earn-outshares are contingent on the Company achieving production of 2,000 barrels ofoil per day equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007.

 

**Note 9 – Affiliate and Related Party Transactions**

 

AtDecember 31, 2003, the Company had a receivable of approximately $162,800due from BPZ & Associates, Inc., which was the parent of the Company priorto the Merger.  Additionally, BPZ Energy,Inc. made additional cash advances to BPZ & Associates, Inc. totaling$789,591 prior to the Merger.  Asdiscussed in Note 3 of the Notes to Consolidated Financial Statements, theseadvances, totaling $952,391, were forgiven as part of the reorganization of BPZEnergy, Inc. and BPZ & Associates, Inc. in connection with the Merger.

 

Asreflected in the Merger Agreement, BPZ & Associates, Inc. retained a 10%cost-free overriding royalty interest in the gross revenues, net of governmentroyalties, of the four blocks in Peru consisting of Block Z-1, Block XIX, AreaVI and Area XVI on which the Company has exclusive rights and licensingagreements for oil and gas exploration and production.  BPZ& Associates, Inc. is an entity controlled by certain officers anddirectors of the Company.  After furtherstudy, the Board of Directors has concluded that it will be better for theCompany and its shareholders to eliminate this overriding royalty interest andto put into place a more traditional management incentive plan based upon theresults of the Company related to the operations of such blocks and otherappropriate measures of Company success. Accordingly, BPZ & Associates, Inc. has agreed to relinquish this10% overriding royalty interest in lieu of a more traditional incentivecompensation arrangement to be determined by the Board of Directors.

 

**Note 10 – Income Taxes**

 

There was no income tax expense or benefit to report for the yearsended December 31, 2004 and 2003.  Areconciliation of income taxes at the statutory rate to the Company’s effectiverate is as follows for the years ended December 31:

 

42

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| ** **                                       | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|
|                                             |       |       |       |     |       |
| Benefit computed at the expected statutory  rate |       | (6,133,692 | )          | (32,154  | )          |
|                                             |       |       |       |     |       |
| Less: valuation allowance                        |       | 6,133,692  |       | 32,154   |       |
| Income tax expense                               |       | —     |       | —   |       |

 

**Note 11 – Commitments and Contingencies**

 

The Company has various obligations and commitments in connection withits properties in Peru.  At the currentstage of operations, these obligations relate primarily to technical servicesand evaluations and are largely discretionary as to timing and amount.  The Company performs a significant amount ofthese technical services using its internal staff and systems.

 

In connection with its Block Z-1 property, the Company was obligated topost a $1,300,000 performance bond in January 2005.  In order to obtain the performance bond, theCompany deposited an equivalent amount in a restricted account in a Peruvianbank.  To satisfy its performanceobligation, the Company must drill at least one well before July 2006.  This well is currently budgeted to costapproximately $2,500,000.

 

The Company will continue to make commitments in the ordinary course ofbusiness as it pursues its development plans for the properties.

 

**Note 12 – Legal Proceedings**

 

Navidec, Inc. was advised in a letter dated February 24, 2004 that the SEC was conducting an informal inquiry to determine whether Navidec, Inc. had violated federal securities laws.  The SEC made an informal request that Navidec voluntarily produce certain documents, which were provided to the SEC in May 2004.  Based on the inquiries made and the information requested, the Company believes that the SEC’s investigation relates, at least in part, to the restatement of reported earnings for the first and second quarters of 2003 by Navidec, Inc.  This restatement was reported in Navidec, Inc.’s Form 10-Q for the third quarter of 2003 filed on December 11, 2003.

 

On December 22, 2004, the Company received notice that the SEC hadissued an Order Directing a Private Investigation and Designating Officers totake Testimony, and would be conducting a formal investigation.  We are cooperating fully with the SEC and arein discussions with the Commission regarding this matter.  Although we intend to work to bring thismatter to a prompt conclusion, we cannot make any assurance that theinvestigation will be solved positively or that it will not have negativeeffects on our limited resources or our ability to raise capital during theperiod of the investigation.

 

**Note 13 – Minimum Lease Payments**

 

**The Company leases office space inHouston, Texas under a twelve-month renewable operating lease and in Lima, Peruunder a month-to-month operating lease. The Company assumed the lease for the Houston office in connection withthe Merger.  Prior to September 2004, thelease was paid by BPZ & Associates, Inc. Total rent expense incurred for the years ended December 31, 2004 and2003 was approximately $18,000 and $4,600 respectively.**

 

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**Item 8.  Changes in and Disagreements****with Accountants on Accounting and Financial Disclosures**

 

On November 17, 2004, the Company engaged Johnson, Miller & Co. to replace Hein & Associates LLP as the Company’s independent accountant to audit the Company’s financial statements for the year ended December 31, 2004.  Johnson, Miller & Co. had been the auditors of BPZ Energy, Inc. for the years ended December 31, 2002 and 2003.  Hein & Associates LLP was dismissed as the Company’s independent accountant on the same date.  The Company’s Board of Directors approved the change in the Company’s independent accountant.

 

The independent auditor’s report of Hein & Associates LLP dated March 13, 2004 for Navidec’s financial statements for the year ended December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion, and was not modified as to audit scope or accounting principles.  However, the report did contain an explanatory fourth paragraph related to the uncertainty about Navidec’s ability to continue as a going concern.

 

The Company did not have any disagreements with Hein & Associates LLP during their engagement as the Company’s auditors.

 

**Item 8A.  Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Prior to the completion of the reverse merger with Navidec, Inc., BPZEnergy, Inc. was a private company and lacked many of the accounting proceduresand disclosure controls necessary to operate effectively as a public company inthe current regulatory environment.  TheChief Executive Officer of the Company, Thomas E. Kelly, is currently servingas the Chief Financial Officer of the Company. Mr. Kelly is not a certified public accountant, nor did the Company haveany full-time employees or officers who possess the training and experiencetypically expected of the Chief Accounting Officer or Chief Financial Officerof a public company as of December 31, 2004. Mr. Kelly, in conjunction with the Company’s accounting and legaladvisors, reviewed the Company’s disclosure controls and procedures as ofDecember 31, 2004 and concluded that the Company’s current disclosure controlsand procedures were not adequate to ensure that (i) the information required tobe disclosed by the Company in its SEC reports is accumulated and communicatedto the Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure, and (ii) that theinformation required to be disclosed in its SEC reports is consistentlyrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

In light of the deficiencies and weaknesses identified in the Company’sdisclosure controls and procedures as discussed above, the Company engagedvarious consultants to assist it in preparing the financial statements for theperiods contained in this report and Mr. Kelly and the Board of Directors haveconcluded, to the best of their knowledge and belief, that the financialinformation and disclosures contained in this report are complete and accurate.

 

44

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Further, subsequent to December 31, 2004 the Company has hiredadditional personnel, including a Controller who is a Certified PublicAccountant, and engaged consultants to assist it in taking the necessarycorrective actions to establish and/or improve the Company’s disclosurecontrols and procedures to ensure that material information relating to theCompany and its consolidated subsidiaries will be made known to it byindividuals within those entities, and that information required to bedisclosed in the Company’s SEC reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

 

**Management’s Report on Internal Control over Financial Reporting**

 

On March 2, 2005, the SEC announced that it has postponed for one yearthe compliance date for reporting on internal control by non-accelerated filersand foreign private issuers regarding amendments to its rules under theSecurities Exchange Act of 1934 that were adopted on June 5, 2003, pursuant toSection 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).  These registrants were scheduled to includein their annual report, a report by management on the company’s internalcontrol over financial reporting and an accompanying auditor’s report, forfiscal years ending on or after July 15, 2005. They must now begin to comply in their annual reports for fiscal yearsending on or before July 15, 2006. Nevertheless, the Company has contracted with an external consultant toassist management in complying with the internal control documentation,evaluation, and reporting provisions of Sarbanes-Oxley and plans to proceedwith the project during the 2005 fiscal year.

 

**Changes in Internal Controls**

 

There have been no significant changes in our internal controls or inother factors that could materially affect, or is likely to materially affect,our disclosure controls and procedures during the quarter ended December 31,2004.

 

**Limitations on the Effectiveness of Controls**

 

A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met.  Further, thedesign of a control system must reflect the fact that there are resourcesconstraints, and the benefits of controls must be considered relative to theircosts.  Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake.  Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of the control.

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

**Item 8B.  Other Information**

 

None.

 

45

 

# **PARTIII**

#  

**Item 9.  Directors and Executive****Officers****of the Registrant**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

**Item 10. Executive Compensation**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

**Item 11. Security Ownership of****CertainBeneficial Owners and Management and Related Stockholder Matters**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

**Item 12.  Certain Relationships****and Related Transactions**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

46

 

**Item 13.  Exhibits**

 

(a) Exhibits.

 
| 3.1    |   | Second  Amended and Restated Articles of Incorporation of Navidec, Inc. (incorporated  by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 2000).                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                         |
| 3.2    |   | Amended and Restated Bylaws of Navidec Inc. (formerly ACI Systems,  Inc.) 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).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.1   |   | Merger  Agreement between Navidec, Inc. and BPZ, Inc. (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. (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 (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 (filed  herewith).                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 10.6   |   | License  Contract from the Government of Peru for Block XIX (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 (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  (incorporated by reference to Exhibit 10.8 to the Company’s Form SB-2 (SEC  File No. 333-122816) filed on February 14, 2005).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 16.1   |   | Letter  from Hein & Associates, LLP (incorporated by reference to Exhibit 16.1  from Navidec’s Form 8-K filed November 18, 2004)                                                                                                                                                                    |

 

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| 21.1   |   | Subsidiaries  of the Small Business Issuer (incorporated by reference to Exhibit 21.1 to  the Company’s Form SB-2 (SEC File No. 333-122816) filed on February 14,  2005). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                           |
| 31.1   |   | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith).                   |
|   |   |                                                                                                                                                                           |
| 32.1   |   | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith).                           |

 

 

**Item 14.  Principal Accountant****Fees and Services**

 

Information required by this item will be contained in our Proxy Statement for the 2005 Annual Meeting of Stockholders, which is incorporated herein by reference.

 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 15, 2005

 

 

BPZ ENERGY, INC.

 

By:

 
| By:    | /s/ THOMAS E. KELLY                                                                               |   |   |                                             |   |
|--------|---------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------------|--------|
|   | Thomas E. Kelly                                                                                   |   |   |                                             |   |
|   | *Chief Executive Officer*                                                                         |   |   |                                             |   |
|   | *Director*                                                                                        |   |   |                                             |   |
|   | *(Principal Executive Officer, Principal  Financial Officer, and Principal Accounting   Officer)* |   |   |                                             |   |
| Date:  | April 15, 2005                                                                                    |   |   |                                             |   |
|   |                                                                                              |   |   |                                             |   |
| By:    | /s/ FERNANDO  ZÚÑIGA Y RIVERO                                                           |   | By:    | /s/ GORDON GRAY                                  |   |
|   | Dr. Fernando  Zúñiga y Rivero                                                      |   |   | Gordon Gray                                      |   |
|   | *Director and Chairman of the Board*                                                              |   |   | *Director*                                       |   |
| Date:  | April 15, 2005                                                                                    |   | Date:  | April 15 2005                                    |   |
|   |                                                                                              |   |   |                                             |   |
| By:    | /s/ JOHN R. MCKOWEN                                                                               |   | By:    | /s/ MANUEL  PABLO ZÚÑIGA-PFLÜCKER |   |
|   | John R. McKowen                                                                                   |   |   | Manuel Pablo  Zúñiga-Pflücker     |   |
|   | *Director*                                                                                        |   |   | *President and Director*                         |   |
| Date:  | April 15, 2005                                                                                    |   | Date:  | April 15, 2005                                   |   |

 

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