** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**Form 10-K/A**

**Amendment No. 1**

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| **x** | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

** **

**For the fiscal year endedDecember 31, 2007**

** **

**Or**

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| **o** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|----------------------------------------------------------------------------------------------------------|

** **

**For the transition periodfrom              to**

** **

**Commission File Number:001-12697**

** **

**BPZResources, Inc.**

(Exactname of registrant as specified in its charter)

 

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

 

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

** **

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

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of Each Class**     | ** ** | **Name of Each Exchange on Which Registered** |
|-----------------------------|------------|-----------------------------------------------|
| Common  Stock, no par value |       | American  Stock Exchange                      |

 

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

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o   No  x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  o   No  x

 

**Note** — Checking the box abovewill not relieve any registrant required to file reports pursuant to Section 13or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.    Yes  x   No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o     |   | Accelerated filer                    x |
|------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| Non-Accelerated filer   o |   | Smaller reporting company   o                                                                                                    |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act)  Yes  o   No  x

 

The number of shares of Common Stock held by non-affiliatesas of  June 29, 2007 was 62,354,069shares, all of one class of common stock, no par value, having an aggregatemarket value of approximately $347,935,705 based upon the closing price ofregistrant’s common stock on such date of $5.58 per share as quoted on theAmerican Stock Exchange.  For purposes ofthe foregoing calculation, all directors, executive officers, and 5% beneficialowners have been deemed affiliated.

 

As of February 29, 2008 there were 74,264,471shares of common stock, no par value, outstanding.

 

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

** **

Portions of the definitive Proxy Statement for theAnnual Meeting of Shareholders held on June 20, 2008, are incorporated byreference into Part III hereof.

 

**TABLEOF CONTENTS**

 
| **PART I**                       |                                                                                                                   | 3      |
|---------------------------------------|------------------------------------------------------------------------------------------------------------------------|--------|
|                                  |                                                                                                                   |   |
| Item 1.                               | Business                                                                                                               | 3      |
| Item 1A.                              | Risk Factors                                                                                                           | 12     |
| Item 1B.                              | Unresolved Staff Comments                                                                                              | 21     |
| Item 2.                               | Properties                                                                                                             | 22     |
| Item 3.                               | Legal Proceedings                                                                                                      | 28     |
| Item 4.                               | Submission of Matters to a Vote of Security Holders                                                                    | 28     |
|                                  |                                                                                                                   |   |
| **PART II**                      |                                                                                                                   | 28     |
| Item 5.                               | Market for  Registrant’s Common Equity and Related Stockholder Matters and Issuer  Purchases of Equity Securities | 28     |
| Item 6.                               | Selected Financial Data                                                                                                | 32     |
| Item 7.                               | Management’s Discussion and Analysis of Financial  Conditions and Results of Operations                           | 32     |
| Item 7A.                              | Quantitative and Qualitative Disclosures About  Market Risk                                                            | 43     |
| Item 8.                               | Financial Statements and Supplementary Data                                                                            | 45     |
| Item 9                                | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosures                                 | 79     |
| Item 9A.                              | Controls and Procedures                                                                                                | 79     |
| Item 9B.                              | Other Information                                                                                                      | 81     |
|                                  |                                                                                                                   |   |
| **PART III**                     |                                                                                                                   | 81     |
| Item 10.                              | Directors, Executive  Officers and Corporate Governance                                                                | 81     |
| Item 11.                              | Executive Compensation                                                                                                 | 81     |
| Item 12.                              | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                        | 81     |
| Item 13.                              | Certain Relationships  and Related Transactions, and Director Independence                                             | 81     |
| Item 14.                              | Principal Accountant  Fees and Services                                                                                | 81     |
|                                  |                                                                                                                   |   |
| **PART IV**                      |                                                                                                                   | 82     |
| Item 15.                              | Exhibits and Financial Statement Schedules                                                                             | 82     |
|                                  |                                                                                                                   |   |
| Glossary of Oil and Natural Gas Terms | 83                                                                                                                     |
|                                  |                                                                                                                   |   |
| Signatures                            |                                                                                                                   | 85     |
|                                  |                                                                                                                   |   |
| Certifications                        |                                                                                                                   |   |

 

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** **

**EXPLANATORY NOTE**

 

BPZ Resources, Inc. (“BPZ” or “the Company”) isfiling this amendment to its Annual Report on Form 10-K for the fiscalyear ended December 31, 2007 that was originally filed on March 14,2008 (the “Original 10-K”) in response to comments received from the Securitiesand Exchange Commission’s Division of Corporation Finance. This amendmentincludes the following:

 

·      additional disclosures of risk factorsassociated with the future marketability of our gas and future gas to powerproject;

·      presentation of  stock -based compensation expense as part ofgeneral and administrative expenses in all applicable sections;

·      renaming of the caption in theStockholders’ Equity Statement from “Adjustment for negative APIC” to “Adoptionof SFAS 123(R)” and presenting the incentive earn-out shares as a separate lineitem in our Consolidated Statement of Stockholders’ Equity (Deficit);

·      furthering the Company’s disclosuresexplaining the nature of the stock forfeiture related to the resignation of aformer employee in 2006;

·      modifications to the presentation of ourSupplemental Oil and Gas Disclosures; and

·      additional disclosures with respect to ourdisclosure controls and procedures.

 

**Other than as specified above, thisamendment does not modify or affect the financial statements or the notes theretoin the Original 10-K*.***Thisamendment does not reflect events occurring after the filing of the Original10-K and does not modify or update the disclosures therein in any way otherthan as required to reflect the amendments as described above and set forthbelow. Unless the statements indicate otherwise, as used in this amendment, theterms “Company,” “we,” “us” and “our” refer collectively to BPZ and itssubsidiaries.

 

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**PART I**

 

*BPZ Resources, Inc. cautions that this documentcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. All statements, other than statements of historical facts,included in or incorporated by reference into this Form 10-K/A whichaddress activities, events or developments which the Company expects, believesor anticipates will or may occur in the future are forward-looking statements.The words “may,” “will,” “should,” “could,” would,” “expects,” “plans,” “anticipates,”“intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” andsimilar expressions are also intended to identify forward-looking statements.These statements are based on certain assumptions and analyses made by themanagement of BPZ in light of its experience and its perception of historicaltrends, current conditions and expected future developments as well as otherfactors it believes are appropriate under the circumstances. The Company  cautions the reader that theseforward-looking statements are subject to risks and uncertainties, many ofwhich are beyond its control, that could cause actual events or results todiffer materially from those expressed or implied by the statements. See Item1A. — “Risk Factors” included on thisForm 10-K.*

* *

*Unless the contextrequires otherwise, references in this Annual Report on Form 10-K to “BPZ”,”we”,“us”, “our” and the “Company” refer to BPZ Resources, Inc., and itsconsolidated subsidiaries.*

* *

**ITEM 1. BUSINESS**

** **

**Overview**

** **

BPZResources, Inc., a Texas corporation, is based in Houston, Texas withoffices in Lima, Peru and Quito, Ecuador. We are focused on the exploration,development and production of oil and natural gas in Peru and Ecuador. We alsointend to utilize part of our planned future natural gas production as a supplysource for the complementary development of a Company owned gas-fired powergeneration facility.

 

Wemaintain a subsidiary registered in Peru through our wholly owned subsidiaryBPZ Energy, Inc., a Texas corporation (“BPZ – Texas”). Currently, we haveexclusive rights and license agreements for oil and gas exploration andproduction covering a total of approximately 2.4 million acres, in four blocks,in northwest Peru. Our license contracts cover 100% ownership of Block Z-1(739,205 acres), Block XIX (472,860 acres), Block XXII (948,000 acres, alsoreferred to as Area VI in previous filings) and Block XXIII (248,000 acres).The Block Z-1 contract was signed in November 2001, the Block XIX contractwas signed in December 2003 and Blocks XXII and XXIII were both signed in November 2007.  Our license contracts provide for an initialexploration period of seven to thirteen years for Block Z-1and seven to tenyears for Blocks XIX, XXII and XXIII.  Inaddition, they require that we conduct specified activities on the propertiesduring this period. If the exploration activities are successful, our totalcontract term can extend up to 30 years for oil exploration and production andup to 40 years for gas exploration and production.

 

Additionally,through our wholly owned subsidiary, SMC Ecuador Inc., a Delaware corporation,and its registered branch in Ecuador, we own a 10% non-operated workinginterest in an oil and gas producing property, Block 2, located in thesouthwest region of Ecuador (the “Santa Elena Property”). The license agreementcovering the property extends through May 2016.

 

Weare in the initial stages of developing our oil and natural gas reserves and haverecently begun producing oil under an extended well test program from ourrecent discoveries.  To date ouractivities in Peru have been primarily limited to analysis and evaluation oftechnical data on our properties, preparation of the development plans for theproperties, including detailed engineering and design of the power plant andgas processing facilities, refurbishment of one of our offshore platforms,procuring machinery and equipment for an extended drilling campaign, obtainingall necessary environmental and operating permits, bringing production on-lineand securing the required capital and financing to conduct the current plan ofoperation.  In March 2007,after a total of six drill stem tests were conducted on separate potential payzones from the Lower and Upper Zorritos formations, our first well the CX11-21XD well, tested positive for both gas and oil at commercially produciblequantities.  Subsequently, in June 2007we successfully recompleted the Corvina CX11-16X well as a natural gasproducing well and completed a total of four drill stem tests on various zonesin the well including one in a formation previously untested in the entirebasin.  In October 2007, wecompleted seven drill stem tests on the CX11-14D well in the Corvina Field.  The first six tests were conducted in theUpper Zorritos formation, with the first two testing the oil zone and the otherfour testing the gas zone, while the seventh test targeted the Cardalitosformation located immediately above the Upper Zorritos.  The CX11-14D well tested positive for both gasand oil at commercially producible quantities. On November 29, 2007, we commenced drilling on the CX11-18XDwell.  The well reached total depth of8,792 feet (measured depth) on January 1, 2008, approximately one monthahead of schedule.  We have recentlyperformed a series of safety and integrity 

 

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tests on the CX-11 Corvina platform including the surfaceequipment.  As part of the integritytesting of the service equipment, we perforated the lower prospective oil sandsidentified in the CX11-18XD well.  Theselower sands tested oil and the results assisted in validating our Corvinageologic model.

 

On June 13,2007, we entered into a capital lease agreement, with an option topurchase, for two barges to assist in the development of the Corvina Field.Each of these barges has a capacity of approximately 40,000 barrels.  The two barges were towed to Peru where onebarge, the Nu’ uanu, is currently being used to transport oil between the CX11platform and the refinery in Talara.  Theother barge, the Nomoku, is currently being fitted with the required equipmentfor its intended use as a floating production, storage and offloading facility(“FPSO”) that will be moored next to the CX11 platform.   However, we have encountered some schedulingdelays in deploying this barge.  Weexpect the Nomoku to be fully fitted and operational by the end of the first orbeginning of the second quarter of 2008. Until such time the Nomoku is fittedwith the permanent production equipment, we are anticipating pumping oildirectly to the Nu’uanu using temporary production equipment and thentransporting the oil to the Talara refinery.

 

We started producing oilfrom the CX11 platform under an extended well testing program beginning on November 1,2007.  By December 31, 2007, weproduced approximately 40,989 barrels of oil and sold approximately 28,741barrels to a refinery in Talara.  Our oilis delivered to the refinery by barge approximately 100 miles south of theplatform.  The remainder was kept inproduction inventory until such time it was delivered to Talara in early 2008.

 

On October 24, 2007,our primary marine transportation contractor entered into two short termagreements with the commercial division of the Peruvian Navy to lease twotankers to transport oil to market. However, on January 30, 2008, one ofthe tankers, the Supe, sank after catching fire.  At the time of the incident the Supe tankercontained approximately 1,300 barrels of oil, most of which is believed to havebeen burned in the fire.  Initialassessments show that environmental issues have been adequatelycontrolled.   No Company employees wereinjured.

 

Currently all production(which had reached approximately 4,200 barrels of oil per day by late January2008) is shut-in due to the incident involving the Navy tanker.  At therequest of the OSINERGMIN, the government agency responsible for auditing thesafety of energy investments in Peru, we successfully performed a series ofsafety and integrity tests on the facilities at the CX-11 Corvina platform,including the equipment that was being used for the ongoing long-term testingof the 21XD and 14D wells.  We confirmed that the well testing equipmentwas in operational condition.  On March 12, 2008 we received clearancefrom the OSINERGMIN, to resume operations at the CX-11 platform, including thescheduled 18XD well drill stem test.  However, the four Corvina wells arecurrently shut-in while we complete the installation of sea-bed pipelinesconnecting the platform to the transport barge, along with the required mooringsystems, that will allow for an improved long-term testing program.Additionally, we are waiting for final clarification from the appropriateauthorities in Peru regarding the transportation of our crude oil to therefinery. 

 

We have submitted all therequested reports and documentation generated during the investigation of the January 30,2008 sinking of the Peruvian Navy tanker, the Supe.  A number of organizations involved in theinvestigation have issued reports concluding there was no environmental damagedue to the incident.  Additionally, weassisted the Peruvian Navy in conducting an underwater survey of the Supe,which established that the vessel does not represent a hazard to navigation nora marine pollution threat, because all its tanks were found to be empty.  The CX-11 Corvina platform and all itsfacilities, as well as the BPZ-01 tender barge, the four Corvina wells, and allthe vessels supporting the operations have now been certified to be inoperational condition.  See Note 14 “Commitments andContingencies”, in the Notes to the Consolidated Financial Statementsbelow, for furtherdiscussion.

 

Consequently (through ourprimary marine transportation contractor) we are now leasing only one vesselfrom the Navy having a capacity of approximately 6,000 barrels.  The lease is set to expire at the end of March 2008.

 

**Reincorporation,Name Change and Internal Restructuring**

** **

On October 11, 2007, BPZ Energy, Inc., aColorado corporation, formerly named Navidec, Inc., completed areincorporation from Colorado to the State of Texas pursuant to the Plan ofConversion as approved by the shareholders at the 2007 annual meeting ofshareholders held on August 17, 2007. The related filings with the Secretary of State of Texas also included achange of the Company’s name from BPZ Energy, Inc. to BPZ Resources Inc.,in connection with an ongoing review of certain internal reorganization mattersrelated to our international tax planning and corporate structure. The Companycontinues to do business under the name BPZ Energy in its regular businessoperations.

 

No changes to the members of the Board of Directors,the management, or the operations of the Company were made in connection withthe conversion from a Colorado corporation to a Texas corporation.  The Company remains as the same businessentity following the reincorporation to Texas, with all of the assets, rights,privileges and powers of, and all 

 

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property owned by, alldebts due to, as well as any causes of action belonging to the predecessorColorado entity.  As part of thereincorporation, a new Certificate of Formation and new Bylaws were adopted,which now govern the rights of holders of the Company’s common stock.  At the effective time of the reincorporation,each outstanding share of the Colorado entity prior to the reincorporation wasautomatically converted into one share of the Texas entity.

 

As part of therestructuring, we have created two British Virgin Island limited partnershipholding companies for various BPZ entities. Each holding company is owned 90% by BPZ Energy, Inc. as general partnerand, in compliance with local requirements, 10% by an individual nomineelimited partner, one of whom is our President and Chief Executive Officer.  Although 10% of each of the holding companiesis nominally owned by an individual, these individuals have agreed to enterinto nominee agreements to assign all associated economic interest back to us,and consequently we treat these subsidiary holding companies and theirsubsidiaries as “wholly-owned” for accounting purposes.  By the time we complete the restructuring, weintend to replace the individual nominees with another wholly-owned subsidiaryto serve as limited partner of the holding companies.

 

**NavidecMerger Transaction**

** **

On September 10, 2004, BPZ Energy, Inc., aTexas corporation, consummated a reverse merger with Navidec, whereby BPZ-Texasbecame a wholly owned subsidiary of Navidec (the “Merger”).  As a result of the Merger, the shareholdersof BPZ-Texas received the majority of the voting interest control of the Boardof Directors and management of the combined entity and on February 4, 2005,Navidec changed its name to BPZ Energy, Inc. For accounting purposes,BPZ-Texas was treated as the acquiring entity. All financial statements hereinrepresent the historical financial statements of the accounting acquirer,BPZ—Texas. Although the Company’s name has been changed, the pre-merger companymay be referred to as Navidec in this filing, as the context may require, toavoid confusion.

 

The Merger Agreement provided for the immediateissuance by Navidec of 9,000,000 shares of its common stock to the shareholdersof BPZ-Texas and the future issuance of an additional 18,000,000 shares on anearn-out basis if the Company achieved certain reserve and production goals.The first 9,000,000 earn-out shares were contingent on achieving certainreserve targets, which were achieved in December 2004. The remaining9,000,000 earn-out shares were contingent on the Company becoming entitled toreceive as its proportionate share from gross production from any oil and gaswells owned or operated by the Company not less than 2,000 barrels of oil perday or its equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007.  In November 2007this production target was achieved based on certification by an independentengineering firm that the Company’s production in Peru has met or exceeded therequired level of production.

 

For accounting purposes, theearn-out arrangement is treated as a stock dividend because the earn-out ispayable to the shareholders of the accounting acquirer, BPZ-Texas as contingentmerger consideration. Accordingly, except for a retroactive increase in thenumber of common shares outstanding for all periods presented, no accountingentry is required upon the issuance of the earn-out shares.

 

**AvailableInformation**

** **

The Company files annual, quarterly and currentreports, proxy statements and other documents with the Securities and ExchangeCommission (“SEC”) under the Securities Act of 1934. The public may read andcopy any materials that we file with the SEC at the SEC’s Public Reference Room atHeadquarters Office, 100 F Street, NE, Washington, DC 20549. The public mayobtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet websitethat contains reports, proxy and information statements, and other informationregarding issuers, including us, that file electronically with the SEC. Thepublic can obtain any documents that we file electronically with the SEC athttp://www.sec.gov. In addition, the Company maintains a website(http://www.bpzenergy.com), on which we make available, free of charge, all ofthe Company’s above mentioned filings with the SEC, including Forms 3, 4 and 5filed with respect to our equity securities under Section 16(a) ofthe Securities Act of 1934. These filings will be available as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the SEC.

 

**OurCompetition**

** **

Intense competitionexists in the oil and gas industry with respect to the acquisition of producingproperties, undeveloped acreage, and rights to explore for such properties.Many major and independent oil and gas companies actively pursue and bid forthe mineral rights of desirable properties, and many companies have beenactively engaged in acquiring oil and gas properties specifically in Peru andEcuador.

 

We believe our efforts inand unique knowledge of our targeted areas have given us a competitiveadvantage in Peru, and to a lesser extent, Ecuador. Although un-leased tractsexist within our target area, we believe these properties may be lessattractive to other companies because it will be difficult for them to obtain asignificant amount of contiguous mineral acres. This results in part from oursignificant holdings in the vicinity of these un-leased tracts. However,increased demand for license rights in surrounding areas may impact our abilityto expand and grow in the future, particularly because many of our competitorshave substantially greater financial and other resources, in addition to bettername recognition and longer 

 

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operating histories. As a result, we may not be able to competesuccessfully to acquire additional oil and gas properties in desirable locations.

 

Intense competition foraccess to drilling and other contract services and experienced technical andoperating personnel needed to drill and complete wells also exists in the oiland gas industry. In the past, for example, we have experienced difficultyobtaining a drilling rig for our planned drilling operations, but now have adrilling rig under contract. Competition for drilling and contract services inour target area is increasing and may affect our plan of operation. We areadjusting our operating plans and timelines to adapt to this changingenvironment. However, increasing future demand for drillers and contractors maylimit our ability to execute in a timely manner and may negatively impact ourability to grow.

 

**Customers**

 

To date, all of our sales of oil in Peru have beenmade under a short-term contract to the Peruvian national oil company,Petroperu.

 

**RegulationImpacting Our Business**

** **

***General***

*** ***

Various aspects of ouroil 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 webelieve our operations are and will be in substantial compliance with existinglegislation and requirements of governmental bodies, our ability to conductcontinued operations is subject to satisfying applicable regulatory andpermitting controls. Our principals have many collective decades of experiencein dealing directly with the Peruvian government on energy projects and in somecases have been directly involved in the drafting and promulgation of petroleumlegislation. Therefore we believe we are in a unique position to understand andcomply with local rules and regulations. However, our current permits andauthorizations as well as 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***

 

***Peruvianhydrocarbon legislation.*** Peru’s hydrocarbon legislation, which includes the Organic HydrocarbonLaw No. 26221 and the regulations thereunder (the “Organic Hydrocarbon Law”),governs our operations in Peru. This legislation covers the entire range ofpetroleum operations, defines the roles of Peruvian government agencies whichregulate and interact with the oil and gas industry, requires that investmentsin the petroleum sector be undertaken solely by private investors (eithernational or foreign), and provides for the promotion of the development ofhydrocarbon activities based on free competition and free access to alleconomic activities. This law provides that pipeline transportation and naturalgas distribution must be handled via contracts with the appropriategovernmental authorities. All other petroleum activities are to be freelyoperated and are subject only to local and international safety and environmentstandards.

 

Under this legal system,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 responsible for promoting andoverseeing the investment of hydrocarbon exploration and exploitation activitiesin Peru. Perupetro is empowered to enter into contracts for either theexploration and exploitation or the exploitation of petroleum and gas on behalfof Peru, the nature of which are described further below. The Peruviangovernment also plays an active role in petroleum operations through theinvolvement of the Ministry of Energy and Mines, the specialized governmentdepartment in charge of devising energy, mining and environmental protectionpolicies, enacting the rules applicable to all these sectors andsupervising compliance with such policies and rules. Within the OSINERGMIN isthe agency charged with economic and technical supervision. We are subject tothe laws and regulations of all of these entities and agencies.

 

Perupetro generally entersinto either license contracts or service contracts for hydrocarbon explorationand exploitation. Peru’s laws also allow for other contract models, but theinvestor must propose contract terms compatible with Peru’s interests. We onlyoperate under license contracts and do not foresee operating under any servicescontracts.  A company must be qualifiedby Perupetro to enter into hydrocarbon exploration and exploitation contractsin Peru. In order to qualify, the company must meet the standards under the RegulationsGoverning the Qualifications of Oil Companies. These qualifications generallyrequire the company to have the technical, legal, economic and financialcapacity to comply with all 

 

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obligations it will assume under the contract based on thecharacteristics of the area requested, the possible investments and theenvironmental protection rules governing the performance of itsoperations. When a contractor is a foreign investor, it is expected to incorporatea subsidiary company or registered branch in accordance with Peru’s municipallaws and appoint representatives who will interact with Perupetro.

 

BPZ Energy, Inc.(Texas) and its corresponding subsidiary or branch in Peru has been qualifiedby Perupetro with respect to our current contracts. However, Perupetro reviewsthe qualification for each specific contract to be signed by a company.Additionally, the qualification for foreign companies is granted in favor ofthe home office or corporation, which is jointly and severally liable at alltimes for the technical, legal, economic and financial capacity of its Peruviansubsidiary or branch.

 

When operating under alicense contract, the licensee is the owner of the hydrocarbons extracted fromthe contract area during the performance of operations, and pays royaltieswhich are collected by Perupetro. The licensee can market the hydrocarbons inany manner whatsoever, subject to a limitation in the case of naturalemergencies where the law stipulates such manner.

 

Licensees are obligatedto submit quarterly reports to the Petroleum Bureau (Direccion General deHidrocarburos). Licensees must also submit a monthly economic report to theCentral Bank of Peru. These reports are generally combined and deliveredtogether with other operating reports required to be submitted to Perupetro.

 

Until August 1993,all license contracts were granted by the Ministry of Energy and Mines. Thechange to Perupetro as the license contract grantor subjects all licensecontracts to a new legal framework. Although there is precedent for these newlicensing procedures, there may still be some uncertainty as to exactly how thelicensing procedures will function in the future.

 

The duration of thelicense contracts is based on the nature of the hydrocarbons discovered. Thecontract duration for crude oil is thirty years, while the contract durationfor natural gas and condensates is forty years. The periods commence on anagreed date and are determined based on location of the contract area, seasonof the year in which exploration commences, and other similar factors.Contracts typically include an exploration phase and an exploitation phase,unless the contract is solely an exploitation contract. Within the contractterm, seven years is allotted to exploration, with the possibility of threeextensions of one year each. A potential deferment period for a maximum of tenyears is also available if certain factors recognized by law delay the economicviability of a discovery, such as lack of transportation facilities or lack ofa market. The exploration phase is generally divided into several periods, witha maximum of seven periods, and each period includes a minimum work program.The fulfillment of work programs must be supported by an irrevocable bankguaranty, usually in the amount of thirty to forty percent of the estimatedvalue of the minimum work program.

 

Perupetro also grantstechnical evaluation agreements. These agreements give the contractor the rightto conduct technical evaluations of the areas under such agreements and toenter into license contracts if the evaluations indicate the potential forprofitable operations. The technical evaluation agreement is generally for aperiod of twenty-four months, depending upon the volume and nature of the workto be carried out.

 

We currently have fourlicense contracts. As of March 14, 2008, we believe we were in compliancewith all of the material requirements of each such contract. We have executedcertain letters of guaranty to insure our performance under the licensecontracts and a drilling service agreement. At December 31, 2007, we had $6.0million in bonds posted at various dates, to secure our obligation under thelicense contract for Block XIX, Z-1, XXII and XXIII and a drilling serviceagreement. The license contract bonds and the service agreement bond arepartially secured by the deposit of restricted cash with the financialinstitutions which issued the bonds in the amount of $2.8 million and $1.0million, respectfully. Should we fail to fulfill our obligations under any ofour license contracts or service agreement without technical justification orother good cause, Perupetro and/or our service provider could seek recourse tothe bond or terminate the license and/or the service contract.

 

***Peruvianfiscal regime.*** Peru’s fiscal regime determines the levels of the government’sentitlement from petroleum activities. This regime is subject to change, whichcould negatively impact our business.

 

License contracts aresubject to royalty payments, which are usually a fixed percentage of the actualproduction sold. The taxing regulations stipulate a minimum royalty payment offive percent increasing incrementally to a maximum of twenty percent based onproduction.

 

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The Organic HydrocarbonLaw and the Regulations Governing the Tax Stability Guaranty and Other Tax Rules ofthe Organic Hydrocarbon Law provide that the tax regime in force on the date ofsigning a contract will remain unchanged during the term of the contract.Therefore, any change to the tax regime, which results in either an increase ordecrease in the tax burden, will not affect the operator.

 

During the explorationphase, operators are exempt from import duties and other forms of taxationapplicable to goods intended for exploration activities. Exemptions arewithdrawn at the production phase, but exceptions are made in certaininstances, and the operator may be entitled to import goods tax-free for anadditional two-year period.

 

Taxable income isdetermined by deducting allowable operating and administrative expenses,including royalty payments. Income tax is levied on the income of the operatorbased upon the legal corporate tax rate in effect at the date the contract wassigned. Operators engaged in the exploration and production of crude oil,natural gas and condensates must determine their taxable income separately foreach license contract under which they operate. Where a contractor carries outthese activities under different individual license contracts, it may offsetits earnings before income tax under one license contract with losses underanother license contract, as long as the contract with the loss is in theproduction phase or has been relinquished, for purposes of determining thecorporate income tax.

 

***Peruvianlabor 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, waterquality at workplaces, medical assistance and first-aid services. Provisionsspecifically related to the exploration phase, which is our current phase ofoperations, are also contained in the regulations and include safety measuresin camps, medical assistance, food conditions, and handling of explosives.Additional safety regulations may also apply as we expand and develop ouroperations.

 

The Constitution of Peruand Legislative Decree Nos. 677 and 892 gives employees working in privatecompanies engaged in activities generating income classified as third categoryincome by the Income Tax Law the right to share in the company’s profits.  This profit sharing is carried out throughthe distribution by the company of a percentage of the annual income beforetax.  According to Article 3 of theUnited Nations International Standard Industrial Classification, BPZ Resources, Inc.’stax percentage is classified under the “mining companies” section, which setsthe rate at 8%.  The benefit granted bythe law to employees is calculated on the basis of the “net income subject totaxation” and not on the net business or accounting income of companies. “Netincome” is obtained after deducting from total revenues subject to income tax,the expenses required to produce them or maintain the source thereof.

 

The following factors are taken into account regardingthe profit sharing system: (1) calculation of profits to be distributed toeach employee is based on two criteria (a) the number of days actuallyworked by each employee, and (b) in proportion to the remunerations ofeach employee; (2) number of days actually worked (including leave ofabsence, temporary shutdown of the workplace, and days not worked due toimproper suspension by the employer); (3) remuneration (the full amountreceived by the employee for his services); (4) maximum profit share limitof 18 monthly remunerations; (5) remainder between the maximum percentageof company profits to be distributed and the maximum limit of the percentagecorresponding to all employees); (6) timing of distributions should bemade within thirty calendar days after expiration of the term for the filing ofthe Annual Income Tax Return; (7) default interest; (8) evidence ofsettlement of profits; and (9) deductible expenses.

 

***Peruvianelectric 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.

 

***Peruvianenvironmental regulation.*** Our operations are subject to numerous and frequently changing laws andregulations governing the discharge of materials into the environment orotherwise relating to environmental protection. Peru has enacted 

 

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specific environmentalregulations applicable to the petroleum industry. The Code on the Environmentand the Natural Resources establishes a framework within which all specificlaws and regulations applicable to each sector of the economy are to bedeveloped. These laws and regulations are designed to ensure a continualbalance of environmental and petroleum interests. The regulations stipulatecertain environmental standards expected from contractors. They also specifyappropriate sanctions to be enforced by the Ministry of Mines and Energy if acontractor fails to maintain such standards. The Ministry of Mines and Energyis charged with the responsibility of issuing the applicable standards.OSINERGMIN is responsible for ensuring compliance with applicable environmentalrules covering hydrocarbon activities.

 

The Organic HydrocarbonLaw also addresses the environmental regulatory regime in Peru. The laworiginally prohibited any mining or extractive operations within certain areasdesignated for protection. It was, however, subsequently modified to enableinvestors to prospect for hydrocarbons within protected areas, provided thereis compliance with several obligations. We must comply with these obligationsas we conduct our business on an ongoing basis. The Environmental Regulationsfor Hydrocarbon Activities provide that companies participating in theimplementation 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 areport corresponding to the previous year describing the company’s compliancewith the environmental legislation in force.

 

Companies involved inhydrocarbon activities must also prepare and file an Environmental Impact Study(“EIS”) with the General Hydrocarbons Bureau, which is part of the Ministry ofEnergy and Mines, in order for the relevant activities to comply with themaximum permissible emission limits set forth by the Ministry of Energy andMines. An EIS must be prepared for each project to be carried out. All of theseproposals must be approved by the General Environmental Bureau, which is alsopart of the Ministry of Energy and Mines.

 

In addition, any partyresponsible for hydrocarbon activities must file an “Oil Spill and EmergencyContingency Plan” with the General Hydrocarbons Bureau. The plan must beupdated 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 contain information on the procedures, personneland equipment required to be used and procedures to be followed to establishuninterrupted communication between the personnel, the governmentrepresentatives, the General Hydrocarbons Bureau and other State entities.

 

Peru has recently enactedamendments to its environmental law, imposing substantial restrictions on theuse of natural resources, interference with the natural environment, locationof facilities, handling and storage of hydrocarbons, use of radioactivematerial, disposal of waste, emission of noise and other activities.Additionally, the laws require monitoring and reporting obligations in theevent of any spillage or unregulated discharge of hydrocarbons.

 

Any failure to complywith environmental protection rules, the import of contaminated products, orfailure to keep a monitoring register or send reports to the GeneralHydrocarbons Bureau in a timely fashion, could subject the company to fines. Inaddition, the General Hydrocarbons Bureau may consider imposing a prohibitionor restriction of the relevant activity, an obligation to compensate theaggrieved parties and/or an obligation to immediately restore the area. Thecompany responsible for any default can also be subject to a suspension ofoperations for a term of one, two or three months, or indefinitely.Furthermore, any contract signed with the Peruvian government, theimplementation of which jeopardizes or endangers the protection or conservationof protected natural areas, can be terminated.

 

We are subject to allPeruvian environmental regulations applicable to the petroleum industry now inexistence and those existing in the future. For example, we are required toobtain an 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 offshore Peru where we intend toconduct oil and gas operations.  Theenactment and enforcement of environmental laws and regulations in Peru isrelatively new. We are therefore uncertain how Peruvian authorities willenforce and supervise environmental compliance and standards. Further, wecannot predict any future regulation or the cost associated with futurecompliance.

 

Although we believe ouroperations 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. In particular,we may in the future experience in the future delays in obtaining permits andauthorizations in Peru necessary for our operations.

 

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***Compliancewith Existing Legislation in Peru***

 

Although we believe ouroperations are and will be in substantial compliance with existing legislationand requirements of Peruvian governmental bodies, our ability to conductcontinued operations is subject to satisfying applicable regulatory andpermitting controls. As noted above, our principals have many collectivedecades of experience in dealing directly with the Peruvian government onenergy projects and in some past cases have been directly involved in thedrafting and promulgation of petroleum legislation. Therefore, we believe weare in a good position to understand and comply with local rules andregulations.

 

***Ecuador***

 

SMC Ecuador, Inc.,our wholly owned subsidiary, has held its 10% non-operating interest in theSanta Elena oil fields since 1997. We acquired all of the common stock of SMCEcuador Inc. in 2004.  As a non-operator,we are not directly subject to the laws and regulations of Ecuador covering theoil and gas industry and the environment. However, if we begin operatingactivities in Ecuador, we will be directly subject to such laws andregulations.

 

**EnvironmentalCompliance and Risks**

** **

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

 

In addition to certain pollution coverage related to oursurface facilities, we also maintain insurance coverage for seepage andpollution, cleanup and contamination from our wells.  Regardless, no such coverage can insure usfully against all environmental risks. We are not aware of any environmentalclaims which would have a material impact upon our financial position orresults of operations.

 

We will continue our efforts to comply with theserequirements, which we believe are necessary to successful long-term operationsin the oil and gas industry. As part of this effort we have establishedguidelines for continuing compliance with environmental laws and regulations.In order to carry out our plan of operation, we are required to conductenvironmental impact studies and obtain environmental approvals for operations.We have engaged outside consultants to perform these studies and assist us inobtaining necessary approvals. Our cost to date for these studies andassistance related to the Block Z-1 Corvina and Albacora fields and Block XIXare approximately $791,808.  We arecurrently assessing what studies are necessary and the associated cost estimatefor Blocks XXII and XXIII.

 

In January, 2008 one ofthe chartered Navy tankers that our primary marine transportation contractorwas chartering from the Peruvian Navy’s commercial branch sunk after catchingfire.  The 7,500 barrel capacity “Supe”,that was moored near the Corvina CX-11 platform and was being used to store oilproduced from Corvina’s 21XD and 14D wells, caught fire and later sankapproximately one and a half miles from the platform.  At the time of the incident the Supe tankercontained approximately 1,300 barrels of oil, most of which is believed to havebeen burned in the fire.  Initialassessments show that environmental issues have been adequatelycontrolled.   No Company employees wereinjured.

 

  There was no damage to our platform, barges,drilling and well testing equipment, or other facilities we own and the damagehas been limited mostly to the Supe, which was anchored at a distance from theplatform and directed away after it caught fire.  We contracted the services of Clean Caribbeanand Americas (“CCA”) to conduct an environmental damage assessment in andaround the area surrounding the incident. CCA concluded that the majority of the crude oil contained in the Navytanker was burned-off during the fire subsequent to the explosion.  This was confirmed after divers inspected thesunken tanker, which is resting 200 feet underwater, and reported that no crudeoil or fuel was detected in any of the tanks. Our environmental consultants, as well as several independentorganizations, conducted additional lab tests on seawater and marine lifewithin the potentially affected area and these lab results indicated nocontamination related to the incident.

 

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

 

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** **

**OperationalHazards and Insurance**

** **

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

 

As iscommon in the oil and natural gas industry, we do not insure fully against allrisks associated with our business either because such insurance is notavailable or because premium costs are considered prohibitive. We currently have insurance coverage which webelieve is adequate for our current stage of operations based on management’sassessment.  Such insurance may not coverevery potential risk associated with the drilling, production and processing ofoil and gas. In particular, coverage is not obtainable for all types ofenvironmental hazards. Additionally, the occurrence of a significant adverseevent, the risks of which are not fully covered by our insurance policy, couldhave a material adverse effect on our financial condition and results ofoperations. Moreover, no assurance can be given that we will be able tomaintain adequate insurance or increase current coverage amounts at rates weconsider reasonable.

 

**Researchand Development**

** **

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

 

**Executive Officers**

 

The following table sets forth the names of our chairmanand executive officers along with their positions and ages, as of December 31,2007.

 
| **Name**                                         | ** ** | **Age** | ** ** | **Position**                                      |
|--------------------------------------------------|------------|---------|------------|---------------------------------------------------|
| Dr. Fernando  Zúñiga y Rivero (1) |       | 80      |       | Chairman  of the Board                            |
| Manuel  Pablo Zúñiga-Pflücker (1) |       | 46      |       | Chief  Executive Officer, President, and Director |
| Frederic  Briens                                 |       | 48      |       | Chief  Operating Officer                          |
| Edward  G. Caminos (2)                           |       | 45      |       | Chief  Financial Officer                          |

 

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(1)             Dr. Zúñiga yRivero is the father of the Company’s President, Chief Executive Officer andDirector, Mr. Zúñiga-Pflücker. There are no other family relationshipsbetween any directors or executive officers of the Company.

 

(2)             Appointed ChiefFinancial Officer as of May 24, 2007.

 

Set forth below are brief descriptions of the recentemployment and business experience of the officers and directors of theCompany.

 

**Dr. FernandoZúñiga y Rivero, Chairman of the Board.**  Dr. Zúñiga y Rivero became Chairman ofthe Board of BPZ upon consummation of the Merger with Navidec, Inc. in September 2004.Immediately prior to the Merger and since 1996, he served as Chairman of BPZ &Associates Inc., (the former parent company of BPZ—Texas), which has beeninactive subsequent to the Merger. Dr. Zúñiga y Rivero was also EnergyDivision project officer of The World Bank, where he planned and implementedexploration promotion projects in 58 countries, primarily in East and WestAfrica, Eastern Europe, Southeast Asia and Latin America from 1979 to 1996. Dr. Zúñigay Rivero has fifty years of experience in the international energy industrystarting as an exploration geologist, biostratigrapher, and exploration head ofan Exxon affiliate in Peru; and continuing as exploration production manager,integrated operations manager, general manager, and ultimately serving as Chairmanand CEO of Petroleos del Peru, the national oil company of Peru. Dr. Zúñigay Rivero holds a B.S., a M.S. and a Ph.D. in Geology from the University of SanAugustin, Peru, and he conducted postgraduate studies at the 

 

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University of California, Los Angeles. Dr. Zúñiga y Rivero servedas a director of Transmeridian Exploration, Inc., a public oil and gascompany with operations in Kazakhstan, from April 2005 until May 2007.

 

**ManuelPablo Zúñiga-Pflücker, President, Chief Executive Officer and Director.**  Mr. Zúñiga-Pflücker became President andDirector of BPZ upon consummation of the Merger with Navidec, Inc. in September 2004and in May 2005 assumed the additional title of Chief Executive Officer.Immediately prior to the Merger and since its formation in 2001, Mr. Zúñiga-Pflückerserved as President of BPZ—Texas. Mr. Zúñiga-Pflücker also served asPresident of BPZ & Associates, Inc., the former parent company ofBPZ—Texas, from 1989 until its Merger with Navidec, Inc. in September 2004,at which time BPZ & Associates, Inc. became inactive. Mr. Zúñiga-Pflückerbegan his career with Occidental Petroleum Corporation. Mr. Zúñiga-Pflückerhas spent the past 20 years in the international oil and gas business, and hehas been involved in projects throughout Latin America and other areas of theworld ranging from exploitation of marginal oil and gas fields to frontierexploration projects. He has also focused on the creative development ofnatural gas fields utilizing power generation and gas to liquids technology. Heholds a B.S. in mechanical engineering from the University of Maryland as wellas an M.S. in petroleum engineering from Texas A&M University.

 

**FredericBriens, Chief Operating Officer.**  Mr. Briens joined BPZ as Vice Presidentof Engineering in December 2004 and was named Chief Operating Officer in May 2005.From 2002 through 2004, Mr. Briens served as Geosciences and BusinessDevelopment Manager for Perenco in Venezuela. From 1999 to 2002, Mr. Brienswas the Chief Reservoir Engineer for Lundin Petroleum in Switzerland. Mr. Briensis a petroleum engineer with over 20 years of operating experience ininternational oil and gas projects spanning the globe. He has also served insenior technical and operating positions with Conoco, Schlumberger and Chevron.Mr. Briens holds an M.S. and a Ph.D. in petroleum engineering from TexasA&M University, an MBA from Colorado State University and an engineeringdegree from Ecole Centrale de Paris. Mr. Briens was a co-founder of BPZ &Associates, Inc., a predecessor to the Company (which is no longeractive), in 1989.

 

**Edward G.Caminos, Chief Financial Officer.**  Mr. Caminos was appointed as ChiefFinancial Officer of the Company, effective May 24, 2007.  Mr. Caminos served as VicePresident—Finance and Chief Accounting Officer since October 30, 2006until his appointment as Chief Financial Officer.  Mr. Caminos also served as interim ChiefFinancial Officer from June 15, 2006 to October 29, 2006 and asCorporate Controller of the Company since January 2005. Prior to joiningthe Company, Mr. Caminos served as Director Financial Reporting for theAmericas Division at Duke Energy from June 2004 to January 2005. FromFebruary 2001 to May 2004, Mr. Caminos served as FinancialReporting Manager and, prior to its sale, as interim Controller for the EuropeDivision, at Reliant Energy.  Mr. Caminosis a Certified Public Accountant and holds a Bachelor’s Degree in BusinessAdministration - Accounting from Bloomsburg University of Pennsylvania.

 

**Employees**

** **

As of December 31,2007, we employed 23 full-time employees (of which 3 are executive officers) inour Houston office and 44 full-time employees (of which 1 is an executiveofficer) in our Lima, Peru office.  Wehad one full-time employee in the Quito, Ecuador office.  BPZ believes that its relationship with itsemployees is satisfactory. None of our employees are currently represented by aunion.

 

**ITEM 1A.  RISKFACTORS**

** **

**RisksRelating to the Oil and Natural Gas Industry, the Power Industry, and OurBusiness.**

 

***We have a limited operating history and have only engaged in start-upand development activities.***Although BPZ-Texas was formedin 2001, we are in the initial stages ofdeveloping our oil and natural gas reserves and have recently begun producingoil from our recent discoveries under an extended well test program.  We are also subject to all of therisks inherent in attempting to expand a relatively new business venture. Suchrisks include, but are not limited to, the possible inability to profitablyoperate our existing properties or properties to be acquired in the future, ourpossible inability to fully fund the development requirements of suchproperties and our possible inability to acquire additional properties that willhave a positive effect on our operations. We can provide no assurance that wewill achieve a level of profitability that will provide a return on investedcapital or that will result in an increase in the market value of oursecurities. The experience of our management team has primarily been in the oiland natural gas exploration and production industry and we have limitedexperience in the power generation business. We are initially relying onconsultants and outside engineering and technical firms to provide theexpertise to plan and execute the power generation aspects of our strategy andwe have not yet hired all necessary full-time employees to manage this line ofbusiness. Accordingly, we are subject to the risk that because of these factorsand other general business risks noted throughout these “Risk Factors,” we may,in particular, not be able to profitably 

 

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execute our power generation strategy.

 

***We own rights to oil and gas properties that have not yet beendeveloped.***We own rights to oil and gas properties thathave limited or no development. There are no guarantees that our propertieswill be developed profitably or that the potential oil and gas resources on theproperty will produce as expected if they are developed.

 

***We require additional financing for the exploration and development ofour foreign oil and gas properties and the construction of our proposed powergeneration facility, pipeline and gas processing facility***.Since the merger with Navidec, Inc. (“Navidec”) on September 10, 2004(the “Merger”) we have funded our operations with the net proceeds ofapproximately $112 million in various private placements of our common stockand $15.5 million in convertible debt financing from the “International FinanceCorporation (“IFC”). We have recently begun to generate revenues fromoperations. With these funds we have begun to implement our plans to developour existing oil and gas properties, but we will need significant additionalfinancing to fully implement our plan of operation. If we are unable to timelyobtain adequate funds to finance our exploration and development, our abilityto develop our oil and natural gas reserves may be limited or substantiallydelayed. Such limitations or delays could result in the potential loss of ouroil and gas properties if we were unable to meet our obligations under thelicense agreements, which could, in turn, limit our ability to repay our debts.Inability to timely obtain funds also could cause us to delay, scale back orabandon our plans for construction of our power generation facility, pipelines,and gas processing facility.

 

Futureamounts required to fund our foreign activities may be obtained throughadditional equity and debt financing, joint venture arrangements, the sale ofoil and gas interests, and/or future cash flows from operations. However,adequate funds may not be available when needed or may not be available onfavorable terms. The exact nature and terms of such funding sources are unknownat this time, and there can be no assurance that we will obtain such funding orhave adequate funding available to finance our future operations.

 

***Our future operating revenue is dependent upon the performance of ourproperties.***Our future operating revenue depends upon ourability to profitably operate our existing properties by drilling andcompleting wells that produce commercial quantities of oil and gas and ourability to expand our operations through the successful implementation of ourplans to explore and acquire additional properties. The successful developmentof oil and gas properties requires an assessment of potential recoverablereserves, future oil and gas prices, operating costs, potential environmentaland other liabilities and other factors. Such assessments are necessarilyinexact. No assurance can be given that we can produce sufficient revenue tooperate our existing properties or acquire additional oil and gas producingproperties and leases. We may not discover or successfully produce anyrecoverable reserves in the future, or we may not be able to make a profit fromthe reserves that we may discover. In the event that we are unable to producesufficient operating revenue to fund our future operations, we will be forcedto seek additional, third-party funding, if such funding can be obtained. Suchoptions would possibly include debt financing, sale of equity interests in theCompany, joint venture arrangements, or the sale of oil and gas interests. Ifwe are unable to secure such financing on a timely basis, we could be requiredto delay or scale back our operations. If such unavailability of fundscontinued for an 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 and can cause substantial losses.***Ourexploration and production activities may be unsuccessful for many reasons,including weather, the drilling of dry holes, cost overruns, equipmentshortages and mechanical difficulties. Moreover, the successful drilling of anatural gas or oil well will not ensure we will realize a profit on ourinvestment. A variety of factors, both geological and market-related, can causea well to become uneconomical or only marginally economical. Our businessinvolves a variety of operating risks, including:

 

·                  fires;

 

·                  explosions;

 

·                  blow-outs and surface cratering;

 

·                  uncontrollable flows of natural gas,oil and formation water;

 

·                  natural disasters, such as hurricanesand other adverse weather conditions;

 

·                  pipe, cement, subsea well or pipelinefailures;

 

·                  casing collapses;

 

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·                  mechanical difficulties, such as lostor stuck oil field drilling and service tools;

 

·                  abnormally pressured formations;

 

·                  environmental hazards, such asnatural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases.

 

Experiencingany of these operating risks could lead to problems with any well bores,platforms, gathering systems and processing facilities, which could adverselyaffect any drilling operations we may commence. Affected drilling operationscould further lead to substantial losses as a result of:

 

·                  injury or loss of life;

 

·                  severe damage to and destruction ofproperty, natural resources and equipment;

 

·                  pollution and other environmentaldamage;

 

·                  clean-up responsibilities;

 

·                  regulatory investigation andpenalties;

 

·                  suspension of our operations;

 

·                  repairs to resume operations;

 

·                  environmental hazards, such asnatural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases.

 

If anyof these risks occur, and our resulting losses are significant, we may have tocurtail or suspend any drilling or production operations.

 

***We conduct offshore exploration, exploitation and production operationsoff the coast of northwest Peru, all of which are also subject to a variety ofoperating risks peculiar to the marine environment.***Suchrisks include capsizing, collisions and damage or loss from adverse weatherconditions or interference from commercial fishing activities. These conditionscan cause substantial damage to facilities, tankers and barges, as well asinterrupt operations. As a result, we could incur substantial liabilities thatcould reduce or eliminate the funds available for exploration, exploitation andacquisitions or result in loss of equipment and properties.

 

***Disruption of services provided by our barges and tankers could temporarilyimpair our operations.***We depend on our deck barge BPZ-01to transport equipment to our offshore platforms and to act as a tender for ouroffshore drilling operations in Block Z-1. In addition, we have two bargesunder capital lease to use as a floating production, storage and offloadingfacility (“FPSO”) and a transport barge in our continuing development of oilproduction operations, and we have one Peruvian Navy tanker under short-termlease through our primary marine transportation contractor, to assist in thetransport of oil from our offshore platforms. These vessels are an importantelement in our strategy to control drilling, storage and transportation costsby allowing the use of existing platforms and avoiding the use of high-pricedships or barges. Any disruption or delay of the services to be provided by ourbarges or tanker because of adverse weather conditions, accidents, mechanicalfailures, insufficient personnel or other events could temporarily impair ouroperations, delay implementation of our business plan, and increase ourcosts.  For example, in January 2008we lost the use of a Peruvian Navy tanker that our primary marine tranporationcontractor had under short-term lease for our benefit when it sank aftercatching on fire.  In addition, ourinsurance may not be adequate to cover any resulting losses.

 

***Our reserve estimates depend onmany assumptions that may turn out to be inaccurate.  Any material inaccuracies in our reserveestimates or underlying assumptions will materially affect the quantities andpresent value of our reserves****.*** **The process of estimating oil and natural gas reserves iscomplex.  It requires interpretations ofavailable technical data and many assumptions, including assumptions relatingto economic factors, that may turn out to be inaccurate.  Any significant inaccuracies in theseinterpretations or assumptions could materially affect the estimated quantitiesand the calculation of the present value of reserves shown in this report.

 

In order to prepare the reserve estimates included inthis report, our independent petroleum engineer must project production ratesand timing of development expenditures as well as analyze available geological,geophysical, production 

 

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and engineering data, and the extent, quality andreliability of this data can vary.  Theprocess also requires economic assumptions about matters such as oil andnatural gas prices, drilling and operating expenses, capital expenditures,taxes, and availability of funds. Therefore, estimates of oil and natural gas reserves are inherentlyimprecise.

 

Actual future production, oil and natural gas prices,revenues, taxes, development expenditures, operating expenses and quantities ofrecoverable oil and natural gas reserves will most likely vary from ourestimates, and those variances may be material. Any significant variance could materially affect the estimatedquantities and present value of our reserves. In addition, our independent petroleum engineer may adjust estimates ofproved reserves to reflect production history, drilling results, prevailing oiland natural gas prices and other factors, many of which are beyond our control.

 

You should not assumethat the net present value of our proved reserves prepared in accordance withSEC guidelines referred to in this report is the current market value of ourestimated oil reserves.  We base the netpresent value of future net cash flows from our proved reserves on the date ofestimate.  Actual future prices, costs,taxes and the volume of produced reserves may differ materially from those usedin the net present value estimate.

 

***Future oil and natural gasdeclines or unsuccessful exploration efforts may result in a write-down of ourasset carrying values. ***Wefollow the successful efforts method of accounting for our investments in oiland natural gas properties.  Under this method, oil and gas lease acquisitioncosts and intangible drilling costs associated with exploration efforts thatresult in the discovery of proved reserves and costs associated withdevelopment drilling, whether or not successful, are capitalized when incurred.Certain costs of exploratory wells are capitalized pending determinations thatproved reserves have been discovered.  Ifproved reserves are not discovered with an exploratory well, the costs ofdrilling the well are expensed.

 

The capitalized costs ofour oil and natural gas properties, on a field basis, cannot exceed theestimated undiscounted future net cash flows of that field.  If netcapitalized costs exceed future net revenues, we must write down the costs ofeach such field to our estimate of its fair market value.  Unprovedproperties are evaluated at the lower of cost or fair marketvalue.  Accordingly, a significant decline in oil or natural gasprices or unsuccessful exploration efforts could cause a future write-down ofcapitalized costs.

 

We evaluate impairment ofour proved oil and gas properties whenever events or changes in circumstances indicatean asset’s carrying amount may not be recoverable. In addition,write-downs would occur if we were to experience sufficient downwardadjustments to our estimated proved reserves or the present value of estimatedfuture net revenues.  Once incurred, awrite-down of oil and natural gas properties cannot be reversed at a later dateeven if oil or natural gas prices increase.

 

***As of December 31, 2007,approximately 75% of our estimated net proved reserves were undeveloped.  There can be no assurance that all of thesereserves will ultimately be developed or produced****.*** **Recovery of undeveloped reservesrequires significant capital expenditures and successful drillingoperations.  The reserve data assumesthat we will make significant capital expenditures to develop ourreserves.  We have prepared estimates ofour natural gas and oil reserves and the costs associated with theses reservesin accordance with industry standards. However, the estimated costs may not be accurate, development may notoccur as scheduled, or the actual results may not be as estimated.  We may not have or be able to obtain thecapital we need to develop these proved reserves.

 

***Construction and operation ofpower generation and gas processing facilities and pipelines involve significantrisks and delays that cannot always be covered by insurance or contractualprotections.***The construction of power generation and gasprocessing facilities and pipelines involve many risks, including:

 

·                  supply interruptions,

 

·                  work stoppages,

 

·                  labor disputes,

 

·                  social unrest,

 

·                  inability to negotiate acceptableconstruction, supply or other contracts,

 

·                  inability to obtain requiredgovernmental permits and approvals,

 

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·                  weather interferences,

 

·                  unforeseenengineering, environmental and geological problems,

 

·                  unanticipatedcost overruns,

 

·                  possible delaysin the acquisition of necessary gas turbines,

 

·                  possible delaysin connection with power plant construction,

 

·                  possible delaysor difficulties in completing financing arrangements for the gas-to-powerproject, and 

 

·                  possibledifficulties or delays with respect to any necessary Peruvian regulatorycompliance.

 

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

 

***We may experience delays in delivering our oil to be sold. ***Our oil from theCorvina Field is delivered by barge to the refinery in Talara approximately 100miles south of the platform where the oil is sold at current marketprices.  As a result of the location, wemay experience delays or interruptions in delivering our oil due to severeweather, accidents or mechanical failures to our barges, or delays to dock inTalara.  Any prolonged delay orinterruption of delivery of our oil could adversely impact our business and ourrevenues.

 

***Our success depends in part onthe existence and growth of markets for natural gas and electricity in Peru andEcuador.***Peru has a relatively well-developed and stablemarket for electricity, while the power market in Ecuador is not aswell-developed or stable. Both countries rely on hydro-electric generatingcapacity for a significant portion of their power demand. Hydro plants are muchless expensive to operate than plants that utilize natural gas, but they aresubject to variable output based on rainfall and reservoir levels. The majorityof the non-hydro, or thermal, power capacity in both countries consists ofgenerating plants that utilize diesel or fuel oil, which are significantly morecostly than natural gas at this time. Both countries have natural gas reserves andproduction, but neither has a well-developed natural gas infrastructure. Ourimmediate business plan relies on the continued stability of the power marketin Peru (and Ecuador for the purpose of gas sales to third-party powerproducers in Ecuador), and our longer-term plans depend on the furtherdevelopment of the electricity market in Ecuador. We currently do not expect tocomplete our power plant until 2010. Our assessment of the future power marketand demand in Peru and Ecuador could be inaccurate. We are subject to the risksthat:

 

·                  Relatively morefavorable business conditions for hydro plants, a material reduction in powerdemand or other competitive issues may adversely affect the demand and pricesfor the electricity that we expect to produce by the time the power plant iscompleted.

 

·                  Our liftingcosts could exceed the minimum wholesale power prices available, making thesale of our gas uneconomical.

 

·                  Potentialdisruptions or changes to regulations of the natural gas or power markets inthese countries could occur by the time our power plant is completed, or we maynot receive the necessary environmental or other permits and governmentalapprovals to operate our power plant. 

 

·                  Although we planto enter into long-term contracts to sell a significant part of our futurepower production, there can be no assurance that we will be successful inobtaining such contracts or that they will be on favorable terms. 

 

·                  We will also besubject to the general commercial issues related to being in the powerbusiness, including the credit-worthiness of, and collections from futurecustomers and the ability to profitably operate our future power plants.

 

***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.***Thegeographic concentration of our properties in northwest Peru and southwestEcuador and adjacent waters means that some or all of our properties could beaffected by the same event should that region, for example, experience:

 

·                  severe weather (such as the effectsof “El Niño,” which can cause excessive rainfall and flooding in Peru andEcuador);

 

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

 

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

 

·                  changes in the political orregulatory environment.

 

Becauseall our properties could experience the same conditions 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.

 

***Instability of International Operations.***Presently,all of our oil and gas properties are located in South America, specificallyPeru and Ecuador. The success and profitability of our international operationsmay be adversely affected by risks associated with international activities,including economic, labor and social conditions, political instability, taxlaws 

 

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(including host-country export, excise and income taxes and U.S. taxeson foreign operations) and fluctuations in the value of the U.S. dollar versusthe local currencies in which oil and gas producing activities may beconducted. This instability in laws, expenses of operations and fluctuations inexchange rates may make our assumptions about the economic viability of our oiland gas properties incorrect. If these assumptions are incorrect, we may not beable 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.***As a result,our drilling and development operations in many instances will take longer tocomplete and may cost more than similar operations in the United States. Theavailability of technical expertise, specific equipment and supplies may bemore limited in Peru and Ecuador than in the United States. Furthermore, onceoil and natural gas production is recovered, there are fewer ways to transportit to market for sale. Pipeline and trucking operations are subject touncertainty and lack of availability. Oil and natural gas pipelines and trucktransport travel through miles of territory and are subject to the risk ofdiversion, destruction or delay. We expect that such factors will continue tosubject our international operations to economic and operating risks thatcompanies 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 our exploitation andexploration operations, which could have a material adverse effect on ourbusiness, financial condition or results of operations. If the unavailabilityor high cost of rigs, equipment, supplies or personnel were particularly severein Peru and Ecuador, we could be materially and adversely affected because ouroperations and properties 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 are subject toextensive foreign laws and regulations relating to the exploration for and thedevelopment, production and transportation of oil and natural gas as well aselectrical power generation. Future laws or regulations, as well as any adversechange in the interpretation of existing laws or our failure to comply withexisting legal requirements may harm our results of operations and financialcondition. In addition, there is indication that the current administration inEcuador is likely to increase state intervention in the economy via newlegislation and tightening control of areas such as energy, which could have asignificant impact on our ability to operate in that country. We may berequired to make large and unanticipated capital expenditures to comply withgovernmental regulations, such as:

 

·                  work program guarantees and otherfinancial responsibility requirements;

 

·                  taxation;

 

·                  royalty requirements;

 

·                  customer requirements;

 

·                  operational reporting; and

 

·                  safety requirements.

 

Under these laws andregulations, we could be liable for:

 

·                  personal injuries; and

 

·                  property and natural resourcedamages; and

 

·                  governmental infringements andsanctions.

 

***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.***Theterms of each of our contracts with the government of Peru, including ourPeruvian license contracts and technical evaluation agreements, require that weperform certain activities, such as seismic interpretations and the drilling ofrequired wells in accordance with those contracts and agreements. Our failureto timely perform those activities as required could result in the loss of ourrights under a particular contract or the loss of the amounts we have posted asa guaranty for the performance of such activities, which would likely result ina significant loss to us.

 

***                We are subject to the ForeignCorrupt Practices Act (the “FCPA”) and our failure to comply with the laws andregulations thereunder could result in penalties which could harm our reputationand have a material adverse effect on our business, results of operations andfinancial condition.*** We are subject to the FCPA,which generally prohibits companies and their intermediaries from makingimproper payments to foreign officials for the purpose of obtaining or keepingbusiness and/or other benefits. Since all of our oil and gas properties are inPeru and Ecuador, there is a risk of potential FCPA violations.  We have aFCPA policy and a limited compliance program designed to ensure that theCompany, its employees and agents comply with the FCPA.  We believe our policy and compliance programare adequate given the small size of our company.  However, there is no assurance that suchpolicy or program will work effectively all of the time or protect us againstliability under the FCPA for actions taken by our agents, employees andintermediaries with respect to our business or any businesses that we acquire.  Any violation of these laws could result inmonetary penalties against us or our subsidiaries and could damage ourreputation and, therefore, our ability to do business.

 

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***We are subject to complex environmental regulatory and permitting lawsand regulations that can adversely affect the cost, manner and feasibility ofour planned operations.***The exploration for, and thedevelopment, production and sale of, oil and gas in South America are subjectto extensive environmental laws and regulations. Our ability to conductcontinued operations is subject to satisfying applicable regulatory andpermitting controls. For example, we are required to obtain an environmentalpermit or approval from the government in Peru prior to conducting seismicoperations, drilling a well or constructing a pipeline in Peruvian territory,including the waters offshore Peru, where we intend to conduct future oil andgas operations. Additionally, environmental laws and regulations promulgated inPeru impose substantial restrictions on the use of natural resources, interferencewith the natural environment, location of facilities, handling and storage ofhydrocarbons, use of radioactive material, disposal of waste, emission of noiseand other activities. The laws create additional monitoring and reportingobligations in the event of any spillage or unregulated discharge ofhydrocarbons. Failure to comply with these laws and regulations also may resultin the suspension or termination of our planned drilling operations and subjectus to administrative, civil and criminal penalties.

 

Ourcurrent permits and authorizations and our ability to get future permits andauthorizations may, over time, be susceptible to increased scrutiny, resultingin increased costs, or delays in receiving appropriate authorizations. Inparticular, we may experience delays in obtaining permits and authorizations inPeru and Ecuador necessary for our operations. Compliance with these laws andregulations may increase our costs of operations, as well as further restrictour foreign operations. Moreover, these laws and regulations could change inways that substantially increase our costs. These laws and regulations havechanged in the past and have generally imposed more stringent requirements thatincrease operating costs or require capital expenditures in order to remain incompliance. It is also possible that unanticipated developments could cause usto make environmental expenditures that are significantly higher than those wecurrently anticipate, thereby increasing our overall costs. Failure to complywith new regulations could cause us to suspend or terminate certain operationsor subject us to administrative, civil and 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 or lessee and operatorof oil and gas properties in Peru and Ecuador, we are subject to variousnational, state and local laws and regulations relating to discharge ofmaterials into, and protection of, the environment. These laws and regulationsmay, among other things, impose liability on the owner or lessee under an oiland gas lease for the cost of property damage, oil spills, discharge ofhazardous materials, remediation and clean-up resulting from operations,subject the owner or lessee to liability for pollution damages and otherenvironmental damages, and require suspension or cessation of operations inaffected areas.

 

Wehave established practices for continued compliance with environmental laws andregulations and we believe the costs incurred by these policies and proceduresso far have been necessary business costs in the oil and gas industry. However,there is no assurance that changes in or additions to laws or regulationsregarding the protection of the environment will not increase such compliancecosts, or have a material adverse effect 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 gas operations aresubject to the economic risks typically associated with exploration,development and production activities, including the necessity of significantexpenditures to locate and acquire producing properties and to drillexploratory 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. Inaddition, the cost and timing of drilling, completing and operating wells isoften uncertain. We also face the risk that the oil and/or gas reserves may beless than anticipated, that we will not have sufficient funds to successfullydrill on the property, that we will not be able to market the oil and/or gasdue to a lack of a market and that fluctuations in the prices of oil and/or gaswill make development of those leases uneconomical. This could result in atotal loss of our investment.

 

***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 a highly competitiveenvironment for reviewing prospects, acquiring properties, marketing oil andnatural gas and securing trained personnel and equipment. In addition, changesin Peruvian government regulation have enabled multinational and regionalcompanies to enter the Peruvian energy market. We actively compete with othercompanies in our industry when acquiring new leases or oil and gas properties.Competition in our business activities has increased and will increase further,as existing and new participants expand their activities as a result of theseregulatory changes. Many of our competitors possess and employ financialresources that allow them to obtain substantially greater technical and personnelresources than we have. For example, if several companies are interested in anarea, Perupetro may 

 

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choose to call for bids, either through international competitivebiddings or through private bidding processes by invitation, and award thecontract to the highest bidder. These additional resources can be particularlyimportant in reviewing prospects and purchasing properties. Our competitors maybe able to evaluate, bid for and purchase a greater number of properties andprospects than our financial or personnel resources permit. Our competitors mayalso be able to pay more for productive oil and natural gas properties andexploratory prospects than we are able or willing to pay. On the acquisitionopportunities made available to us, we compete with other companies in ourindustry for properties operated by third parties through a private biddingprocess, direct negotiations or some combination thereof. Our ability toacquire additional prospects and to find and develop reserves in the futurewill depend on our ability to evaluate and select suitable properties and toconsummate transactions in a highly competitive environment. If we are unableto compete successfully in these areas in the future, our future revenues andgrowth may be diminished or restricted. The availability of properties foracquisition depends largely on the divesting practices of other oil and naturalgas companies, commodity prices, general economic conditions and other factorswe cannot control or influence.

 

***The loss of senior management or key technical personnel couldadversely affect us.***We have engaged certain members ofmanagement who have substantial and unique expertise in the type of endeavorswe presently conduct and the geographical areas in which we conduct them. We donot maintain any life insurance against the loss of any of these individuals.To the extent their services become unavailable, we will be required to retainother qualified personnel. There can be no assurance we will be able to recruitand hire qualified persons upon acceptable terms.

 

Similarly,the oil and gas exploration industry requires the use of personnel withsubstantial technical expertise. In the event that the services of our currenttechnical personnel become unavailable, we will need to hire qualifiedpersonnel to take their place. No assurance can be given that we will be ableto recruit and hire such persons on acceptable terms.

 

***Insurance does not cover all risks.***Explorationfor, and production of, oil and natural gas can be hazardous, involvingunforeseen occurrences such as blowouts, cratering, fires and loss of wellcontrol, which can result in damage to or destruction of wells or productionfacilities, formations, injury to persons, loss of life, or damage to propertyor the environment. As a result, we presently maintain insurance coverage inamounts consistent with our business activities and to the extent required byour license contracts. Such coverage includes certain physical damage to theCompany’s and third parties’ property, hull and machinery, protection andindemnity, employer’s liability, comprehensive third party general liability,workers compensation and certain pollution and environmental risks. However, weare not fully insured against all risks in all aspects of our business, such aspolitical risk, civil unrest, war, business interruption, environmental damageand reservoir loss or damage. Further, no such insurance coverage can insurefor all operational or environmental risks. The occurrence of an event that isnot insured or not fully insured could result in losses to us. For example,uninsured or under insured environmental damages, property damages or damagesrelated to personal injuries could divert capital needed to implement our planof operation. If any such uninsured losses are significant, we may have tocurtail or suspend our drilling operations until such time as replacementcapital is obtained, if ever, and this could have a material impact on ourfinancial position.

 

***A substantial or extended decline in oil or natural gas prices mayadversely affect our business, financial condition, cash flow, liquidity orresults of operations as well as our ability to meet our capital expenditureobligations and financial commitments to implement our business plan.***Anyrevenues, cash flow, profitability and future rate of growth we achieve will begreatly dependent upon prevailing prices for oil and gas. Our ability tomaintain or increase our borrowing capacity and to obtain additional capital onattractive terms is also expected to be dependent on oil and gas prices. Oiland natural gas are commodities, and, therefore, their prices are subject towide fluctuations in response to relatively minor changes in supply and demand.Historically, oil and gas prices and markets have been volatile and are likelyto continue to be volatile in the future. Prices for oil and gas are subject topotentially wide fluctuations in response to relatively minor changes in supplyof and demand for oil and gas, market uncertainty, and a variety of additionalfactors beyond our control. Those factors include:

 

·                  international political conditions(including wars and civil unrest);

 

·                  the domestic and foreign supply ofoil and gas;

 

·                  the level of consumer demand;

 

·                  weather conditions;

 

·                  domestic and foreign governmentalregulations and other actions;

 

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·                  actions taken by the Organization ofPetroleum Exporting Countries (OPEC);

 

·                  the price and availability ofalternative fuels; and

 

·                  overall economic conditions.

 

Loweroil and natural gas prices may not only decrease our revenues on a per unitbasis, but may also reduce the amount of oil and natural gas we can produceeconomically, if any. A substantial or extended decline in oil and natural gasprices may materially affect our future business, financial condition, resultsof operations, liquidity and borrowing capacity, and may require a reduction inthe carrying value of our oil and gas properties. While our revenues mayincrease if prevailing oil and gas prices increase significantly, explorationand production costs and acquisition costs for additional properties andreserves may also increase.

 

***We may not be able to replace our reserves.***Our future success will depend upon ourability to find, acquire and develop oil and gas reserves that are economicallyrecoverable. Any reserves we develop will decline as they are produced unlesswe are able to conduct successful revitalization activities, or are able toacquire properties containing proven reserves, or both. To develop reserves andachieve production, we must implement our development and production programs,identify and produce previously overlooked or by-passed zones and shut-in wells,acquire additional properties or undertake other replacement activities. We cangive no assurance that our planned development, revitalization, and acquisitionactivities will result in significant reserves replacement or that we will havesuccess in discovering and producing reserves at economical exploration anddevelopment costs. We may not be able to locate geologically satisfactoryproperty, particularly since we will be competing for such property with otheroil and gas companies, most of which have much greater financial resources thanwe do. Moreover, even if desirable properties are available to us, we may nothave sufficient funds with which to acquire or develop them.

 

***Investor profits, if any, may be limited for the near future.***Inthe past, we have never paid a dividend. We do not anticipate paying anydividends in the near future. Accordingly, investors in our common stock maynot derive any profits from their investment in us for the foreseeable future,other than through any price appreciation of our common stock that may occur.Further, any appreciation in the price of our common stock may be limited ornonexistent as long as we continue to have operating losses. We have not beenprofitable and have accumulated deficits during our exploratory stage ofoperations totaling $58.3 million through December 31, 2007. To date wehave had limited revenue and no earnings from operations.  There can be no assurances that sufficientrevenue to cover total expenses can be achieved until we fully implement our operationalplan.

 

***Additional infusions of capital may have a dilutive effect on existingshareholders.***To finance our operations we may selladditional shares of our stock. We currently have $266 million in common stockavailable under an effective shelf registration statement, which we may sellfrom time to time in one or more offerings pursuant to underwritten publicofferings, negotiated transactions, block trades or a combination of thesemethods.  Any additional equity financingthat we receive may involve substantial dilution to our then-existingshareholders. Furthermore, we may issue stock to acquire properties, assets, orbusinesses. In the event that any such shares are issued, the proportionateownership and voting power of other shareholders will be reduced. In addition,we are authorized to issue up to 25,000,000 shares of preferred stock, therights and preferences of which may be designated by our Board of Directors. Ifwe issue shares of preferred stock, such preferred stock may have rights andpreferences that are superior to those of our common stock.

 

***Shares eligible for future sale by our current shareholders may impairour ability to raise capital through the sale of our stock.***Asof December 31, 2007, we had 73,914,471 shares of common stock issued andoutstanding. In addition, we have outstanding 5,917,267 shares of otherpotentially dilutive securities, which mainly consist of Long-Term IncentiveShares.  We also have an additional3,152,450 common shares available under our Long-Term Incentive CompensationPlan and Directors Compensation Incentive Plan. In addition, we have $15.5million of convertible debt outstanding under the “C” loan agreementwith the IFC, which can be converted to approximately 1.5 million shares of ourcommon stock pursuant to the terms of the agreement.  The possibility that substantial amounts ofshares of our common stock may be sold in the public market may causeprevailing market prices for our common stock to decrease and thus could impairour ability to raise capital through the sale of our equity securities.

 

***We are controlled by our officers, directors and entities affiliatedwith them.***In the aggregate, our management and directorsown or control approximately 19.8% of our common stock issued as of December 31,2007. These shareholders, if acting together, will be able to significantlyinfluence all matters requiring approval by our shareholders, including theelection of directors and the approval of mergers or other business combinationtransactions.

 

***The transfer of Navidec Financial Services, Inc. (“NFS”) couldresult in liability to us because the shares***

 

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***transferred were not registered with the SEC.***On September 9,2004, the day prior to the effective date of the Merger, Navidec assigned allof its pre-merger business operations, assets and liabilities to NFS, and allissued and outstanding shares of NFS were subsequently transferred to theNavidec pre-merger shareholders of record as of September 9, 2004 for nocash consideration. Pursuant to the terms of the Merger Agreement, the transferand any necessary qualifications or registrations of the NFS shares underapplicable securities laws was agreed to be handled by NFS, and we believed,based on information provided by NFS and its advisors, that NFS had undertakenthe necessary actions to comply with applicable registration requirements. On July 13,2006, NFS filed a Registration Statement on Form 10-SB with the SEC and anamendment thereto on October 27, 2006. It is our understanding that theRegistration Statement has become effective under applicable SEC rules.However, because a registration of the NFS shares was not effective at the timeof the transfer of the NFS shares, it might be determined that the distributionof the NFS shares was made without full compliance with applicable registrationor qualification requirements under applicable securities laws. As a result,although we took no actions in connection with the transfer, we might incur liability,as a successor to Navidec, by merger, with respect to any damages resultingfrom such failure to register. If, despite the fact that we did not control thetransfer of the NFS shares, regulatory authorities determine that we did notcomply with applicable registration requirements with respect to the transfer,fines or other sanctions might be imposed on us.

 

**ITEM 1B.  UNRESOLVED STAFFCOMMENTS**

 

None

 

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** **

**ITEM 2.  PROPERTIES**

** **

**Offices**

** **

Our corporateheadquarters office is in Houston, Texas, where we lease approximately 7,770square feet of office space under a five-year lease which expires on September 30,2010 and 2,580 square feet of adjacent office space under a two-year subleasewhich expires on February 28, 2009. We also maintain administrativeoffices in Lima, Peru of 3,700 square feet and Quito, Ecuador of 829 squarefeet, both under month-to-month leases.

 

**Properties in Peru**

** **

** **

** **

Wecurrently have exclusive rights to four properties in northwest Peru. We have a100% working interest in license contracts for Block Z-1, Block XIX, Block XXIIand Block XXIII. The license contracts afford an initial exploration period ofseven to ten years (seven to thirteen for Block Z-1), and, if explorationefforts are successful, provide a total contract term of up to 40 yearsfor gas exploration and production and up to 30 years for oil explorationand production.  These four blocks covera combined area of approximately 2.4 million acres.

 

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Thefollowing table is a summary of our properties in northwest Peru. As of December 31,2007 only acreage in Block Z-1 has been partially developed.

 
| **PROPERTY** | ** ** | **BASIN**       | ** ** | **BPZ’S  OWNERSHIP** | ** ** | **LICENSE  CONTRACT  SIGNED** | ** ** | **UNDEVELOPED  ACRES** | ** ** | **DEVELOPED  ACRES** | ** ** | **PRODUCTIVE  WELLS (1)** | ** ** |
|--------------|------------|-----------------|------------|---------------------------|------------|-------------------------------|------------|------------------------|------------|----------------------|------------|--------------------------------|------------|
| ** **   | ** ** | ** **      | ** ** | ** **                | ** ** | ** **                    | ** ** | ** **             | ** ** | ** **           | ** ** | ** **                     | ** ** |
| Block Z-1    |       | Tumbes/Talara   |       | 100                       | %          | November 2001            |       | 738,472                |       | 733                  |       | 2                              |       |
| Block XIX    |       | Tumbes/Talara   |       | 100                       | %          | December 2003            |       | 472,860                |       |                 |       |                           |       |
| Block XXII   |       | Lancones/Talara |       | 100                       | %          | November 2007            |       | 948,000                |       |                 |       |                           |       |
| Block XXIII  |       | Tumbes/Talara   |       | 100                       | %          | November 2007            |       | 248,000                |       |                 |       |                           |       |
| Total        |       |            |       |                      |       |                          |       | 2,407,332              |       | 733                  |       | 2                              |       |

 

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**(1)****                                **Does not include the****CX11-16X of which the tests produced quantities of gas we believeto be in commercial amounts.

 

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

 

Block Z-1, a coastaloffshore area encompassing 739,205 acres, is situated at the southern end ofthe Gulf of Guayaquil in northwest Peru. Geologically, the block lies withinthe Tumbes basin. From the coastline, water depths increase gradually. Theaverage water depth of the area is approximately 200 feet and only 10% of thearea has depths ranging from 500 feet up to 1,000 feet. Located within BlockZ-1 are five structures which were drilled in the 1970’s and 1980’s by previousoperators, including Tenneco, Inc. and Belco Oil and Gas Corporation (“Belco”).These structures are known as the Albacora, Barracuda, Corvina, Delfin andPiedra Redonda fields. Wells drilled in each of these structures encounteredhydrocarbons, principally natural gas, while drilling at depths ranging from6,000 to 12,000 feet. However, at the time the wells were drilled, it was notconsidered economic to produce and sell natural gas from the fields.Consequently, the wells were either suspended or abandoned.

 

Inthe Corvina Field, five wells were drilled, including two wells drilled byTenneco in the mid-1970’s and three wells drilled by Belco in the late 1970’sand early 1980’s. Two drilling and production platforms were set up by Belcoduring this period and are still in place in the Corvina Field. The platformsneed to be repaired and refurbished, but they are structurally sound, and webelieve they are suitable for our future operations. All seven wells in theCorvina Field encountered indications of natural gas and apparentreservoir-quality formations, although only one of the wells, the CX11-16X, wascompleted and tested. At the time these wells were drilled, there was nocommercial market for natural gas in the region. The CX11-16X produced naturalgas at rates as high as 16.6 million cubic feet of gas per day (“MMcf/d”)during two separate tests over a period of approximately 20 days each. Thewell was shut-in. In June 2007we successfully recompleted the Corvina CX11-16X well as a natural gasproducing well and completed a total of four DST’s on various zones in the wellincluding one in a formation previously untested in the entire basin.  The tests produced quantities of gas webelieve to be in commercial amounts.

 

Inthe Piedra Redonda Field, two wells were drilled by Belco in the late 1970’sand early 1980’s. Indications of natural gas were present in both wells. Onewell was completed, while the other well encountered abnormally high pressuresand was abandoned for mechanical reasons prior to reaching its intended totaldepth. A previously constructed drilling and production platform is still inplace in the Piedra Redonda Field. The completed well in the Piedra RedondaField, the C18X, produced natural gas at rates as high as 8.3 MMcf/d over aperiod of approximately 20 days during an extended test in 1979 and wasalso shut-in. We believe this well can be reestablished as a producing well.

 

We originally acquiredour 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 originalcontract, BPZ owned a 5% non-operating working interest in the block.Syntroleum later transferred its interest to Nuevo Energy, Inc. Subsequentto the merger of Nuevo Energy, Inc. and Plains Exploration and ProductionCompany, Nuevo Energy, Inc. transferred its interest in Block Z-1 to BPZwhich then assumed a 100% working interest, as well as the remainingobligations under the contract. Perupetro approved the assumption of Nuevo’sinterest by BPZ and the designation of BPZ as a qualified operator under thecontract in November 2004. This action was subject to officialratification and issuance of a Supreme Decree by the government of Peru, whichwas issued in February 2005. Accordingly, an amended contract was signedwith Perupetro, naming BPZ as the owner of 100% of the participation under thelicense contract.

 

The license contractprovides for an initial exploration phase of seven years, which is divided intofour periods, and can be extended under certain circumstances up to anadditional six years. Each period has a commitment for exploration

 

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activities and requires a financial guarantee to secure the performanceof the work commitment during such period. Block Z-1 is currently in the thirdexploration period. The third exploration period was originally scheduled tobegin in July 2006. However, permission was granted to extend the secondexploration period to May 2007 to compensate for the delay by the Ministryof Energy and Mines in approving our Environmental Impact Study.  In December, 2006, as a result of thedrilling of our first well, the CX11-21XD, the $1.3 million performance bondand related cash posted as collateral was released. The third explorationperiod began in May 2007 and is scheduled to expire in December 2008.It will require the drilling of an additional exploratory well or otherequivalent work commitments.  Aperformance bond of $1.0 million was also posted for cash collateral of$750,000 as a result. The fourth and final exploration period is scheduled tobegin in December 2008 and expire in December 2009. It will alsorequire the drilling of an additional exploratory well or other equivalent workcommitments and will require a performance bond of $1.0 million. Theperformance bond amounts are not cumulative, and are released at the end of eachexploration period if the work commitment for that period has been satisfied.In addition, we are required to make technology transfer payments related totraining costs of Perupetro professional staff during the exploration phase of$50,000 per year.

 

On November 21,2007, we submitted a letter to Perupetro declaring a commercial discovery inthe Block Z-1 field.  We are currentlyputting together a field development plan which is required to be filed withPerupetro within 180 days of the declaration of the commercial discovery.  The commercial development period of thecontract will commence as soon as we receive approval of the field developmentplan. Under the contract, oil exploration, development and production cancontinue for a total of up to 30 years from the effective date of the contract,and gas exploration, development and production can continue for up to 40years. Royalties under the contract vary from 5% to 20% based on productionvolumes. Royalties start at 5% if and when production is less than 5,000barrels of oil equivalent per day (boepd) and are capped at 20% if and whenproduction surpasses 100,000 boepd.

 

**Descriptionof Block XIX and License Contract**

 

Block XIX coversapproximately 472,860 acres, lying entirely onshore and adjacent to Block Z-1in northwest Peru. Geologically, the block lies primarily within the Tumbesbasin of Oligocene-Neogene age, but also covers part of the Talara Basin to thesouth.  Several older wells showedevidence of gas potential in the Mancora formation as well as oil show from theHeath Formation.  The Tumbes and Talara Basins are primarily an exploratory area and havehad limited drilling and seismic activity. However, the Mancora formation is expected to continue from offshore inBlock Z-1 in Piedra Redonda through Block XXIII, also under license to us, andinto Block XIX an area which spans approximately fifty miles

 

In February 2003, weentered into a Technical Evaluation Agreement with Perupetro for Block XIX. In December 2003,we signed a license contract whereby we acquired a 100% interest in Block XIX.The term for the exploration period is seven years and can be extended undercertain circumstances for an additional period of up to three years. If acommercial discovery is made during the exploration period, the contract willallow for the exploration and production of oil for a period of 30 years fromthe effective date of the contract and the exploration and production of gasfor a period of 40 years. Royalties under the contract vary from 5% to 20%based on production volumes. Royalties start at 5% if and when production isless than 5,000 barrels of oil equivalent per day (boepd) and are capped at 20%if and when production surpasses 100,000 boepd.

 

The seven yearexploration phase is divided into five periods of 18 months, 24 months, 15months, 15 months and 12 months, respectively. As of December 31, 2007 wehad a $585,000 bond posted for $247,000 in cash collateral.  We are currently in the third explorationperiod, which is scheduled to end in May of 2009. During the thirdexploration period, we are required to drill and test one well. Drilling ofthis well is scheduled to commence during the fourth quarter of 2008.  In connection with the third exploration period,which began in February 2008, we posted a $585,000 performance bond andthe performance bond associated with the second exploration period wasreleased. The fourth exploration period is scheduled to begin in May 2009and will require a performance bond of $585,000. The fifth and finalexploration period is scheduled to begin in August 2010 and will require aperformance bond of $585,000. The performance bond amounts are not cumulative,and will be released at the end of each exploration period if the workcommitment for that period has been satisfied. In addition, we are required tomake technology transfer payments related to training costs of Perupetroprofessional staff during the exploration phase in the amount of $5,000 peryear. The exploitation, or development, period of the contract will commence assoon as the Company declares a commercial discovery and receives approval for afield development plan. We must declare a commercial discovery no later thanthe end of the last exploration period, including any extensions or deferments.

 

24

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**Descriptionof Block XXII and License Contract**

 

On November 21,2007, we signed a license contract whereby we acquired a 100% interest in Block XXII (formerly known as Area VI).  Block XXII is located onshore in northwestPeru within the Lancones Basin of Cretaceous—Upper Eocene Age and covers anarea of approximately 948,000 acres. The Lancones Basin is primarily anexploratory area and has had limited drilling and seismic activity.  The southern sector of this block alsocovers the productive Talara basin of northwest Peru, near the TalaraRefinery.  The exploration period of the license contract extends over a seven yearperiod divided into five periods or four periods of 18 months and a final periodof 12 months.  Under certaincircumstances, the exploration periods may be extended for an additional periodof up to three years.  The first periodrequires that we purchase, process and interpret 200 kms of 2-D seismicdata.  We will also be required toprepare a comprehensive geological and engineering study for the area.  In each subsequent period after the first 18month period we are required to drill an exploratory well.  If a commercial discovery is madeduring the exploration period, the contract will allow for the exploration andproduction of oil for a period of 30 years from the effective date of thecontract and the exploration and production of gas for a period of 40 years.Royalties under the contract vary from 15% to 30% based on productionvolumes.  Royalties start at 15% if andwhen production is less than 5,000 barrels of oil equivalent per day (boepd)and are capped at 30% if and when production surpasses 100,000 boepd.

 

In connection with thefirst exploration period, we were required to obtain a cash collateralized$600,000 bond for cash collateral in the amount of $300,000. The performancebond amounts are not cumulative, and will be released at the end of eachexploration period if the work commitment for that period has been satisfied.

 

**Descriptionof Block XXIII and License Contract**

 

In July 2006,Perupetro informed BPZ that its proposal for Block XXIII, which consists ofapproximately 248,000 acres and is located onshore in northwest Peru betweenBlocks Z-1 and XIX, was the winning bid in their recent tender process.  This block is located in the Tumbes basin, although inits southern section Talara basin sediments maybe found deeper.  The Tumbesand Talara Basins are primarily an exploratory area and have had limiteddrilling and seismic activity.

 

On November 21,2007, we signed a license contract whereby we acquired a 100% interest in BlockXXIII.  The exploration period of thelicense contract extends over a seven year period divided in to two periods of18 months and two periods of 24 months. In addition, it commits the Company to drill a certain number of wells,acquire certain amount of either 2-D or 3-D seismic data and prepare anintegrated geological, geochemical and reservoir engineering evaluation of thehydrocarbon prospects in the block. In connection with this block we posted aperformance bond to guarantee our various obligations and commitments. If a commercial discovery is made duringthe exploration period, the contract will allow for the exploration andproduction of oil for a period of 30 years from the effective date of thecontract and the exploration and production of gas for a period of 40 years.Royalties under the contract vary from 15% to 30% based on productionvolumes.  Royalties start at 15% if andwhen production is less than 5,000 barrels of oil equivalent per day (boepd)and are capped at 30% if and when production surpasses 100,000 boepd.

 

In connection with thefirst exploration period, we were required to obtain a cash collateralized$3,075,000 bond in the amount of $1,537,500. The performance bond amounts arenot cumulative, and will be released at the end of each exploration period ifthe work commitment for that period has been satisfied.

 

**ProvedReserves**

 

Our estimated proved oil reservequantities were prepared by Netherland, Sewell & Associates, Inc.,(“NSAI”) independent petroleum engineers. NSAI was chosen based on their knowledge and experience of the region inwhich we operate.  Numerous uncertaintiesarise in estimating quantities of proved reserves and projecting future ratesof production and the timing of development expenditures.  These uncertainties are greater forproperties which are undeveloped or have a limited production history, such asin Northern Peru.  Our actual reserves,future rates of production and timing of development expenditures may varysubstantially from these estimates.  Allof our proved reserves are in the Corvina Field.  Our net quantities of proved developed andundeveloped reserves of crude oil and standardized measure of future net cashflows are reflected in the table below. See further information about the basis of presentation of theses amountin Note 18 “Supplemental Oil and Gas Disclosures (Unaudited)” to ourConsolidated Financial Statements provided herein.

 

Asof December 31, 2007, we owned a 100% working interest in the CorvinaField, subject to Peruvian government royalties of 5% to 20% net revenueinterest depending on the level of production. The effect of these interest deductions is reflected in the calculationof our net proved reserves.  Our estimateof proved reserves have been prepared under the assumption

 

25

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that our license contract will allow productionfor the expected 30-year term for oil and 40-year term for gas, as more fullydiscussed under “Description of Block Z-1” above.  Based on forecast production volumes, theaverage royalty over the term of the license contract associated with provedreserves is expected to be 5.0%.

 

26

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**Net Proved Crude Oil and Natural Gas Reserves and Future Net Cash Flows**

**As of December 31, 2007**

**(Quantities in barrels)**

 
| ** **                                                                          | ** ** | **Actual** | ** **  |
|-------------------------------------------------------------------------------------|------------|------------|-------------|
| Proved Developed Producing                                                          |       | 2,976,868  |        |
| Proved Undeveloped                                                                  |       | 8,962,864  |        |
| Total Proved Reserves                                                               |       | 11,939,732 |        |
| Standardized Measure of Discounted Future Net Cash  Flows, Discounted @ 10% (PV-10) |       | $          | 556,682,275 |   |
|                                                                                     |            |            |             |  |

 

**Acreage**

 

The following table shows the number of developed andundeveloped acres as of December 31, 2007:

 
| ** **    | ** ** | **Acres** | ** ** |
|---------------|------------|-----------|------------|
| Developed     |       | 733       |       |
| Undeveloped   |       | 2,407,332 |       |
| Total acreage |       | 2,408,065 |       |

 

**DrillingActivity**

 

Thefollowing lists our successful exploratory and development wells that weredrilled in 2007:

 
| **Corvina Field** | ** ** | **Exploratory/Development**         | ** ** | **Drilling Depth  (feet)** | ** ** | **Date Objective  Drilled/Tested** | ** ** |
|------------------------|------------|-------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|
| CX 11-21XD             |       | Exploratory &  Development |       | 10,457                          |       | 1st quarter                             |       |
| CX11-16X (1)           |       | Development                         |       | 8,684                           |       | 2nd quarter                             |       |
| CX11-14D               |       | Development                         |       | 8,350                           |       | 3rd quarter                             |       |

 

----

(1)  Recompleted gaswell

 

Drilling activity refersto the number of wells completed at any time during the fiscal year, regardlessof when drilling was initiated. For the purpose of this table, the term “completed”refers to the installation of permanent equipment for the production of oil ornatural gas.

 

**Present Activities**

 

In November 2007,we commenced drilling on the CX11-18XD well. The wellreached total depth of 8,792 feet (measured depth) on January 1, 2008,approximately one month ahead of schedule. We recently performed a series of safety and integrity tests on theCX-11 Corvina platform including the surface equipment.  As part of the integrity testing of thesurface equipment, we perforated the lower prospective oil sands identified inthe CX11-18XD well.  These lower sandstested oil and the results assisted in validating our Corvina geologic model.

 

27

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Currently all production(which had reached approximately 4,200 barrels of oil per day by late January2008) is shut-in due to the incident involving the Navy tanker.  At therequest of the OSINERGMIN, the government agency responsible for auditing thesafety of energy investments in Peru, we successfully performed a series ofsafety and integrity tests on the facilities at the CX-11 Corvina platform,including the equipment that was being used for the ongoing long-term testingof the 21XD and 14D wells.  We confirmed that the well testing equipmentwas in operational condition.  On March 12, 2008 we received clearancefrom the OSINERGMIN, to resume operations at the CX-11 platform, including thescheduled 18XD well drill stem test.  However, the four Corvina wells arecurrently shut-in while we complete the installation of sea-bed pipelinesconnecting the platform to the transport barge, along with the required mooringsystems, that will allow for an improved long-term testing program.Additionally, we are waiting for final clarification from the appropriateauthorities in Peru regarding the transportation of our crude oil to therefinery. 

 

**Property in Ecuador**

 

Throughour wholly-owned subsidiary, SMC Ecuador Inc., a Delaware corporation, andits registered branch in Ecuador, we also own a 10% non-operated workinginterest in an oil and gas producing property, Block 2, located in thesouthwest region of Ecuador (the “Santa Elena Property”). The Santa ElenaProperty is located west of the city of Guayaquil along the coast of Ecuador.The license contract provides for royalty payments equal to 23% of production.There have been almost 3,000 wells drilled in the field since production beganin the 1920’s. Currently, there are approximately 1,250 active wells whichproduce approximately 1,600 barrels of oil per day. The majority of the wellsproduce intermittently by gas lift, mechanical pump or swabbing techniques.Crude oil is gathered in holding tanks and pumped via pipeline to an oilrefinery in the city of Libertad, Ecuador. The license agreement covering theproperty extends through May 2016.

 

**ITEM 3. LEGAL PROCEEDINGS**

** **

*SEC Inquiryof Navidec*

 

Navidecwas advised in February 2004 that the SEC was conducting an informalinquiry to determine whether Navidec had violated federal securities laws.Based on information available to us, we believe the SEC’s investigationrelates, at least in part, to the restatement of Navidec’s reported earningsfor the first and second quarters of 2003. This restatement was reported inNavidec’s Form 10-Q for the third quarter of 2003 filed on December 11,2003.  Pursuant to the Merger agreement,we have been indemnified by NFS for the costs of the SEC investigation, and NFShas borne the costs incurred to date. We are not aware of the future actions,if any, which the SEC intends to pursue in this matter, but no assurance can begiven that the investigation has been and will be resolved without negativeconsequences to the Company.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

** **

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

 

**PART II**

** **

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

** **

**Market Information**

** **

Our Common Stock begantrading on the American Stock Exchange (“AMEX”) under the symbol “BZP”, on January 12,2007.  Between December 27, 2005 andJanuary 12, 2007, our common stock was traded on the Pink Sheets under thesymbol “BPZI.PK”.

 

The following table setsforth, for the periods indicated, the high and low prices of a share of ourCommon Stock as reported on the AMEX and the Pink Sheets for the applicabletime periods. The quotations provided for the over the counter market reflectinterdealer prices without retail mark-up, mark-down or commissions, and maynot represent actual transactions.

 

28

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| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2007**       |       |     |       |    |       |
| Fourth quarter |       | $        | 13.08      |    | $          | 8.11 |   |
| Third quarter  |       | 7.84     |       | 4.14    |       |
| Second quarter |       | 7.55     |       | 5.58    |       |
| First quarter  |       | 6.00     |       | 3.61    |       |
| **2006**       |       |     |       |    |       |
| Fourth quarter |       | $        | 4.59       |    | $          | 3.55 |   |
| Third quarter  |       | 5.45     |       | 3.40    |       |
| Second quarter |       | 4.00     |       | 2.42    |       |
| First quarter  |       | 3.95     |       | 3.20    |       |

 

**Holders**

 

As of February 29, 2008, wehad approximately 293 shareholders of record, and an estimated 13,000beneficial owners of our common stock.

 

**We currently intend to retain all future earnings to fundthe development and growth of our business. **We have never paidcash or other dividends on our stock. For the foreseeable future, we intend to retain earnings, if any, tomeet our working capital requirements and to finance future operations.Accordingly, we do not plan to declare or distribute cash dividends to theholders of our common stock in the foreseeable future.  As of the date of this filing, we have notrepurchased any of our equity securities and have not adopted a stockrepurchase program.

** **

**Equity Compensation Plan**

** **

The BPZ Resources, Inc. 2007 Long-Term IncentiveCompensation Plan (the “LTIP” or “Plan”) permits our Board of Directors toaward eligible employees, employee directors and consultants with incentive-basedand non-incentive-based compensation and our Directors Compensation IncentivePlan permits our Board of Directors to award non-employee directors with equitybased compensation.

 

The following table summarized our equity securitiesauthorized for issuance under our equity compensation plan as of December 31,2007.

 

29

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| ** **                                                     | ** ** | **Number of   securities  to be issued  upon  exercise of  outstanding  options,  warrants   and rights** | ** ** | **Weighted-  average  exercise price  of outstanding  options,  warrants and  rights** | ** ** | **Number of  securities  remaining  available  for future  issuance under  equity  compensation  plans  (excluding  securities  reflected  in column)** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                                                                                                                              | ** ** | ** **                                                                                            | ** ** | ** **                                                                                                                                                                  | ** ** |
| *Equity  compensation plans approved by security holders:*     |       |                                                                                                                                    |       |                                                                                                  |       |                                                                                                                                                                        |       |
| BPZ Long Term  Incentive Compensation Plan                     |       | —                                                                                                                                  |       | $                                                                                                     | —     |                                                                                                                                                                        | 1,327,450  |   |
| BPZ Directors  Comensation Incentive Plan                      |       | —                                                                                                                                  |       | —                                                                                                |       | 1,825,000                                                                                                                                                                   |       |
|                                                           |       | —                                                                                                                                  |       | $                                                                                                     | —     |                                                                                                                                                                        | 3,152,450  |   |
| *Equity  compensation plans not approved by security holders:* |       |                                                                                                                                    |       |                                                                                                  |       |                                                                                                                                                                        |       |
| Contingent  Incentive Earn-Out Shares                          |       | —                                                                                                                                  |       | $                                                                                                     | —     |                                                                                                                                                                        | —     |   |
| Navidec, Inc.  2004 Stock Option Plan                     |       | —                                                                                                                                  |       | —                                                                                                |       | —                                                                                                                                                                      |       |
| Options pursuant  to Business Consulting Agreement             |       | —                                                                                                                                  |       | —                                                                                                |       | —                                                                                                                                                                      |       |
| Stock Options  pursuant to Director’s Agreement           |       | 424,248                                                                                                                                 |       | 1.30                                                                                                  |       | —                                                                                                                                                                      |       |
| Total not  approved by security holders                        |       | 424,248                                                                                                                                 |       | 1.30                                                                                                  |       | —                                                                                                                                                                      |       |
| Total all  compensation plans (1)                              |       | 424,248                                                                                                                                 |       | $                                                                                                     | 1.30       |                                                                                                                                                                        | 3,152,450  |   |

 

----

(1)             Pursuantto a Director’s Agreement related to a former director.

 

**Recent Sales of Unregistered Securities**

** **

On May 4, 2007, with anover-allotment purchase that closed on June 15, 2007, we completed aprivate placement of 7,170,000 shares of common stock, no par value, to anaccredited investor pursuant to a Subscription Agreement.  The common stock was priced at $5.25 pershare and the over-allotment was priced at $5.40 per share resulting inproceeds to us of approximately $37.7 million. No warrants or dilutive securities were issued in connection with theoffering.  The offering was placed directlyby the Company.  A placement fee of 2% ofthe gross proceeds of this transaction was paid to Morgan Keegan for investmentservices and consulting related to the offering.

 

We closed our “C” Loan withthe IFC on November 19, 2007.  Theloan consists of $15.5 million of convertible debt.  The outstanding debt may be converted at anytime prior to the date all amounts payable under the terms of the loan havebeen paid by the Company under certain circumstances and by the IFC at anytime.  The conversion price is $10.39 pershare, as may be adjusted under the terms of the loan, and the Company mayforce the conversion if theaverage closing price of the Company’s common stock over twenty consecutive business days exceeds $18.19per share.

 

In November 2007, weissued 9,000,000 shares of common stock as contingent merger consideration inconnection with the second earn-out provision in The Merger Agreement.  This transaction is more fully described in “Business-NavidecMerger Transaction” included herein.

 

Thesecurities issued during the period were exempted from registration in relianceupon Section 4(2) of the Securities Act of 1933, as amended, andRegulation D promulgated thereunder. Shares in the private placement were onlyoffered to select accredited investors (as such term is defined in Rule 501(a) ofRegulation D under the Securities Act).

 

**Performance Graph**

 

The following graphcompares the cumulative total shareholder return for the Company’s Common Stockto that of (i) the Russell 2000 Stock Index, and (ii) a Company peergroup of five independent oil and gas exploration companies

 

30

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selected by us, for the period indicated as prescribed by the SEC’srules. The companies in our selected peer group are Transmeridian Exploration, Inc.,Contango Oil & Gas, Co, Harvest Natural Resources, Inc., Far EastEnergy Corp, and Carrizo Oil & Co Inc. “Cumulative total return” is defined as the change in share price duringthe measurement period, plus

 

cumulative dividends forthe measurement period (assuming dividend reinvestment), divided by the shareprice at the beginning of the measurement period. The graph assumes $100 wasinvested on January 1, 2002 in our Common Stock, the Russell 2000 StockIndex and a Company peer group.

 

 

 
| ** **                | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| BPZ Energy, Inc.          |       | $        | 100        |     | $          | 51       |       | $        | 168        |     | $          | 188      |       | $ | 181 |   | $ | 495 |   |
| Russell 2000  Stock Index |       | 100      |       | 147      |       | 170      |       | 176      |       | 205      |       | 199      |       |
| Peer Group  Composite     |       | 100      |       | 146      |       | 202      |       | 274      |       | 352      |       | 628      |       |
|                           |            |          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

31

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**ITEM 6.  SELECTED FINANCIAL DATA**

 

The following selected financial information should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operation” and the consolidated financial statements and thenotes thereto included under “Item 8. Financial Statements and SupplementaryData.”

 
| ** **                                                       | ** ** | **For the year ended December 31,** | ** **  |
|------------------------------------------------------------------|------------|--------------------------------------------------------------|-------------|
| ** **                                                       | ** ** | **2007**                                                     | ** **  | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating Results:                                          |       |                                                         |        |   |   |   |   |   |   |   |   |
| Revenue (net)                                                    |       | $                                                            | 2,350,388   |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Operating and administrative expenses:                           |       |                                                         |        |   |   |   |   |   |   |   |   |
| Lease operating expense                                          |       | 754,833                                                      |        | — |   | — |   | — |   | — |   |
| General and administrative                                       |       | 18,548,465                                                   |        | 11,531,864 |   | 5,805,226 |   | 8,915,192 |   | 537,125 |   |
| Geological, geophysical and engineering                          |       | 4,045,381                                                    |        | 2,048,742 |   | 998,131 |   | 360,965 |   | — |   |
| Depreciation, depletion and amortization                         |       | 792,531                                                      |        | 213,815 |   | 29,638 |   | 157 |   | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Total operating expenses                                         |       | 24,141,210                                                   |        | 13,794,421 |   | 6,832,995 |   | 9,276,314 |   | 537,125 |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Operating loss                                                   |       | (21,790,822                                                  | )           | (13,794,421 | ) | (6,832,995 | ) | (9,276,314 | ) | (537,125 | ) |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Other income (expense):                                          |       |                                                         |        |   |   |   |   |   |   |   |   |
| Income from investment in Ecuador property, net of  amortization |       | 264,031                                                      |        | 1,403,298 |   | 468,726 |   | 147,861 |   | — |   |
| Interest expense                                                 |       | —                                                       |        | (15,815 | ) | (11,149 | ) | (66,959 | ) | — |   |
| Amortization of deferred financing costs                         |       | —                                                       |        | — |   | (67,561 | ) | (360,439 | ) | — |   |
| Registration delay expense                                       |       | —                                                       |        | (3,552,513 | ) | (515,967 | ) | — |   | — |   |
| Interest income                                                  |       | 854,905                                                      |        | 787,455 |   | 509,808 |   | — |   | — |   |
| Merger costs                                                     |       | —                                                       |        | — |   | — |   | (5,470,455 | ) | — |   |
| Miscellaneous income                                             |       | 200,904                                                      |        | (315,463 | ) | 42,149 |   | 13,129 |   | 1,445 |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| Total other income (expense)                                     |       | 1,319,840                                                    |        | (1,693,038 | ) | 426,006 |   | (5,736,863 | ) | 1,445 |   |
| Loss before income taxes                                         |       | (20,470,982                                                  | )           | (15,487,459 | ) | (6,406,989 | ) | (15,013,177 | ) | (535,680 | ) |
| Income taxes                                                     |       | 39,001                                                       |        | — |   | — |   | — |   | — |   |
| Net loss                                                         |       | $                                                            | (20,509,983 | ) | $ | (15,487,459 | ) | $ | (6,406,989 | ) | $ | (15,013,177 | ) | $ | (535,680 | ) |
| Basic and diluted net loss per share                             |       | $                                                            | (0.30       | ) | $ | (0.29 | ) | $ | (0.16 | ) | $ | (0.62 | ) | $ | (0.04 | ) |
| Weighted average common shares outstanding                       |       | 69,156,404                                                   |        | 53,751,761 |   | 40,899,291 |   | 24,169,823 |   | 13,103,454 |   |
| Oil sales price per barrel, net                                  |       | $                                                            | 81.78       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating cost per barrel produced                               |       | $                                                            | 26.26       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                          |       |                                                         |        |   |   |   |   |   |   |   |   |
| Working Capital                                                  |       | $                                                            | 1,549,390   |   | $ | 22,057,206 |   | $ | 29,036,304 |   | $ | 3,611,410 |   | $ | (376,312 | ) |
| Property, equipment and construction in progress,  net           |       | 100,366,091                                                  |        | 38,726,910 |   | 4,365,040 |   | 5,505 |   | — |   |
| Total assets                                                     |       | 129,619,204                                                  |        | 74,036,726 |   | 38,090,980 |   | 5,161,095 |   | 252,336 |   |
| Total long-term debt                                             |       | 15,537,293                                                   |        | 55,815 |   | 70,908 |   | — |   | 755,000 |   |
| Stockholders’ equity                                        |       | 90,740,112                                                   |        | 63,635,905 |   | 36,731,577 |   | 4,586,155 |   | (891,312 | ) |
|                                                             |       |                                                         |        |   |   |   |   |   |   |   |   |
| **Cash Flow Data:**                                              |       |                                                         |        |   |   |   |   |   |   |   |   |
| Cash flow used in operating activites                            |       | (15,170,838                                                  | )           | (6,681,722 | ) | (4,461,328 | ) | (1,473,800 | ) | (528,806 | ) |
| Cash flow used in investing activities                           |       | (58,463,949                                                  | )           | (34,269,582 | ) | (5,745,130 | ) | (1,305,662 | ) | (240,000 | ) |
| Cash flow provided by financing activities                       |       | 55,824,742                                                   |        | 36,820,407 |   | 35,647,397 |   | 6,785,497 |   | 755,000 |   |

 

**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTSOF OPERATIONS**

 

*The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith our audited consolidated financial statement and related notes containedelsewhere in this report.  The followingdiscussion*

 

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*includes forward-looking statement that reflect ourplans, estimations and beliefs.  Ouractual results could differ materially from those discussed in theseforward-looking statements.  Factors thatcould cause or contribute to such differences include, but are not limited to,those discussed below and elsewhere in this report*

 

**Overview**

** **

We arean independent oil and gas company focused on the exploration, development andproduction of oil and natural gas in Peru and Ecuador.  We also intend to utilize part of our plannedfuture natural gas production as a supply source for the complementarydevelopment of a Company owned gas-fired power generation facility.  We have the exclusive rights and licenseagreements for oil and gas exploration and production covering approximately2.4 million acres in four blocks in northwest Peru and off the northwest coastof Peru in the Gulf of Guayaquil.  Wealso own a 10% non-operated working interest in an oil and gas producingproperty, Block 2, located in the southwest region of Ecuador (the “Santa ElenaProperty”).

 

We are in the initial stages of developing our oil andnatural gas reserves and in November 2007we began producing oil under anextended well testing program from our recent discoveries.  To date our activities in Peru have beenprimarily limited to analysis and evaluation of technical data on theproperties and preparation of the development plans for the properties,including detailed engineering and design of the power plant and gas processingfacilities, refurbishment of two of our offshore platforms, procuring machineryand equipment for an extended drilling campaign, obtaining all necessaryenvironmental and operating permits, procuring development and transportationequipment and securing the required capital and financing to complete thecurrent plan of operation. 

 

**Corvina Field**

*** ***

***OilDevelopment***

 

In March 2007, after a total of six drill stemtests were conducted on separate potential pay zones from the Lower and UpperZorritos formations, the CX11-21 XD well, our first well, tested positive forboth gas and oil in commercially producible quantities.  Subsequently, in June 2007 wesuccessfully recompleted the Corvina CX11-16X well as a natural gas producingwell and completed a total of four drill stem tests on various zones in thewell including one in a formation previously untested in the entire basin.  In October 2007 we completed seven drillstem tests on the CX11—14D well in the Corinva Field.  The first six tests were conducted in theUpper Zorritos formation, with the first two testing the oil zone and the otherfour testing the gas zone, while the seventh test targeted the Cardalitosformation located immediately above the Upper Zorritos.  The CX11-14D well tested positive for bothgas and oil in quantities at commercially producible quantities.  On November 29, 2007, we commenceddrilling on the CX11-18XD well.  The wellreached total depth of 8,792 feet (measured depth) on January 1, 2008,approximately one month ahead of schedule. We recently performed a series of safety and integrity tests on theCX-11 Corvina platform including the surface equipment.  As part of the integrity testing of thesurface equipment, we perforated the lower prospective oil sands identified inthe CX11-18XD well.  These lower sandstested oil and the results assisted in validating our Corvina geologicmodel.  All wells tested positive for oiland/or gas at commercially producible quantities.  We did not drill any other wells in 2007. 

 

On June 13, 2007, we entered into a capital leaseagreement, with an option to purchase, for two barges to assist in thedevelopment of the Corvina Field. Each of these barges has a capacity ofapproximately 40,000 barrels.  The twobarges were towed to Peru where one barge, the Nu’ uanu, is currently beingused to transport oil between the CX11 platform and the refinery inTalara.  The other barge, the Nomoku, iscurrently being fitted with the required equipment for its intended use as afloating production, storage and offloading facility (“FPSO”) that will bemoored next to the CX11 platform.  However, we have encountered some scheduling delays in deploying thisbarge.  We expect the Nomoku to be fullyfitted and operational by the end of the first or beginning of the secondquarter  of 2008. Until such time as theNomoku is fitted with the permanent production equipment, we are anticipatingpumping oil directly to the Nu’ uanu using temporary production equipment andthen transporting the oil to the Talara refinery.

 

We started producing oilfrom the CX11 platform under an extended well testing program beginning on November 1,2007.  By December 31, 2007, weproduced approximately 40,989 barrels of oil and sold approximately 28,741barrels to a refinery in Talara at current market prices.  Our oil is delivered to the refinery by bargeapproximately 100 miles south of the platform. The remainder was kept in production inventory until such time as it wasdelivered to Talara in early 2008.

 

On October 24, 2007, our primary marinetransportation contractor entered into two short term agreements with thecommercial division of the Peruvian Navy to lease two tankers on our behalf totransport oil to market. However, on January 30, 2008, one of the tankerssank after catching fire. 

 

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Currently all production(which had reached approximately 4,200 barrels of oil per day by late January2008) is shut-in due to the incident involving the Navy tanker.  At therequest of the OSINERGMIN, the government agency responsible for auditing thesafety of energy investments in Peru, we successfully performed a series ofsafety and integrity tests on the facilities at the CX-11 Corvina platform,including the equipment that was being used for the ongoing long-term testingof the 21XD and 14D wells.  We confirmed that the well testing equipmentwas in operational condition.  On March 12, 2008 we received clearancefrom the OSINERGMIN, to resume operations at the CX-11 platform, including thescheduled 18XD well drill stem test.  However, the four Corvina wells arecurrently shut-in while we complete the installation of sea-bed pipelinesconnecting the platform to the transport barge, along with the required mooringsystems, that will allow for an improved long-term testing program.Additionally, we are waiting for final clarification from the appropriateauthorities in Peru regarding the transportation of our crude oil to therefinery.

 

Consequently, through ourmarine transportation contractor, we are now leasing only  one vessel from the Navy having a capacity ofapproximately 6,000 barrels.   The leaseis set to expire at the end of March 2008.

 

***Gas-to-Power Project***

 

The Corvina Gas-to-Power project, with an estimatedcapital budget of $115 million, entails the installation of a 10-mile gaspipeline from the CX-11 platform to shore, construction of gas processingfacilities and an approximately 160 megawatt (“MW”) simple-cycle electricgenerating plant.  The proposed powerplant site is located adjacent to an existing substation and power transmissionlines which, with certain upgrades, are expected to be capable of handling upto 360 MW of power. In order to support our proposed electric generationproject, we commissioned an independent power market analysis for the region.The Peruvian electricity market is deregulated and power is transported throughan interconnected national grid managed by the Committee for EconomicDispatching of Electricity (known as COES). Based on this study, we believe wewill be able to sell economic quantities of electricity from the initial 160 MWpower plant. The market study also indicates that there may be futureopportunities for us to generate and sell significantly greater volumes ofpower into the Peruvian and Ecuadorian power markets.  Our plan is to own 100% of the power plant.Accordingly, our revenues from the natural gas delivered to the power plantwill be derived from the sale of electricity, which is currently projected forearly 2010, though this schedule is subject to many factors outside ourcontrol, including obtaining all necessary financing, equipment and noassurance can be given that we can meet this schedule.

 

We are currently working on securing and finalizingfunding for our gas to power initiatives comprised of approximately $120million of senior debt to be syndicated by IFC, which is expected to close inthird quarter of 2008. This financing will be subject to identification of thelending syndicate members and subsequent negotiation and approval of thenecessary loan documentation.

 

**Resultsof Operations**

** **

***Year Ended December 31,2007 Compared to Year Ended December 31, 2006***

 
| ** **                               | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                                     | ** ** | **2006** | ** ** | **Increase/  (Decrease)** | ** ** |
| Lease operating expense                  |       | $                                                            | 754,833    | ** ** | $ | **—** |   | 754,833 |   |
| General and administrative               |       | 18,548,465                                                   |       | 11,531,864 |   | 7,016,601 |   |
| Geological, geophysical and engineering  |       | 4,045,381                                                    |       | 2,048,742 |   | 1,996,639 |   |
| Depreciation, depletion and amortization |       | 792,531                                                      |       | 213,815 |   | 578,716 |   |
| Total operating expenses                 |       | $                                                            | 24,141,210 |   | $ | 13,794,421 |   | $ | 10,346,789 |   |
|                                          |            |                                                              |            |  |  |  |  |  |  |  |

*** ***

Ouroperating and administrative expenses to date have consisted principally ofgeneral and administrative costs as well as geological, geophysical andengineering costs. 

 

Due to commencement of production from the CX11 platform,we have incurred lease operating expense of $754,833 during the year ended December 31,2007 compared to no operating expenses incurred during the year ended December 31,2006.  General and administrative costshave increased significantly from $11,531,864 during the year ended December 31,2006 to $18,548,465 during the year ended December 31, 2007 as a result ofour increased activity levels, necessary additional personnel and costsassociated with being a public company listed on the American Stock Exchange.  Included in general and administrative expenseis stock-based compensation expense. Stock-based compensation expensefor year ended December 31, 2007 was approximately $7,039,603 compared to$3,225,508 during the year ended December 31, 2006. Stock basedcompensation expense is primarily related to our restricted stock grants,accrued stock-based compensation under our 2007 Long-Term Incentive Plan andthe recognition of Incentive Earn-out Stock Compensation for two of ourexecutive officers, in the third quarter of 2007due to the achievement of theentitlement to the right to production of not less than 2,000 barrels of oil per day or itsequivalent (approximately 12 million cubic feet of gas per day) prior toDecember 28, 2007. The overall increase was partially offset by areduction associated with unvested restricted stock grants forfeited by certainemployees who resigned from the Company during the year ended 2007.  Weincurred $4,045,381 of geological, geophysical and engineering costs during theyear ended December 31, 2007 primarily related to the oil discovery inCorvina and to the continued development of our Corvina Gas-to-Power projectand 2-D seismic expense on Block XIX, compared to $2,048,742 during the yearended December 31, 2006 primarily as a result of the commencement of ourCorvina Gas-to-Power project.

 

We received net cash distributionsfrom our investment in Ecuador property of $546,847 during the year ended December 31,2007, compared to net cash distributions of $1,291,547 million during the yearended December 31, 2006. The decrease in income primarily relates tocapacity problems at the local refinery in Ecuador.  As a result, oil sales for the year ended December 31,2007 were significantly less than for the year ended December 31, 2006.Since our investment consists of an interest in a producing oil and gasproperty, we are amortizing the investment on a straight-line basis over theremaining term of the license agreement covering the property. Accordingly, werecorded $187,584 of amortization expense during each of the years ended December 31,2007 and December 31, 2006.

 

We incurred interest expense of$930,786 during the year ended December 31, 2007, all of which wascapitalized to construction in progress, compared with $15,815 for the yearended December 31, 2006. The difference is primarily due to interestassociated with the purchase of two vessels under capital lease obligation in2007 compared to other debt related to acquiring furniture and fixtures during2006.  See Note 9 “Debt” to theConsolidated Financial Statements below.

 

We didnot incur any registrationdelay expense for the year ended December 31, 2007. During the year ended December 31,2006 we recorded registration delay expense totaling $3,552,513, of whichapproximately $1,221,734 was paid in cash and $2,330,779 was settled by theissuance of 865,238 shares of common stock. In connection with the private 

 

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placement of 11,466,000common shares in July 2005, we were obligated to prepare and file with theSEC a Registration Statement on Form S-1 and to use our best efforts tocause the Registration Statement to be declared effective by the SEC no laterthan ninety days from closing. The Registration Statement had not been declaredeffective by the required date and we were liable to the investors for liquidateddamages in an amount equal to 1.0% of the purchase price of the shares,approximately $343,000, for each thirty day period until the RegistrationStatement is declared effective by the SEC. In addition, in connection with theprivate placement of 4,482,000 common shares in March 2006, we wereobligated to prepare and file with the SEC a Registration Statement on Form S-1within ninety days from closing, and to use our best efforts to cause theRegistration Statement to be declared effective by the SEC no later than ninetydays, from March 8, 2006. The Registration Statement was not filed ordeclared effective by the required dates and we were liable to the investorsfor liquidated damages in an amount equal to 1.0% of the purchase price of theshares, approximately $50,010, for each thirty day period until theRegistration Statement is declared effective by the SEC. On November 8,2006, the SEC declared effective the Registration Statement on Form S-1covering the common shares issued in connection with the July 19, 2005, March 10,2006, and June 30, 2006, private placements.  As a result, we were no longer subject to theliquidated damages described above

 

As a result of our cash balancesfrom the various private placements of our common stock during 2005, 2006 and2007, we received interest income of $854,905 during the year ended December 31,2007 and $787,455 during the twelve months ended December 31, 2006.

 

We realized federal income taxexpense of $39,001 during the year ended December 31, 2007. The tax isrelated to the revenues from our 10% non-operated working interest inthe Santa Elena Property in southwestern Ecuador. No tax expense was incurredduring the year ended December 31, 2006.

 

Duringthe year ended December 31, 2007, we recognized a foreign exchange gain ofapproximately $190,000 compared to approximately $56,000 during the year ended December 31,2006.   This is primarily as a result ofour collection of  Value Added Tax inPeru ( “ IGV”) under the early recovery program.  IGV is denominated in local currency and thePeruvian Nuevo Soles has become stronger against the U. S. Dollar over the pastyear.

 

We realized a net loss of$20,509,983 or $(0.30) per share during the year ended December 31, 2007,compared to a net loss of $15,487,459 or $(0.29) per share for the year ended December 31,2006.

 

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

 
| ** **                              | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **Increase/  (Decrease)** | ** ** |
| General and administrative              |       | $                                                            | 11,531,864 |   | $ | 5,805,226 |   | $ | 5,726,638 |   |
| Geological, geophysical and engineering |       | 2,048,742                                                    |       | 998,131 |   | 1,050,611 |   |
| Depreciation expense                    |       | 213,815                                                      |       | 29,638 |   | 184,177 |   |
| Total operating expenses                |       | $                                                            | 13,794,421 |   | $ | 6,832,995 |   | $ | 6,961,426 |   |

*** ***

Our operating and administrative expenses to date haveconsisted principally of general and administrative costs as well asgeological, geophysical and engineering costs. General and administrative costs have increased significantly from $5,805,226during the year ended December 31, 2005 to $11,531,864 during the yearended December 31, 2006 as a result of our increased activity levels,additional personnel and costs associated with being a public company.  Included in general and administrativeexpense is stock-based compensation expense. Stock-based compensation expense for the twelve months ended December 31,2006 was approximately $3,225,508, compared to $1,382,479 during the sameperiod in 2005.  Stock based compensationexpense is primarily related to our 2005 and 2006 restricted stock and optiongrants and accrued stock-based compensation under our 2005 Long-Term IncentiveCompensation Plan.  We incurred $2,048,742 ofgeological, geophysical and engineering costs for the year ended December 31,2006 compared to $998,131 for the same period ended, 2005.  This was primarily related to the developmentof our Block Z-1 gas-to-power project.

 

We received net cash distributionsfrom our Ecuador property of $1,291,547 during the twelve months ended December 31,2006, compared to net cash distributions of $605,278 during the same periodending 2005.  Since our investmentconsists of an interest in a producing oil and gas property, we are amortizingthe investment on a straight-line

 

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basis over the remainingterm of the license agreement covering the property.  Accordingly, we recorded $187,584 ofamortization expense during the twelve months ended December 31, 2006,compared to $136,552 during the twelve months ended December 31, 2005.

 

We incurred interest expense of$15,815 during the twelve months ending December 31, 2006, primarilyrelated to other debt related to acquiring furniture and fixtures as comparedwith interest expense of $11,149 and amortization of deferred financing costsof $67,561 year ended December 31, 2005, principally from notes payableincurred to finance the acquisition of SMC in September 2004.

 

Forthe year ended December 31, 2006, we recorded a foreign currencytranslation gain of $56,000.  The primaryreason for the translation difference related to the early recovery of ValueAdded Tax in Peru (“IGV”), which, by Peruvian law must be transacted andaccounted for in the local currency.  Dueto the relatively low level of activity in 2005 and the relatively steadyexchange rate in Peru, translation differences were immaterial during thetwelve months ended December 31, 2005.

 

For the twelve months ended December 31, 2006, we recorded registration delay expense totaling $3,552,513, of which approximately $1,221,734 was paid in cash and $2,330,779 was settled by the issuance of 865,238 shares of common stock as compared to registration delay expense of $515,967 during the twelve months ended December 31, 2005.  In connection with the private placement of 11,466,000 common shares in July 2005, we were obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use our best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days from closing. The Registration Statement had not been declared effective by the required date and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $343,000, for each thirty day period until the Registration Statement was declared effective by the SEC. In addition, in connection with the private placement of 4,482,000 common shares in March 2006, we were obligated to prepare and file with the SEC a Registration Statement on Form S-1 within ninety days, and to use our best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days, from March 8, 2006.  The Registration Statement was not filed or declared effective by the required dates and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,100, for each thirty day period until the Registration Statement was declared effective by the SEC.  On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements.  As a result, we were no longer subject to the liquidated damages described above.

 

As a result of the increased cashbalance from the various private placements of our common stock during 2005 and2006, we received interest income of $787,455 during the twelve months ended December 31,2006, as compared to $509,808 during the same period ended December 31,2005.

 

We realized a net loss of$15,487,459 or $(0.29) per share for the year ended December 31, 2006,compared to a net loss of $6,406,989, or $(0.16) per share, for the same period in2005.

 

**Project Capital Budget**

 

We established an initial 2008capital budget of approximately $215 million. Approximately half of this budget is related with our gas-to-powerinitiative, of which all of the associated capital expenditures are expected tobe funded by IFC.  We increased ourprojected capital budget to reflect the drilling of three additional wells atthe Corvina platform based on the favorable results of the three recentlycompleted wells and the potential to further delineate the oil and gasdiscoveries.  We also intend to begin ourdrilling program in the Albacora Field in late 2008 as well as other prospectsin Block XIX and Piedra Redonda at an additional capital expenditure of $43.0million.  Detail of our Projected CapitalBudget is as follows:

 

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| ** **                                       | ** ** | **($ in millions)** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| Corvina  oil & gas development program  |       | $                             | 52.0       |   |
| Albacora  oil & gas development program |       | 29.0                          |       |
| Other prospects                                  |       | 14.0                          |       |
| Contingencies                                    |       | 5.0                           |       |
| Total  exploration and production                |       | 100.0                         |       |
| Power plant and  related equipment               |       | 69.0                          |       |
| Pipelines and  processing facilities             |       | 41.0                          |       |
| Contingencies                                    |       | 5.0                           |       |
| Total  Gas-to-Power                              |       | 115.0                         |       |
| Total estimated  capital budget                  |       | $                             | 215.0      |   |

 

**Liquidity, Capital Resources and CapitalExpenditures**

 

As of February 29,2008, our cash balance was approximately $4.2 million.

 

***Production***

 

In November 2007, webegan producing oil from the CX11-21 XD and 14D wells in the Corvina Fieldunder an extended well testing program. By December 31, 2007, we producedapproximately 40,989 barrels of oil and sold approximately 28,741 barrels to arefinery in Talara.  The oil is deliveredto the refinery by barge approximately 100 miles south of the platform.  The remainder was kept in productioninventory until such time it was delivered to Talara in early 2008.

 

As aresult of the commencement of oil production we achieved the rights to theentitlement of production goal as set forth in the Merger Agreement as arequirement for the issuance of 9,000,000 additional shares of common stock ascontingent merger consideration. Accordingly, as required under the Merger Agreement between Navidec andBPZ-Texas in 2004, we issued an additional 9,000,000 shares of common stock tothe former shareholders of BPZ-Texas. The issuance of these earn-out shares wasrequired once the Company is entitled to receive as its proportionate sharefrom gross production from any oil and gas wells owned or operated by theCompany of not less than 2,000 barrels of oil per day or its equivalent (approximately12 million cubic feet of gas per day) prior to December 28, 2007. Foraccounting purposes, the earn-out arrangement is treated as a stock dividendbecause the earn-out is payable to the shareholders of the accounting acquirer,BPZ-Texas. Accordingly, except for a retroactive increase in the number ofcommon shares outstanding for all periods presented, no accounting entry isrequired upon the issuance of the earn-out shares.

 

Theproduction goal under the Merger Agreement was the same under an IncentiveEarn-out share arrangement with two executive officers.  The total of such incentive awards related to the MergerAgreement was 450,000 shares.  Stockcompensation expense for the incentive earn-out shares was approximately$1,980,000 during the year ended December 31, 2007.

 

***Capital Raises and Debt Activity***

 

On May 4, 2007, with anover-allotment purchase that closed on June 15, 2007, we completed aprivate placement of 7,170,000 shares of common stock, no par value, toaccredited investors pursuant to a Subscription Agreement. The common stock waspriced at $5.25 per share and the over-allotment was priced at $5.40 per shareresulting in proceeds to us of approximately $37.7 million. No warrants ordilutive securities were issued in connection with the offering. The offeringwas placed directly by us. A placement fee of 2% of the gross proceeds of thistransaction was paid to Morgan Keegan for investment services and consultingrelated to the offering. The registration statement was declared effective bythe Securities and Exchange Commission on June 14, 2007, and the relatedprospectus was filed on June 21, 2007.

 

On October 22, 2007, weentered into a non-binding debt term sheet with the IFC, the private sectordivision of the World Bank Group based in Washington, D.C., delineating the keyterms and conditions for the first tranche (see Loan “C” immediately below) ofa debt package with IFC. Previously, we announced a total debt package,approved by IFC, of $100.5 million. However, we are actively negotiating withIFC to increase the debt package to an estimated $165 million for furtherdevelopment of our assets.

 

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Theinitial $120 million aggregate debt and equity financing package was approved bythe Credit Committee of the IFC on November 29, 2006, and included aninvestment by IFC in BPZ’s common stock which took place on December 18,2006. Thecommon stock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million. The offering was placed directly by us and therewere no placement fees. IFC currently holds approximately 9% equityposition in the Company with 6.5 million shares of our common stock. Inaddition, IFC has a preemptive right to purchase its pro rata share of commonstock or securities convertible into common stock that are issued and sold bythe Company (except for certain issuances of securities, such as pursuant tostock splits, stock dividends, acquisitions by the Company or under the Company’sincentive compensation plan). IFC’s total equity and senior debt investment inthe Company, based upon execution and funding of the increased debt agreement,as described above, may reach approximately $185 million. Any increase infunding of the debt package is subject to final internal approvals by theappropriate representatives of both IFC and BPZ. It is uncertain if suchapproval will occur, or if approved, the timing or amount of suchapprovals.  The $165 million facility is expected to consist of thefollowing:

 

·                  Loan “C”, which closed on November 19,2007, consists of $15.5 million of convertible debt. The terms of the loanagreement stipulated a conversion price is $10.39 per share as may be adjustedunder the terms of the loan and includes a forced conversion exercisable at theCompany’s option if the the average closing price of the Company’s common stockexceeds $18.19 per share over twenty consecutive business days. The instrumenthas a 10 year term with a variable interest rate of 2% per annum above 6-monthLIBOR.  The loan from the IFC isunsecured, but restricts our ability to pledge assets to another lender unlesscertain conditions are met.  The IFC loan does not restrict our ability toissue additional capital stock, but does call for an adjustment in itsconversion price into BPZ common stock based on the terms of any subsequentequity offering.  The agreement contains customary default andcross-default provisions along with covenants restricting our ability to paydividends and the disposition of assets.  We are required to maintain arequired ratio of Balance Sheet Liabilities to Tangible Net Worth (as definedin the Loan Agreement), calculated quarterly, of no greater than 70:30. As of December 31, 2007 and as of March 14, 2008, we were in compliancewith all financial covenants.

 

·                  Loan “A”, which is for IFC’s ownaccount, is expected to consist of $34.5 million in secured  long-term senior debt. This second tranche isexpected to be closed during the second quarter of 2008.  The terms of the instrument are still beingnegotiated.

 

·                  Loan “B”, comprised of senior debt tobe syndicated by IFC, is projected to be approximately $115 million. This thirdtranche is expected to close late in the third quarter of 2008. This remainingdebt portion of the financing will be subject to identification of the lendingsyndicate members and subsequent negotiation and approval of the necessary loandocumentation.

 

As of March 14, 2008, thefinal “A” and “B” Loan documents have not yet been completed.

 

Duringthe year ended December 31, 2007, we incurred capital expenditures ofapproximately $56.4 million primarily related to drilling, completion andtesting activity on the three Corvina wells as well as $6.2 million beingprimarily related to the capital lease of two barges to be used for production,storage and delivery of oil produced from Corvina oil and $0.5 million formiscellaneous property and equipment. In comparison, during the year ended December 31,2006, we incurred capital expenditures ofapproximately $34.8 million primarily related to drilling and completionof our first well in the Corvina Gas Field for approximately $20.0million.  We also incurred capital costsassociated with the purchase of a deck barge and related equipment forapproximately $6.5 million, the modernization and refurbishment of aplatform tender assist drilling rig of approximately $4.5 million, power plant,gas processing facility, and pipeline designs of approximately$3.4 million and $0.4 million related to other miscellaneous propertyand equipment.

 

As of December 31, 2007, inconnection with our Peru properties, we obtained five performance bondstotaling $6.0 million to insure certain obligations and commitments, of whichfour related to performance obligations under the license contracts for BlocksZ-1, XIX, XXII and XXIII. As of December 31, 2007, we had restricted cashdeposits of approximately $3.8 million which partially collateralize theperformance bonds. We were required to deposit approximately $0.8 million as restrictedcash to collateralize a performance bond of $1.0 million in connection with thebeginning of the third exploration period under the Block Z-1 license contract,which began in June 2007. In addition, we were required to depositapproximately $0.2 million as restricted cash to collateralize performancebonds of $0.4 million under the Block XIX license contract in connection withthe first exploration period. We were also required to post a $1.0 millionperformance bond to guarantee payment under a service agreement, which expiredin January 2008. The $1.0 million cash collateral was released to us andthe performance bond was cancelled.  Inconnection with signing the license contracts for Blocks XXII and XXIII in November 2007,we were required to post $0.3 million and $1.5 million, respectively in restrictedcash to collateralize $0.6

 

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million and $3.1 million,bonds respectively, in connection with the first exploration period.  The performance bonds were issued by Peruvianbanks and their terms are governed by the corresponding license contract oragreement.

 

***EquipmentActivity***

 

Inearly August 2006, we incurred an operational delay of approximately threeweeks resulting from a navigation incident which caused the BPZ-01 barge to begrounded on a sand bank in Talara Bay in northwest Peru during the secondmobilization trip to the Corvina CX-11 platform. No injuries were sustained byany of our employees, nor to any of the tug boat operator’s crew members. TheBPZ-01 is a U.S. flagged vessel and as such was inspected after the incident bythe U.S. Coast Guard, to its satisfaction. The barge resumed normal operationsimmediately thereafter. Based upon information currently available, the Companyestimates that total expenditures related to this incident will beapproximately $1.1 million. As of December 31, 2006, approximately$382,000 had been incurred for barge recovery and temporary repairs to thevessel. In addition, the Company expects to incur approximately $330,000 inpermanent repairs to the barge and approximately $432,000 of consequentialdamages, primarily stand-by charges. As of the March 14, 2008, we have notpresented a final claim to our insurance carrier for the barge repairs and weare negotiating a settlement agreement with a third party for recovery of anydamages not covered through our insurance. A mandatory dry-dock is scheduledfor the third quarter 2008 at which time a full survey of the barge will beconducted and an insurance claim is expected to be filed.  We believe the majority of the costsassociated with this incident will be reimbursed through insurance or through athird party. No assurances can be given, however, that any such recoveries willbe sufficient to cover all costs associated with this incident or to the timingof any such recoveries. This incident did not have a material impact on ouroperations or business plan.

 

Inconnection with the Block XIX license contract, we have recently completedshooting 200 kilometers of 2-D seismic. The cost to acquire this seismic datawas approximately $3.6 million. Processing and interpretation of the data wascompleted in late January 2008. Based on the results of the 2-D seismicsurveys and in order to comply with the requirements under the next phase ofthe related license contract, we plan to drill a well in Block XIX in late 2008at an estimated cost of $8.0 million.

 

On June 13, 2007, the Company entered into a capitallease agreement, with an option to purchase, for two barges to assist inthe development of the Corvina oil. The two barges were towed to Peru where onebarge, the Nu’ uanu, is currently being used to transport oil between the CX11platform and the refinery in Talara, approximately 100 miles south.  The Nomoku is currently being fitted with therequired equipment for its intended use as a floating production, storage andoffloading facility (“FPSO”) that will be moored next to the CX11platform.   However, we have encounteredsome deployment delays due to scheduling. We expect the Nomoku to be fully fitted and operational by the end ofthe first or beginning of the second quarter 2008.

 

On October 24, 2007,the Company’s primary marine transportation contractor entered into two shortterm agreements with the commercial division of the Peruvian Navy to lease twotankers, on our behalf, to transport oil to market earlier than scheduled. Thetwo tankers leased from the Navy each had capacity of approximately 7,000barrels.  This enabled us to produce oilinto the Nu’ uanu, using temporary production equipment.  The oil is then transported to the Talararefinery.  However, on January 30,2008, the “Supe”, which was moored near the Corvina CX-11 platform and wasbeing used to store oil produced from Corvina’s 21XD and 14D wells, caught fireand later sank approximately one and a half miles from the platform.

 

At the time of theincident the Supe tanker contained approximately 1,300 barrels of oil, most ofwhich is believed to have been burned in the fire.  Initial assessments show that environmentalissues have been adequately controlled.  No Company employees were injured. No damage to the Company’s platform, barges, drilling and well testingequipment, or other facilities owned by the Company resulted from the incidentand the Company understands that damage has been limited mostly to the Supe,which was anchored at a distance from the platform and directed away after itcaught fire.  Initial assessments showthat environmental issues have been adequately controlled.   Wehired a third party environmental consultant to conduct an environmental damageassessment in and around the area surrounding the incident.  The results from our environmentalconsultant, as well as several other independent organizations, indicate thatthere was no contamination to the seawater and marine life related to theincident.  However, production from the21XD and 14D wells, approximately 4,200 barrels of oil per day at the time, aswell as the testing operations on the 18XD well have been temporarily suspendeduntil a full assessment of the situation has been completed.   We believe potential costs associated withenvironmental cleanup, business interruption, and equipment damages associatedwith this incident will be reimbursed through insurance.  No assurances can be given, however, that anysuch recoveries will be sufficient to cover all costs associated with this 

 

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incident or to the timing of any such recoveries. We do not expect thisincident to have a material impact on our future operations or overall businessplan.

 

Ourmajor sources of funding to date, has been through equity raises and, to alesser extent, debt financing activities. With our current cash balance, proceeds from the expected IFC debtfacilities, current and prospective Corvina Oil development cash flow, otherpotential third-party financing and potential financing from future equityraises, we believe we will have sufficient capital resources to execute ourinitial Corvina oil development project and gas-to-power project as wecurrently envision it as well as service our current debt obligations. However,the timing and execution of our project is dependent on a variety of factors,including the technical design of facilities, permitting, availability ofequipment, time and costs required for delivery and construction, performanceby contractors and the success of planned financing, many of which factors areoutside our control and cannot be assured.

 

**Subsequent Events**

** **

In February 2008, we enteredinto a lease-purchase agreement to acquire a deck barge (“BPZ 02”), ofapproximately 330 feet in length, to assist in the drilling activities in theAlbacora field as well as to assist in future drilling and development activities.  In the near term, the BPZ 02 will be used toact as a tender assist for the Petrex drilling rig as it is moved to theAlbacora field in third quarter 2008. During that time, as mentioned in Note 14 “Commitment andContingencies”, the BPZ 01 will be placed in drydock to repair damagessustained when it ran aground in late 2006. The acquisition of the BPZ 02 allows the Company better assetmaintenance scheduling and will aid in the support of increased offshore explorationand development activities.  The terms ofthe lease-purchase stipulate a 19% rate of interest over a one year term atwhich point, title to the BPZ 02 will transfer to the Company upon finalpayment of the lease.  The Company willaccount for the transaction as a Capital Lease in accordance to SFAS 13,“Accounting For Leases (As Amended)” under the criteria the barge will transfertitle at the end of the lease period and, as a result, depreciation will becalculated over the economic life of the asset.

 

**Off-Balance Sheet Arrangements**

 

As of December 31, 2007, we had no transactions,agreements or other contractual arrangements with unconsolidated entities orfinancial partnerships, often referred to as special purpose entities, whichgenerally are established for the purpose of facilitating off-balance sheetarrangements.

 

**Contractual Obligations**

 
| ** **                     | ** ** | **Payments Due by Period at December 31, 2007** | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                                                         | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| ** **                     | ** ** | **Total**                                                                          | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| **Contractual  Obligations:**  |       |                                                                               |       |   |   |   |   |   |   |   |   |
| Operating lease  obligation(1) |       | $                                                                                  | 572,176    |   | $ | 239,817 |   | $ | 332,359 |   | $ | — |   | $ | — |   |
| Debt  obligation(2)            |       | 33,937,441                                                                         |       | 8,823,851 |   | 2,167,235 |   | 2,127,530 |   | 20,818,825 |   |
| Total                          |       | $                                                                                  | 34,509,617 |   | $ | 9,063,668 |   | $ | 2,499,594 |   | $ | 2,127,530 |   | $ | 20,818,825 |   |

 

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(1)                                  Operating leases for ourexecutive office in Houston, Texas, our branch office in Quito, Ecuador, andour branch office and corporate apartments in Lima, Peru.

 

(2)                                  Includes IFC convertibledebt agreement of $15.5 million which began on November 19, 2007 and maturesin 10 years.  Interest is paid annuallyand principal is paid on the maturity date. Also, includes capital lease for two production and storage barges whichbegan in August 2007 and is set to expire in November 2009.Lease payments totaling $6.0 million are variable, based on the working statusof the barges, with a purchase option of $5,000,000 after the first year of thelease and $4,000,000 after the maturity date of the lease. The capital lease for officefurniture in our executive office in Houston, Texas expiring in 2010 is alsoincluded.

 

**Critical Accounting Policies**

 

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

 

***Successful Efforts Method of Accounting***

 

We follow the successful efforts method of accounting forour investments in oil and gas properties. Under this method, oil and gas leaseacquisition costs and intangible drilling costs associated with explorationefforts that result in the discovery of proved reserves and costs associatedwith development drilling, whether or not successful, are capitalized whenincurred. Certain costs of exploratory wells are capitalized pending determinationsthat proved reserves have been found. If the determination is dependent uponthe results of planned additional wells and required capital expenditures toproduce the reserves found, the drilling costs will be capitalized as long assufficient 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 costs related to unsuccessful

 

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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 described in the preceding sentence are not required. We assess ourcapitalized exploratory wells pending evaluation each quarter to determinewhether costs should remain capitalized or should be charged to earnings. Otherexploration costs, including geological and geophysical costs, are expensed asincurred. We will recognize gains or losses on the sale of properties, shouldthey occur, on a field-by-field basis.

 

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

 

The successful efforts method of accounting can have a significantimpact on the operational results reported when we enter a new exploratory areain hopes of finding oil and gas reserves. Seismic costs can be substantial,which will result in additional exploration expenses when incurred. The initialexploratory wells may be unsuccessful and the associated costs will then beexpensed as dry hole costs, and any associated leasehold costs may be impaired.

 

***Revenue Recognition***

 

TheCompany does not recognize revenues until they are realized or realizable andearned. Revenues are considered realized or realizable and earned when: (i) persuasiveevidence of an arrangement exists, (ii) delivery has occurred or serviceshave been rendered, (iii) the seller’s price to the buyer is fixed ordeterminable and (iv) collectability is reasonably assured.

 

TheCompany sells its production in the Peruvian domestic market on a contractbasis.  Revenue is recorded net ofroyalties when the purchaser takes delivery of the oil.  At the end of the period, oil that has beenproduced but not sold is recorded as inventory at the lower of cost ormarket.  Cost is determined on a weightedaverage based on production costs.

 

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

 

We periodically evaluate the recoverability of thecarrying value of our long-lived assets and identifiable intangibles bymonitoring and evaluating changes in circumstances that may indicate that thecarrying amount of the asset may not be recoverable. Examples of events orchanges in circumstances that indicate the recoverability of the carryingamount of an asset should be assessed include, but are not limited to, (a) asignificant decrease in the market value of an asset, (b) a significantchange in the extent or manner in which an asset is used or a significantphysical change in an asset, (c) a significant adverse change in legalfactors or in the business climate that could affect the value of an asset oran adverse action or assessment by a regulator, (d) an accumulation ofcosts significantly in excess of the amount originally expected to acquire orconstruct an asset, and/or (e) a current period operating or cash flowloss combined with a history of operating or cash flow losses or a projectionor forecast that demonstrates continuing losses associated with an asset usedfor the purpose of producing revenue.

 

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

 

***Future Dismantlement, Restoration, and AbandonmentCosts***

 

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

 

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estimates as to the proper discount rate to use andtiming of abandonment.

 

Our plan of operations includes the drilling of wellsand the construction of an electric power generation plant. We will be requiredto plug and abandon those wells and restore the well sites and power generationsite upon abandonment if they are abandoned prior to the end of the contractperiod.  See Note 8 “Asset RetirementObligation” to the Consolidated Financial Statements provided herein forfurther detail.

 

***Accounting Changes andError Corrections***

*** ***

In June 2005, the Financial Accounting StandardsBoard issued SFAS No. 154, Accounting Changes and Error Corrections, whichreplaced Accounting Principles Board Opinion No. 20, Accounting Changes (“APB20”), and SFAS No. 3, Reporting Accounting Changes in Interim FinancialStatements. SFAS 154 requires retrospective application to prior periodfinancial statements of a voluntary change in accounting principle unless it isimpracticable. In contrast, APB 20 previously required that most voluntarychanges in accounting principle be recognized by including the cumulativeeffect of changing to the new accounting principle in net income in the periodof change. SFAS 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. Earlierapplication is permitted for accounting changes and correction of errors madein fiscal years beginning after June 1, 2005. SFAS 154 does not change thetransition provisions of any existing accounting pronouncements, includingthose that are in a transition phase as of its effective date. We have electedto adopt the provisions of SFAS 154 on January 1, 2006. We do not expectadoption to have a material effect on our results of operations or financialposition.

 

***Principles ofConsolidation***

*** ***

Our consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries and branch offices.All intercompany balances and transactions have been eliminated.

 

Our accounting policy regarding partnership or jointventure interests in oil and gas properties is to consolidate such interests ona pro-rata basis in accordance with accepted practice in the oil and gasindustry. However, we have not been able to receive timely information to allowus to proportionately consolidate the minority non-operated working interestowned by our consolidated subsidiary, SMC Ecuador Inc. See Note 6 “Investmentin Ecuador Property and Note Payable” to the Consolidated Financial Statementsfor further discussion regarding the investment in our Ecuador property.Accordingly, we account for this investment under the cost method. As such, werecord our share of cash received or paid attributable to this investment asother income or expense.

 

***Foreign Exchange***

*** ***

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as itsofficial currency. Peru, however, still uses its local currency, Nuevo Soles,in addition to the U.S. Dollar and therefore our financial results are subjectto favorable or unfavorable fluctuations in the exchange rate and inflation ofthat country. We have adopted SFAS No. 52, “Foreign Currency Translation,”which requires that the translation of the applicable foreign currency intoU.S. dollars be performed for balance sheet monetary accounts using currentexchange rates 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 gains or losses resulting from suchtranslation are included in other income and expense in the consolidatedstatements of operations.

 

**Recent Accounting Pronouncements**

 

***Staff AccountingBulletin 110 “Share-Based Payment.”***

*** ***

***On December 21, 2007, the SEC released Staff AccountingBulletin, (“SAB 110”) “Share-Based Payment” which will no longer allow the useof the “Simplified” method to estimate the expected terms as on the variablesto determine the fair value of share-based payments.  With a limited number of exceptions,companies can continue to use the simplified method.  However, doing so requires the types ofgrants for which the Simplified method is used if not for all grants, and theperiods for which the Simplified method is being used.  The adoption of this Staff AccountingBulletin is not expected to have a material impact on our consolidatedfinancial position, results of operations, or cash flows.***

 

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SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *FairValue Measurements*. SFAS 157 defines fair value as used in numerousaccounting pronouncements, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles and expands disclosurerequirements related to the use of fair value measures in financial statements.SFAS 157 will be effective for the Company’s financial statements for thefiscal year beginning January 1, 2008; however, earlier application isencouraged. We are currently evaluating the impact that adoption might have onits financial position or results of operations, although we do not expect anyimpact to be significant.

 

***FAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115” (“FAS 159”).***

*** ***

In February 2007,the FASB issued SFAS 159, *The Fair ValueOption for Financial Assets and Financial Liabilities, Including an Amendmentof FASB Statement No. 115,* which will become effective on January 1,2008. FAS 159 permits entities to measure eligible financial assets, financialliabilities and firm commitments at fair value, on an instrument-by-instrumentbasis, that are otherwise not permitted to be accounted for at fair value underother generally accepted accounting principles. The fair value measurementelection is irrevocable and subsequent changes in fair value must be recordedin earnings. We will adopt this statement in the first quarter of 2008 and wedo not expect to elect the fair value option for any eligible financialinstruments and other items.

 

***SFAS No. 141(revised 2007), “BusinessCombinations, which replaces FASB Statement No. 141. SFAS 141(R”).***

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations*, which replaces FASB Statement No. 141.SFAS 141(R) establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any non- controlling interest in theacquiree and the goodwill acquired. SFAS 141(R) also establishesdisclosure requirements that will enable users to evaluate the nature andfinancial effects of the business combination. SFAS 141(R) is effectivefor acquisitions that occur in an entity’s fiscal year that begins after December 15,2008, which will be the company’s fiscal year 2009. We do not expect theadoption of SFAS No. 141R to have a material impact on the ourconsolidated financial position, results of operations or cash flows.

 

***SFAS No. 160,”Noncontrolling Interests inConsolidated Financial Statements—an amendment of ARB No. 51.”***

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51*.SFAS 160 requires that accounting and reporting for minority interests will berecharacterized as noncontrolling interests and classified as a component ofequity. SFAS 160 also establishes reporting requirements that providesufficient disclosures that clearly identify and distinguish between theinterests of the parent and the interests of the noncontrolling owners. SFAS160 applies to all entities that prepare consolidated financial statements,except not-for-profit organizations, but will affect only those entities thathave an outstanding noncontrolling interest in one or more subsidiaries or thatdeconsolidate a subsidiary. This statement is effective for fiscal yearsbeginning after December 15, 2008.  We do not expect theadoption of SFAS No. 160 to have a material impact on our consolidatedfinancial position, results of operations or cash flows.

 

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The primary objective ofthe following information is to provide forward-looking quantitative andqualitative information about our potential exposure to market risks. The term “marketrisk” refers to the risk of loss arising from adverse changes in interestrates, oil and natural gas prices and foreign currency exchange rates. Thedisclosures are not meant to be precise indicators of expected future losses,but rather indicators of reasonable possible losses. This forward-lookinginformation provides indicators of how we view and manage our ongoing marketrisk exposures. All of our market risk sensitive instruments were entered intofor purposes other than speculative trading.

 

*Interest Rate Risk*

 

As of December 31, 2007, the Company had long-termdebt of $15.5 million and current maturities of long-term debt of $6.2 million,consisting of an IFC loan, a capital lease obligation for the two barges to beused in the Corvina oil 

 

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production as well as two secured loans for the purchase ofoffice furniture.  The loan from the IFC,Loan “C”, was closed on November 19, 2007 and comprised of $15.5million convertible debt. The terms of the loan agreement stipulates aconversion price is $10.39 per share as may be adjusted under the terms of theloan, and includes a forced conversion exercisable by the Company if theaverage closing price of its common stock exceeds $18.19 per share over twentyconsecutive business days. The instrument has a 10 year term with a variableinterest rate of 2% per annum above 6-month LIBOR.  The capital lease obligation has an imputed interest rateof 18.00% over a lease term of 27 months and includes a purchase option whichwe anticipate for accounting purposes we will exercise on the 15th month of the lease term. The other twoloans have a term of 60 months and bear interest at fixed rates of 5.94% and9.44%, with principal and interest payments due on a monthly basis. We do notexpect a significant change in the market interest rate to impact the intereston our term debt. However, significant changes in market interest rates maysignificantly affect the level of financing that the IFC will structure withrespect to our project in Peru.

 

*Commodity Price Risk.*

 

With respect to our oil and gas business, any revenues,cash flow, profitability and future rate of growth we achieve will be greatlydependent upon prevailing prices for oil and gas. Our ability to maintain or increaseour borrowing capacity and to obtain additional capital on attractive terms isalso expected to be dependent on oil and gas prices. Oil and natural gas arecommodities, and, therefore, their prices are subject to wide fluctuations inresponse to relatively minor changes in supply and demand. Historically, oiland gas prices and markets have been volatile and are likely to continue to bevolatile in the future. Prices for oil and gas are subject to potentially widefluctuations in response to relatively minor changes in supply of and demandfor oil and gas, market uncertainty, and a variety of additional factors thatare beyond our control.

 

Lower oil and natural gas prices may not only decrease ourrevenues on a per unit basis, but may also reduce the amount of oil and naturalgas we can produce economically, if any. A substantial or extended decline inoil and natural gas prices may materially affect our future business, financialcondition, results of operations, liquidity and borrowing capacity, and we mayrequire a reduction in the carrying value of our oil and gas properties. Whileour revenues may increase if prevailing oil and gas prices increasesignificantly, exploration and production costs and acquisition costs foradditional properties and reserves may also increase.

 

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

 

*Foreign Currency Exchange RateRisk.*

 

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as itsofficial currency. Peru, however, still uses its local currency, Nuevo Soles,in addition to the U.S. Dollar, and therefore, our financial results aresubject to favorable or unfavorable fluctuations in the exchange rate and inflationof that country. Transaction differences have steadily increased as ourexpected activities in Peru continue to escalate. During the year ended December 31,2007, we incurred an exchange rate gain of approximately $190,000, primarilyrelated to the early recovery of Value Added Taxes in Peru (“IGV”).

 

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**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

BPZ Resources, Inc. and SubsidiariesIndex to Consolidated Financial Statements

 
| Report  of Independent Registered Public Accounting Firm                                                                   | 46     |
|----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                       |   |
| Consolidated Balance  Sheets as of December 31, 2007 and 2006                                                         | 47     |
|                                                                                                                       |   |
| Consolidated Statements  of Operations for the Years Ended December 31, 2007, 2006 and 2005                           | 48     |
|                                                                                                                       |   |
| Consolidated Statements  of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2007,  2006 and 2005 | 49     |
|                                                                                                                       |   |
| Consolidated Statements  of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005                           | 50     |
|                                                                                                                       |   |
| Notes to Consolidated  Financial Statements                                                                                | 51     |

 

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**Reportof Independent Registered Public Accounting Firm**

 

To the Board of DirectorsBPZ Resources, Inc. and Subsidiaries

 

We have audited theaccompanying consolidated balance sheets of BPZ Resources, Inc. andSubsidiaries as of December 31, 2007 and 2006 and the related consolidatedstatements of operations, stockholders’ equity (deficit), and cash flows foreach of the three years in the period ended December 31, 2007. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

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

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of BPZ Resources, Inc. andSubsidiaries at December 31, 2007 and 2006, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31,2007 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), BPZ Resources, Inc. and Subsidiaries’ internal controlover financial reporting as of December 31, 2007, based on criteriaestablished in Internal Control — Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) and ourreport dated March 12, 2008, expressed an unqualified opinion thereon.

 

Johnson Miller &Co., CPA’s PC Midland, Texas

March 12, 2008

 

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**BPZResources, Inc. and SubsidiariesConsolidated Balance Sheets**

 
| ** **                                                                                                                                                                        | ** ** | **December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                                                        | ** ** | **2007**              | ** **  | **2006** | ** ** |
| ** **                                                                                                                                                                        | ** ** | ** **            | ** **  | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                        |       |                  |        |   |   |
|                                                                                                                                                                              |       |                  |        |   |   |
| Current assets:                                                                                                                                                                   |       |                  |        |   |   |
| Cash  and cash equivalents                                                                                                                                                        |       | $                     | 7,514,188   |   | $ | 25,324,233 |   |
| Restricted  cash                                                                                                                                                                  |       | 1,013,152             |        | — |   |
| Accounts  receivable                                                                                                                                                              |       | 2,950,089             |        | — |   |
| Value  added tax receivable                                                                                                                                                       |       | 7,496,547             |        | 3,159,698 |   |
| Inventory                                                                                                                                                                         |       | 3,372,883             |        | 1,945,781 |   |
| Prepaid  and other current assets                                                                                                                                                 |       | 2,271,282             |        | 1,972,500 |   |
| Total  current assets                                                                                                                                                             |       | 24,618,141            |        | 32,402,212 |   |
|                                                                                                                                                                              |       |                  |        |   |   |
| Property, equipment and  construction in progress, net                                                                                                                            |       | 100,366,091           |        | 38,726,910 |   |
| Restricted cash                                                                                                                                                                   |       | 2,834,519             |        | 1,150,000 |   |
| Prepaid and other  non-current                                                                                                                                                    |       | 230,433               |        | — |   |
| Investment in Ecuador  property, net                                                                                                                                              |       | 1,570,020             |        | 1,757,604 |   |
| Total  assets                                                                                                                                                                     |       | $                     | 129,619,204 |   | $ | 74,036,726 |   |
|                                                                                                                                                                              |       |                  |        |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |       |                  |        |   |   |
|                                                                                                                                                                              |       |                  |        |   |   |
| Current liabilities:                                                                                                                                                              |       |                  |        |   |   |
| Accounts  payable                                                                                                                                                                 |       | $                     | 11,774,316  |   | $ | 7,376,310 |   |
| Accrued  liabilities                                                                                                                                                              |       | 4,384,049             |        | 2,849,376 |   |
| Other  liabilities                                                                                                                                                                |       | 263,439               |        | 101,975 |   |
| Accrued  interest payable                                                                                                                                                         |       | 458,279               |        | — |   |
| Current  maturity of long-term debt and capital lease obligation                                                                                                                  |       | 6,188,668             |        | 17,345 |   |
| Total  current liabilities                                                                                                                                                        |       | 23,068,751            |        | 10,345,006 |   |
| Asset retirement  obligation                                                                                                                                                      |       | 273,048               |        | — |   |
| Long-term debt                                                                                                                                                                    |       | 15,537,293            |        | 55,815 |   |
| Total  long-term liabilities                                                                                                                                                      |       | 15,810,341            |        | 55,815 |   |
|                                                                                                                                                                              |       |                  |        |   |   |
| Commitments and  contingencies (Note 14)                                                                                                                                          |       |                  |        |   |   |
|                                                                                                                                                                              |       |                  |        |   |   |
| Stockholders’ equity:                                                                                                                                                        |       |                  |        |   |   |
| Preferred stock, no par  value, 25,000,000 authorized; none issued and outstanding                                                                                                |       | —                |        | — |   |
| Common  stock, no par value, 250,000,000 authorized; 73,914,471 and 54,143,717 shares  issued and outstanding at December 31, 2007 and December 31, 2006,  respectively |       | 149,050,032           |        | 96,574,326 |   |
| Additional  paid in capital                                                                                                                                                       |       | —                |        | 5,092,341 |   |
| Stock  subscription receivable                                                                                                                                                    |       | —                |        | (230,825 | ) |
| Accumulated  deficit                                                                                                                                                              |       | (58,309,920           | )           | (37,799,937 | ) |
| Total  stockholders’ equity                                                                                                                                                  |       | 90,740,112            |        | 63,635,905 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                  |       | $                     | 129,619,204 |   | $ | 74,036,726 |   |

 

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

 

47

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**BPZ Resources, Inc. and SubsidiariesConsolidated Statements of Operations**

 
| ** **                                                       | ** ** | **Year ended  December 31,** | ** **  |
|------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                       | ** ** | **2007**                          | ** **  | **2006** | ** ** | **2005** | ** ** |
|                                                             |       |                              |        |   |   |   |   |
| Revenue                                                          |       | $                                 | 2,350,388   |   | $ | — |   | $ | — |   |
|                                                             |       |                              |        |   |   |   |   |
| Operating and administrative expenses:                           |       |                              |        |   |   |   |   |
| Lease operating expense                                          |       | 754,833                           |        | — |   | — |   |
| General and administrative                                       |       | 18,548,465                        |        | 11,531,864 |   | 5,805,226 |   |
| Geological, geophysical and engineering                          |       | 4,045,381                         |        | 2,048,742 |   | 998,131 |   |
| Depreciation, depletion and amortization                         |       | 792,531                           |        | 213,815 |   | 29,638 |   |
|                                                             |       |                              |        |   |   |   |   |
| Total operating  expenses                                        |       | 24,141,210                        |        | 13,794,421 |   | 6,832,995 |   |
|                                                             |       |                              |        |   |   |   |   |
| Operating loss                                                   |       | (21,790,822                       | )           | (13,794,421 | ) | (6,832,995 | ) |
|                                                             |       |                              |        |   |   |   |   |
| Other income (expense):                                          |       |                              |        |   |   |   |   |
| Income from investment in Ecuador property, net of  amortization |       | 264,031                           |        | 1,403,298 |   | 468,726 |   |
| Interest expense                                                 |       | —                            |        | (15,815 | ) | (11,149 | ) |
| Amortization of deferred financing costs                         |       | —                            |        | — |   | (67,561 | ) |
| Registration delay expense                                       |       | —                            |        | (3,552,513 | ) | (515,967 | ) |
| Interest income                                                  |       | 854,905                           |        | 787,455 |   | 509,808 |   |
| Other income/(expense)                                           |       | 200,904                           |        | (315,463 | ) | 42,149 |   |
|                                                             |       |                              |        |   |   |   |   |
| Total other  income (expense)                                    |       | 1,319,840                         |        | (1,693,038 | ) | 426,006 |   |
|                                                             |       |                              |        |   |   |   |   |
| Loss before income taxes                                         |       | (20,470,982                       | )           | (15,487,459 | ) | (6,406,989 | ) |
|                                                             |       |                              |        |   |   |   |   |
| Income taxes                                                     |       | 39,001                            |        | — |   | — |   |
|                                                             |       |                              |        |   |   |   |   |
| Net loss                                                         |       | $                                 | (20,509,983 | ) | $ | (15,487,459 | ) | $ | (6,406,989 | ) |
|                                                             |       |                              |        |   |   |   |   |
| Basic and diluted net loss per share                             |       | $                                 | (0.30       | ) | $ | (0.29 | ) | $ | (0.16 | ) |
|                                                             |       |                              |        |   |   |   |   |
| Weighted average common shares outstanding                       |       | 69,156,404                        |        | 53,751,761 |   | 40,899,291 |   |

 

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

 

48

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**BPZ Resources, Inc. and SubsidiariesConsolidated Statements of Stockholders’ Equity (Deficit) Years Ended December 31, 2007, 2006 and 2005**

 
| ** **                                                 | ** ** | **Common  Stock** | ** ** | **Additional  Paid-  in** | ** **  | **Stock  Subscription** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|---------------------------|-------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                 | ** ** | **Shares**             | ** ** | **Amount**                | ** **  | **Capital**             | ** ** | **Receivable**  | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balances, January 1, 2005                             |       | 16,581,385             |       | $                         | 12,967,238  |                    | $          | 7,755,231       |       | $           | (230,825   | ) | $ | (15,905,489 | ) | $ | 4,586,155 |   |
|                                                       |       | —                 |       |                      |        |                    |       |            |       |        |       |   |   |
| Stock-based compensation                                   |       | 35,000                 |       | 146,650                   |        | 300,000                 |       | —          |       | —      |       | 446,650 |   |
| Exercise of stock options assumed in acquisition           |       | 401,389                |       | 1,288,459                 |        | (1,288,459              | )          | —          |       | —      |       | — |   |
| Exercise of warrants                                       |       | 1,403,500              |       | 4,566,621                 |        | (698,361                | )          | —          |       | —      |       | 3,868,260 |   |
| Restricted stock awards                                    |       | 1,120,000              |       | 4,928,000                 |        | (3,992,172              | )          | —          |       | —      |       | 935,828 |   |
| Common stock issued to acquire property interest           |       | 250,000                |       | 1,112,500                 |        | —                  |       | —          |       | —      |       | 1,112,500 |   |
| Common stock sold for cash, net of offering costs          |       | 11,466,000             |       | 31,917,213                |        | —                  |       | —          |       | —      |       | 31,917,213 |   |
| Warrants issued in connection with sale of                 |       | —                 |       | (325,000                  | )           | 325,000                 |       | —          |       | —      |       | — |   |
| Common stock issued pursuant to merger earn-out  agreement |       | 9,000,000              |       | —                    |        | —                  |       | —          |       | —      |       | — |   |
| Common stock issued for registration delay expenses        |       | 92,705                 |       | 271,960                   |        | —                  |       | —          |       | —      |       | 271,960 |   |
| Net loss                                                   |       | —                 |       | —                    |        | —                  |       | —          |       | (6,406,989  | )          | (6,406,989 | ) |
| Balances at December 31, 2005                         |       | 40,349,979             |       | 56,873,641                |        | 2,401,239               |       | (230,825        | )          | (22,312,478 | )          | 36,731,577 |   |
|                                                       |       |                   |       |                      |        |                    |       |            |       |        |       |   |   |
| Stock-based  compensation                                  |       | 10,000                 |       | 43,900                    |        | 318,281                 |       | —          |       | —      |       | 362,181 |   |
| Exercise of stock options assumed in acquisition           |       | 275,000                |       | 882,750                   |        | (882,750                | )          | —          |       | —      |       | — |   |
| Long-term incentive compensation plan, net of  forfeitures |       | (8,500                 | )          | (143,599                  | )           | 3,006,926               |       | —          |       | —      |       | 2,863,327 |   |
| Deferred stock-based compensation adjustment               |       | —                 |       | —                    |        | —                  |       | —          |       | —      |       | — |   |
| Common stock issued to acquire property interest           |       | —                 |       | —                    |        | —                  |       | —          |       | —      |       | — |   |
| Common stock sold for cash, net of offering costs          |       | 12,652,000             |       | 36,835,500                |        | —                  |       | —          |       | —      |       | 36,835,500 |   |
| Warrants issued in connection with sale of common  stock   |       | —                 |       | (248,645                  | )           | 248,645                 |       | —          |       | —      |       | — |   |
| Common stock issued for registration delay expenses        |       | 865,238                |       | 2,330,779                 |        | —                  |       | —          |       | —      |       | 2,330,779 |   |
| Net loss                                                   |       | —                 |       | —                    |        | —                  |       | —          |       | (15,487,459 | )          | (15,487,459 | ) |
| Balances at December 31, 2006                         |       | 54,143,717             |       | 96,574,326                |        | 5,092,341               |       | (230,825        | )          | (37,799,937 | )          | 63,635,905 |   |
|                                                       |       |                   |       |                      |        |                    |       |            |       |        |       |   |   |
| Stock-based  compensation                                  |       | 5,000                  |       | 19,000                    |        | (24,891                 | )          | —          |       | —      |       | (5,891 | ) |
| Exercise of stock options assumed in merger                |       | 378,652                |       | 647,035                   |        | (647,035                | )          | —          |       | —      |       | — |   |
| Exercise of stock options                                  |       | 1,868,752              |       | 3,425,616                 |        | —                  |       | —          |       | —      |       | 3,425,616 |   |
| Long-term incentive compensation plan, net of  forfeitures |       | 898,350                |       | 12,020,140                |        | (6,954,646              | )          | —          |       | —      |       | 5,263,494 |   |
| Incentive earn-out shares                                  |       | 450,000                |       | —                    |        | 1,980,000               |       | —          |       | —      |       | 1,782,000 |   |
| Common stock sold for cash, net of offering costs          |       | 7,170,000              |       | 37,717,497                |        | (799,351                | )          | 230,825         |       | —      |       | 37,148,971 |   |
| Common stock dividend                                      |       | 9,000,000              |       | —                    |        | —                  |       | —          |       | —      |       | — |   |
| Adoption of SFAS 123(R)                                    |       | —                 |       | (1,353,582                | )           | 1,353,582               |       | —          |       | —      |       | — |   |
| Net loss                                                   |       | —                 |       | —                    |        | —                  |       | —          |       | (20,509,983 | )          | (20,509,983 | ) |
| Balances at December 31, 2007                         |       | 73,914,471             |       | $                         | 149,050,032 |                    | $          | —          |       | $           | —     |   | $ | (58,309,920 | ) | $ | 90,740,112 |   |

** **

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

 

49

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**BPZ Resources, Inc. and SubsidiariesConsolidated Statements of Cash Flows**

 
| ** **                                                                           | ** ** | **For the year ended December 31,** | ** **  |
|--------------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                           | ** ** | **2007**                                 | ** **  | **2006** | ** ** | **2005** | ** ** |
|                                                                                 |       |                                     |        |   |   |   |   |
| Cash flows from  operating activities:                                               |       |                                     |        |   |   |   |   |
| Net  loss                                                                            |       | $                                        | (20,509,983 | ) | $ | (15,487,459 | ) | $ | (6,406,989 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities:         |       |                                     |        |   |   |   |   |
| Stock-based  compensation                                                            |       | 7,039,603                                |        | 3,225,508 |   | 1,382,479 |   |
| Stock  issued for registration delay expenses                                        |       | —                                   |        | 2,330,779 |   | 271,960 |   |
| Depreciation,  depletion and amortization                                            |       | 792,531                                  |        | 213,815 |   | 29,638 |   |
| Amortization  of investment in Ecuador property                                      |       | 187,584                                  |        | 187,584 |   | 136,552 |   |
| Net  gain (loss) on the sale of asset                                                |       | 9,207                                    |        | (150 | ) |   |   |
| Amortization  of deferred financing fees                                             |       | 2,067                                    |        | — |   | 67,561 |   |
| Changes  in operating assets and liabilities:                                        |       |                                     |        |   |   |   |   |
| Increase  in accounts receivable                                                     |       | (2,950,089                               | )           | — |   | — |   |
| Increase  in value added tax receivable                                              |       | (4,336,849                               | )           | (2,797,143 | ) | — |   |
| Increase  in inventory                                                               |       | (1,200,269                               | )           | (1,945,781 | ) | — |   |
| Increase  in other assets                                                            |       | (298,783                                 | )           | (1,465,386 | ) | (865,070 | ) |
| Increase  in accounts payable                                                        |       | 4,398,006                                |        | 6,628,963 |   | 435,735 |   |
| Increase  in accrued liabilities                                                     |       | 1,534,673                                |        | 2,378,744 |   | 416,290 |   |
| Increase  in other liabilities                                                       |       | 161,464                                  |        | 48,804 |   | 70,516 |   |
| Net  cash used by operating activities                                               |       | (15,170,838                              | )           | (6,681,722 | ) | (4,461,328 | ) |
|                                                                                 |       |                                     |        |   |   |   |   |
| Cash flows from  investing activities:                                               |       |                                     |        |   |   |   |   |
| Property  and equipment additions                                                    |       | (55,766,279                              | )           | (34,575,535 | ) | (4,389,177 | ) |
| Restricted  cash                                                                     |       | (2,697,670                               | )           | 305,953 |   | (1,355,953 | ) |
| Net  cash used by investing activities                                               |       | (58,463,949                              | )           | (34,269,582 | ) | (5,745,130 | ) |
|                                                                                 |       |                                     |        |   |   |   |   |
| Cash flows from  financing activities:                                               |       |                                     |        |   |   |   |   |
| Borrowings                                                                           |       | 15,500,000                               |        | — |   | 96,828 |   |
| Repayments  of borrowings                                                            |       | (17,345                                  | )           | (15,093 | ) | (234,904 | ) |
| Deferred  loan fees                                                                  |       | (232,500                                 | )           | — |   | — |   |
| Proceeds  from exercise of warrants, net                                             |       | —                                   |        | — |   | 3,868,260 |   |
| Proceeds  from exercise of stock options, net                                        |       | 3,425,616                                |        | — |   | — |   |
| Proceeds  from sale of common stock, net                                             |       | 37,148,971                               |        | 36,835,500 |   | 31,917,213 |   |
| Net  cash provided by financing activities                                           |       | 55,824,742                               |        | 36,820,407 |   | 35,647,397 |   |
|                                                                                 |       |                                     |        |   |   |   |   |
| Net (decrease) increase  in cash and cash equivalents                                |       | (17,810,045                              | )           | (4,130,897 | ) | 25,440,939 |   |
| Cash and cash  equivalents at beginning of period                                    |       | 25,324,233                               |        | 29,455,130 |   | 4,014,191 |   |
| Cash and cash  equivalents at end of period                                          |       | $                                        | 7,514,188   |   | $ | 25,324,233 |   | $ | 29,455,130 |   |
|                                                                                 |       |                                     |        |   |   |   |   |
| Supplemental cash flow  information:                                                 |       |                                     |        |   |   |   |   |
| **Cash paid for:**                                                                   | ** ** | ** **                               | ** **  | ** ** | ** ** | ** ** | ** ** |
| Interest                                                                             |       | $                                        | 470,440     |   | $ | 15,815 |   | $ | 13,761 |   |
| Income tax                                                                           |       | 39,001                                   |        | — |   | — |   |
| **Non — cash items:**                                                           | ** ** | ** **                               | ** **  | ** ** | ** ** | ** ** | ** ** |
| Common stock issued for  property interest                                           |       | $                                        | —      |   | $ | — |   | $ | 1,112,500 |   |
| Warrants issued to  private placement agent                                          |       | —                                   |        | — |   | 325,000 |   |
| Purchase  and additions to equipment with the issuance of a capital lease obligation |       | 6,170,146                                |        | — |   | — |   |
| Accrued interest  capitalized to construction in progress                            |       | 458,279                                  |        | — |   | — |   |
| Depletion allocated to  production inventory                                         |       | 226,831                                  |        | — |   | — |   |
| Depreciation  on support equipment capitalized to construction in progress           |       | 474,421                                  |        | 195,755 |   | — |   |
| Asset retirement  obligation capitalized to property and equipment                   |       | 268,572                                  |        | — |   | — |   |

 

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

 

50

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** **

**BPZResources, Inc and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**December 31, 2007**

** **

**Note 1 — Basis of Presentation and SignificantAccounting Policies**

** **

**Organization**

** **

BPZ Resources, Inc.,(the “Company” or “BPZ”) a Texas corporation, is based in Houston, Texas withoffices in Lima, Peru and Quito, Ecuador. The Company is focused on theexploration, development and production of oil and natural gas in Peru andEcuador. It also intends to utilize part of our planned future natural gasproduction as a supply source for the complementary development of a Companyowned gas-fired power generation facility.

 

The Company maintains asubsidiary registered in Peru through our wholly owned subsidiary BPZ Energy, Inc.,a Texas corporation (“BPZ – Texas”). Currently, BPZ Energy has exclusive rightsand license agreements for oil and gas exploration and production covering atotal of approximately 2.4 million acres, in four blocks, in northwest Peru.The Company’s license contracts cover 100% ownership of Block Z-1 (739,205acres), Block XIX (472,860 acres), Block XXII (948,000 acres, also referred toas Area VI in previous filings) and Block XXIII (248,000 acres). The Block Z-1contract was signed in November 2001, the Block XIX contract was signed inDecember 2003 and Blocks XXII and XXIII were both signed in November 2007.  The Company’s license contracts provide foran initial exploration period of seven to thirteen years for Block Z-1and sevento ten years for Blocks XIX, XXII and XXIII. In addition, they require that the Company conduct specified activitieson the properties during this period. If the exploration activities are successful,the total contract term can extend up to 30 years for oil exploration andproduction and up to 40 years for gas exploration and production.

 

Through its wholly ownedsubsidiary, SMC Ecuador Inc., a Delaware corporation, and its registered branchin Ecuador, the Company owns a 10% non-operated working interest in an oil andgas producing property, Block 2, located in the southwest region of Ecuador(the “Santa Elena Property”). The license agreement covering the propertyextends through May 2016.

 

The Company is in theinitial stages of developing its oil and natural gas reserves and has recentlybegun producing oil under an extended well testing program from our recentdiscoveries.  To date its activities in Peruhave been primarily limited to analysis and evaluation of technical data on theproperties and preparation of the development plans for the properties,including detailed engineering and design of the power plant and gas processingfacilities, refurbishment of two of our offshore platforms, procuring machineryand equipment for an extended drilling campaign, obtaining all necessaryenvironmental and operating permits procuring development equipment andsecuring the required capital and financing to conduct the current plan ofoperation.

 

**CorvinaField**

 

***OilDevelopment***

 

  In March 2007, after a total of sixdrill stem tests were conducted on separate potential pay zones from the Lowerand Upper Zorritos formations, the CX11-21 XD well, the Company’s first well,tested positive for both gas and oil at commercially produciblequantities.  Subsequently, in June 2007the Company successfully recompleted the Corvina CX11-16X well as a natural gasproducing well and completed a total of four drill stem tests on various zonesin the well including one in a formation previously untested in the entirebasin.  In October, we completed sevendrill stem tests on the CX11—14D well in the Corinva Field.  The CX11-14D well tested positive for bothgas and oil at commercially producible quantities.  The first six tests were conducted in theUpper Zorritos formation, with the first two testing the oil zone and the otherfour testing the gas zone, while the seventh test targeted the Cardalitosformation located immediately above the Upper Zorritos.  On November 29, 2007, BPZ commenceddrilling on the CX11-18XD well.  The wellreached total depth of 8,792 feet (measured depth) on January 1, 2008,approximately one month ahead of schedule. The Company recently performed a series of safety and integrity tests onthe CX-11 Corvina platform including the surface equipment.  As part of the integrity testing of theservice equipment, it perforated the lower prospective oil sands identified inthe CX11-18XD well.  These lower sandstested oil and the results assisted in validating the Company’s Corvinageologic model.

 

The Company startedproducing oil from the CX11 platform under an extended well testing programbeginning on November 1, 2007.  By December 31,2007, it produced approximately 40,989 barrels of oil and sold approximately28,741 barrels to a refinery in Talara. The oil is delivered to the refinery by barge approximately 100 milessouth of the platform.  The remainder waskept in production inventory until such time it was delivered to Talara inearly 2008.

 

51

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Prior to December 2007,the Company had no significant revenues and was considered an exploratory stagecompany.  However, in December 2007,the Company delivered 28,741 barrels of oil. As a result, the Company is no longer considered an exploratory stagecompany as of December 31, 2007.

 

On June 13, 2007, the Company entered into a capitallease agreement, with an option to purchase, for two barges to assist inthe development of the Corvina Field. The two barges were towed to Peru whereone barge, the Nu’ uanu, is currently being used to transport oil between theCX11 platform and the refinery in Talara, approximately 100 miles south.  The other barge, the Nomoku, is currentlybeing fitted with the required equipment for its intended use as a floatingproduction, storage and offloading facility (“FPSO”) that will be moored nextto the CX11 platform.   However, we haveencountered some delays in deploying this barge due to scheduling.  The Company expects the Nomoku to be fullyfitted and operational by the end of the first or beginning of the secondquarter of  2008. Until such time theNomoku is fitted with the permanent production equipment, the Company isanticipating pumping oil directly to the Nu’ uanu using temporary productionequipment and then transporting the oil to the Talara refinery.

 

On October 24, 2007,the Company’s primary marine transportation contractor entered into two shortterm agreements with the commercial division of the Peruvian Navy to lease twotankers to transport oil to market. However, on January 30, 2008, one ofthe tankers sank after catching fire. Consequently, through its primary marine transportation contractor, theCompany is now leasing only one vessel from the Navy having a capacity ofapproximately 6,000 barrels.  The leaseis set to expire at the end of March 2008.

 

Currently all production(which had reached approximately 4,200 barrels of oil per day by late January2008) is shut-in due to the incident involving the Navy tanker.  At therequest of the OSINERGMIN, the government agency responsible for auditing thesafety of energy investments in Peru, we successfully performed a series ofsafety and integrity tests on the facilities at the CX-11 Corvina platform, includingthe equipment that was being used for the ongoing long-term testing of the 21XDand 14D wells.  We confirmed that the well testing equipment was inoperational condition.  On March 12, 2008 we received clearance from theOSINERGMIN, to resume operations at the CX-11 platform, including the scheduled18XD well drill stem test.  However, the four Corvina wells are currentlyshut-in while we complete the installation of sea-bed pipelines connecting theplatform to the transport barge, along with the required mooring systems, thatwill allow for an improved long-term testing program. Additionally, we arewaiting for final clarification from the appropriate authorities in Peruregarding the transportation of our crude oil to the refinery.

 

The Company has submittedall the requested reports and documentation generated during the investigationof the January 30, 2008 sinking of the Peruvian Navy tanker, Supe.  A number of organizations involved in theinvestigation have issued reports concluding there was no environmental damagedue to the incident.  Additionally, theCompany assisted the Peruvian Navy in conducting an underwater survey of theSupe, which established that the vessel does not represent a hazard tonavigation nor a marine pollution threat, as all its tanks were found to beempty.  The CX-11 Corvina platform andall its facilities, as well as the BPZ-01 tender barge, the four Corvina wells,and all the vessels supporting the operations have now been certified to be inoperational condition.

 

***Gas-to-Power Project***

 

The Corvina Gas-to-Power project, with an estimatedcapital budget of $115 million, entails the installation of a 10-mile gaspipeline from the CX-11 platform to shore, construction of gas processingfacilities and an approximately 160 megawatt (“MW”) simple-cycle electricgenerating plant.  The proposed powerplant site is located adjacent to an existing substation and power transmissionlines which, with certain upgrades, are expected to be capable of handling upto 360 MW of power. In order to support the Company’s proposed electricgeneration project, it commissioned an independent power market analysis forthe region. The Peruvian electricity market is deregulated and power istransported through an interconnected national grid managed by the Committeefor Economic Dispatching of Electricity (known as COES). Based on this study,the Company believes it will be able to sell economic quantities of electricityfrom the initial 160 MW power plant. The market study also indicates that theremay be future opportunities for the Company to generate and sell significantlygreater volumes of power into the Peruvian and Ecuadorian power markets.  The Company plans to own 100% of the powerplant. Accordingly, its revenues from the natural gas delivered to the powerplant will be derived from the sale of electricity, which is currentlyprojected for early 2010, though this schedule is subject to many factorsoutside its control, including obtaining all necessary financing, equipment andno assurance can be given that the Company can meet this schedule.

 

The Company is currently working on securing andfinalizing funding for its gas to power initiatives comprised of approximately$120 million of senior debt to be syndicated by IFC, which is expected to closein August of 2008. This financing will be subject to identification of thelending syndicate members and subsequent negotiation and approval of thenecessary loan documentation.

 

**Reincorporation, Name Change and InternalRestructuring**

** **

On October 11, 2007,BPZ Energy, Inc., a Colorado corporation, formerly named Navidec, Inc.,(“Navidec”), completed a reincorporation from the State of Colorado to theState of Texas pursuant to the Plan of Conversion as approved by theshareholders at the 2007 annual meeting of shareholders held on August 17,2007. The related filings with the Secretary of State of Texas also included achange of the company’s name from BPZ Energy, Inc. to BPZ Resources, Inc.,in connection with an ongoing review of certain internal reorganization mattersrelated to our international tax planning and corporate structure. The Companycontinues to do business under the name BPZ Energy in its regular businessoperations.

 

No changes to the membersof the Board of Directors, the management, or the operations of the Companywere made in connection with the reincorporation from a Colorado corporation toa Texas corporation. The Company remains the same business entity following thereincorporation to Texas, with all of the assets, rights, privileges and powersof, and all property owned by, all debts due to, as well as any other causes ofaction belonging to the predecessor Colorado entity. As part of thereincorporation, a new Certificate of Formation and new Bylaws were adopted,and now govern the rights of holders of the Company’s common stock. At theeffective time of the reincorporation, each outstanding share of the Coloradoentity prior to the reincorporation was automatically converted into one shareof the Texas entity.

 

As part of the restructuring,we have created two British Virgin Island limited partnership holding companiesfor various BPZ entities.  Each holdingcompany is owned 90% by BPZ Energy, Inc. as general partner and, in compliancewith local requirements, 10% by an individual nominee limited partner, one ofwhom is our President and Chief Executive Officer.  Although 10% of each of the holding companiesis nominally owned by an individual, these individuals have agreed to enterinto nominee agreements to assign all associated economic interest back to us,and consequently we treat these subsidiary holding companies and theirsubsidiaries as “wholly-owned” for accounting purposes.  By the time we complete the restructuring, weintend to replace the individual nominees with another wholly-owned subsidiaryto serve as limited partner of the holding companies.

 

**Navidec Merger Transaction**

** **

On September 10,2004, BPZ Energy, Inc., a Texas (“BPZ-Texas”) corporation consummated areverse merger with Navidec, whereby BPZ-Texas became a wholly ownedsubsidiary of Navidec (the “Merger”). As a result of the Merger, theshareholders of BPZ-Texas received the majority of the voting interest andcontrol of the Board of Directors and management 

 

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of the combined entity.For accounting purposes, BPZ-Texas was treated as the acquiring entity. Allfinancial statements herein represent the historical financial statements ofthe accounting acquirer, BPZ — Texas. See “Business—Navidec Merger Transaction”for detailed discussion regarding the Merger. On February 4, 2005, Navidecchanged its name to BPZ Energy, Inc. Although the Company’s name has beenchanged, the pre-merger company may be referred to as Navidec in this filing,as the context may require, to avoid confusion.

 

The Merger Agreementprovided for the immediate issuance by Navidec of 9,000,000 shares of itscommon stock to the shareholders of BPZ-Texas and the future issuance of anadditional 18,000,000 shares on an earn-out basis if the Company achievedcertain reserve and production goals. The first 9,000,000 earn-out shares werecontingent on achieving certain reserve targets, which were achieved in December 2004.The remaining 9,000,000 earn-out shares were contingent on the Company becomingentitled to receive as its proportionate share from gross production from anyoil and gas wells owned or operated by the Company not less than 2,000 barrelsof oil per day or its equivalent (approximately 12 million cubic feet of gasper day) prior to December 28, 2007. In November 2007 this production target was achieved based oncertification by an independent engineering firm that the Company’s productionin Peru has met or exceeded the required level of production.

 

For accounting purposes, the earn-out arrangement istreated as a stock dividend because the earn-out is payable to the shareholdersof the accounting acquirer, BPZ-Texas as contingent merger consideration.Accordingly, except for a retroactive increase in the number of common sharesoutstanding for all periods presented, no accounting entry is required upon theissuance of the earn-out shares.

 

**Basis of Presentation and****Principles of Consolidation**

 

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries and branch offices.All intercompany balances and transactions have been eliminated.

 

The Company’s accounting policy regarding partnershipor joint venture interests in oil and gas properties is to consolidate suchinterests on a pro-rata basis in accordance with accepted practice in the oiland gas industry. However, the Company has not been able to receive timelyinformation to allow it to proportionately consolidate the minoritynon-operated working interest owned by its consolidated subsidiary, SMC EcuadorInc. See Note 6 “Investment in Ecuador Property and Note Payable” to theConsolidated Financial Statements for further discussion regarding the Company’sinvestment in its Ecuador property. Accordingly, the Company accounts for thisinvestment under the cost method. As such, the Company records its share ofcash received or paid attributable to this investment as other income orexpense.

 

**Revenue Recognition**

 

TheCompany does not recognize revenues until they are realized or realizable andearned. Revenues are considered realized or realizable and earned when: (i) persuasiveevidence of an arrangement exists, (ii) delivery has occurred or serviceshave been rendered, (iii) the seller’s price to the buyer is fixed ordeterminable and (iv) collectibility is reasonably assured.

 

The Company sells its production in the Peruviandomestic market on a contract basis. Revenue is recorded net of royalties when the purchaser takes deliveryof the oil.  At the end of the period,oil that has been produced but not sold is recorded as inventory at the lowerof cost or market.  Cost is determined ona weighted average based on production costs.

 

**Reporting and Functional Currency**

** **

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as itsofficial currency. Peru, however, uses its local currency, Nuevo Soles, inaddition to the U.S. Dollar and therefore our financial results are subject toforeign currency gains and losses. We have adopted Statement of FinancialAccounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”,which requires that the translation of the applicable foreign currency intoU.S. dollars be performed for balance sheet monetary accounts using currentexchange rates 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 gains or losses resulting from suchtranslation are included in other income and expense in the consolidatedstatements of operations. Due to the relatively low level of activity to-dateand the relatively steady exchange rate in Peru, a translation gain ofapproximately $190,000 was recognized during the year ended December 31,2007 and a translation gain $56,000 was recognized during the year ended December 31,2006.  The primary reason for thetranslation difference related to the early recovery of Value Added Tax in Peru(“IGV”), which by Peruvian law must be transacted and accounted for in thelocal currency.

 

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**Useof Estimates**

** **

The preparation of the consolidated financialstatements in accordance with U.S. generally accepted accounting principlesrequires management to make certain estimates and assumptions. These estimatesand assumptions affect the reported amounts of assets, liabilities, revenuesand expenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities. Actual results could differ from theseestimates.

 

**Cashand Cash Equivalents**

** **

The Company considers cash on hand, cash in banks,money market mutual funds and highly liquid debt instruments purchased with anoriginal maturity of three months or less to be cash equivalents. Certain ofthe Company’s cash balances are maintained in foreign banks which are not coveredby deposit insurance. The cash balance in the Company’s U.S. bank accounts mayexceed federally insured limits.

 

**RestrictedCash**

** **

As discussed in Note 7, “Restricted Cash” containedherein under notes to the Consolidated Financial Statements, the Company hassecured various performance bonds, collateralized primarily by certificates ofdeposit, to guarantee its obligations and commitments in connection with itsexploratory properties in Peru. All of the performance bonds have been issuedby Peruvian banks and their terms are dictated by the corresponding LicenseContract or Agreement.

 

****Allowancefor Doubtful Accounts****

 

Currently, the Company’scontract terms regarding oil sales have a relatively short settlementperiod.  However, the Company regularlyreviews all aged accounts receivables for collectability and establishes anallowance as necessary for balances greater than 90 days outstanding.  Currently all receivables are current or wereoutstanding less than thirty days.  It isthe Company’s belief that there are no balances in accounts receivable thatwill not be collected and that an allowance was not necessary at December 31,2007.  There was no receivable balance asof December 31, 2006.

 

**Property,Equipment and Construction in Progress**

** **

The Company follows the “successful efforts” method ofaccounting of its costs of acquisition, exploration and development of oil andgas properties. Under this method, oil and gas lease acquisition costs andintangible drilling costs associated with exploration efforts that result inthe discovery of proved reserves and costs associated with developmentdrilling, whether or not successful, are capitalized when incurred. Certaincosts of exploratory wells are capitalized pending determinations that provedreserves have been found. If the determination is dependent upon the results ofplanned additional wells and required capital expenditures to produce thereserves found, the drilling costs will be capitalized as long as sufficientreserves have been found to justify completion of the exploratory well andadditional wells are underway or firmly planned to complete the evaluation ofthe 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 described in the preceding sentence are not required.

 

The Company assesses its capitalized exploratory wellspending evaluation each quarter to determine whether costs should remaincapitalized or should be charged to earnings. Other exploration costs,including geological, geophysical and engineering costs, are expensed asincurred. The Company recognizes gains or losses on the sale of properties,should they occur, on a field-by-field basis.

 

Projects under construction are not depreciated oramortized until placed in service. For assets we construct, we capitalizedirect costs, such as labor and materials, and indirect costs, such as overheadand interest. As of December 31, 2007, property and equipment consists ofoffice equipment, vehicles and leasehold improvements made to the Company’soffices. All such values are stated at cost and are depreciated on astraight-line basis over the estimated useful life of the assets which isranges between three and five years, or the term of the lease. Barges andrelated equipment are depreciated on a straight-line basis over the estimateduseful life of the asset which is between fifteen and twenty years.  Maintenance and repairs are expensed asincurred. Replacements, upgrades or expenditures which improve and extend thelife 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.

 

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**Impairmentof Long-Lived Assets**

** **

The Company periodically evaluates the recoverabilityof the carrying value of its long-lived assets, goodwill and identifiableintangibles by monitoring and evaluating changes in circumstances that mayindicate that the carrying amount of the asset 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 decrease in the market value of an asset, asignificant change in the extent or manner in which an asset is used or asignificant physical change in an asset, a significant adverse change in legalfactors or in the business climate that could affect the value of an asset oran adverse action or assessment by a regulator, an accumulation of costs significantlyin excess of the amount originally expected to acquire or construct an asset,and/or a current period operating or cash flow loss combined with a history ofoperating or cash flow losses or a projection or forecast that demonstratescontinuing losses associated with an asset used for the purpose of producingrevenue.

 

The Company considers historical performance andanticipated future results in its evaluation of potential impairment.Accordingly, when indicators of impairment are present, the Company evaluatesthe carrying value of these assets in relation to the operating performance ofthe business and future discounted and non-discounted cash flows expected toresult from the use of these assets. Impairment losses are recognized when the expectedfuture cash flows from an asset are less than its carrying value.

 

**StockBased Compensation**

** **

On January 1, 2006, the Company adopted SFAS No. 123— Revised 2004, *Share-Based Payment*, whichestablishes accounting for stock-based payment transactions for employeeservices and goods and services received from non-employees. SFAS 123(R) isa revision of SFAS No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”), and supersedes APB No. 25, *Accounting for Stock Issued to Employees*. Under the provisionsof SFAS 123(R), stock-based compensation cost is measured at the date of grant,based on the calculated fair value of the award, and is recognized as expenseover the employee’s or non-employee’s service period, which is generally thevesting period of the equity grant.

 

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

 

**Capitalized Interest**

 

Certaininterest costs have been capitalized as part of the cost of oil and gasproperties under development, including wells in progress and relatedfacilities.  Total interest costscapitalized during the year ended December 31, 2007 was $0.9 million.  No interest was capitalized during the yearsended December 31, 2006 and 2005 due to the lack of operational debtduring those periods.

 

**IncomeTaxes**

** **

The Company accounts for income taxes using theliability method. Under this method, deferred tax assets and liabilities aredetermined based on differences between the financial reporting and tax basisof assets and liabilities, and are measured using the enacted tax rates andlaws that will be in effect when the differences are expected to reverse.Valuation allowances are established when necessary to reduce deferred taxassets to the amount expected to be realized.

 

**Environmental**

** **

The Company is subject to environmental laws andregulations of various U.S. and international jurisdictions. These laws andregulations, which are subject to change, regulate the discharge of materialsinto the environment and may require the Company to remove or mitigate theenvironmental effects of the disposal or release of petroleum or chemicalsubstances at various sites.

 

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Environmental costs that relate to current operationsare expensed or capitalized as appropriate. Costs are expensed when they relateto an existing condition caused by past operations and will not contribute tocurrent or future revenue generation. Liabilities related to environmentalassessments and/or remedial efforts are accrued when property or services areprovided and when such costs can be reasonably estimated.

 

**Lossper Common Share**

** **

In accordance with provisions of SFAS No. 128,Earnings per Share, basic earnings per share is computed on the basis of theweighted-average number of common shares outstanding during the periods.Diluted earnings per share is computed based upon the weighted-average numberof common shares outstanding plus the assumed issuance of common shares for allpotentially dilutive securities. Diluted earnings per share equals basicearnings per share for the periods presented because the effects of potentiallydilutive securities are antidilutive.

 

**Recent Accounting Pronouncements**

 

***ShareBased Payments.***

 

On December 21,2007, the SEC released Staff Accounting Bulletin, (“SAB 110”) “Share-BasedPayment” which will no longer allow the use of the “Simplified” method toestimate the expected terms as on the variables to determine the fair value ofshare-based payments.  With a limitednumber of exceptions, companies can continue to use the simplified method.  However, doing so requires the types ofgrants for which the Simplified method is used if not for all grants, and theperiods for which the Simplified method is being used.  The adoption of this Staff AccountingBulletin is not expected to have a material impact on our consolidatedfinancial position, results of operations, or cash flows.

 

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

 

In September 2006, the FASB issued SFAS No. 157**,**”FairValue Measurements”, which addresses how companies should measure fair valuewhen companies are required to use a fair value measure for recognition ordisclosure purposes under generally accepted accounting principles (“GAAP”). Asa result of SFAS 157, there is now a common definition of fair value to be usedthroughout GAAP. SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose years. Although the disclosure requirements may be expanded where certainassets or liabilities are fair valued such as those related to stockcompensation expense and hedging activities, the Company does not expect theadoption of SFAS 157 to have a material impact on the Company’s consolidatedfinancial position, results of operations, or cash flows.

 

***TheFair Value Option for Financial Assets and Financial Liabilities***

 

In February 2007,the FASB issued SFAS 159, *The Fair ValueOption for Financial Assets and Financial Liabilities, Including an Amendmentof FASB Statement No. 115,* which will become effective on January 1,2008. FAS 159 permits entities to measure eligible financial assets, financialliabilities and firm commitments at fair value, on an instrument-by-instrumentbasis, that are otherwise not permitted to be accounted for at fair value underother generally accepted accounting principles. The fair value measurementelection is irrevocable and subsequent changes in fair value must be recordedin earnings. The Company will adopt this statement in the first quarter of 2008and it does not expect to elect the fair value option for any eligiblefinancial instruments and other items.

 

***BusinessCombinations***

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations*, which replaces FASB Statement No. 141.SFAS 141(R) establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any non- controlling interest in theacquiree and the goodwill acquired. SFAS 141(R) also establishesdisclosure requirements that will enable users to evaluate the nature andfinancial effects of the business combination. SFAS 141(R) is effectivefor acquisitions that occur in an entity’s fiscal year that begins after December 15,2008, which will be the company’s fiscal year 2009. The Company does not expectthe adoption of SFAS No. 141R to have a material impact on the ourconsolidated financial position, results of operations or cash flows.

 

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***NoncontrollingInterests in Consolidated Financial Statements.***

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51*.SFAS 160 requires that accounting and reporting for minority interests will berecharacterized as noncontrolling interests and classified as a component ofequity. SFAS 160 also establishes reporting requirements that providesufficient disclosures that clearly identify and distinguish between theinterests of the parent and the interests of the noncontrolling owners. SFAS160 applies to all entities that prepare consolidated financial statements,except not-for-profit organizations, but will affect only those entities thathave an outstanding noncontrolling interest in one or more subsidiaries or thatdeconsolidate a subsidiary. This statement is effective for fiscal yearsbeginning after December 15, 2008.  The Company does not expectthe adoption of SFAS No. 160 to have a material impact on our consolidatedfinancial position, results of operations or cash flows.

 

**Note 2 — Value Added TaxReceivable**

 

Value-added tax (referred to as “IGV”in Peru) is generally imposed on goods and services at a rate of 19%. Perucurrently has an IGV early recovery program for companies during theexploration phase. Under this program, IGV paid on the acquisition of certaingoods and services used directly in hydrocarbon exploration activities can berecovered prior to a commercial discovery taking place or production andrevenue billings begin. Because the Company has oil sales, it is no longereligible for the IGV early recovery program.

 

TheCompany’s value added tax receivable balance as of December 31, 2007 was$7.5 million. Of this balance, the Company has filed claims with the Peruviantax authority to recover approximately $2.9 million under the IGV earlyrecovery program. During the year ended, December 31, 2007 the Companyaccrued approximately $11.4 million for IGV related to expenditures during theyear and offset IGV by approximately $0.5 million related to the sale of oil inDecember 2007.  Approximately $6.6million of IGV has been collected during the year ended December 31, 2007.

 

During the year ended December 31,2006 the Company received a refund of approximately $2.2 million under the IGVearly recovery program.  The Company’svalue added tax receivable balance as of December 31, 2006 was $3.2million.

 

**Note 3 — Inventory**

 

Inventories consistprimarily of tubular goods, accessories and spare parts for productionequipment, stated at the lower of average cost or market.  The balance associated with tubular goods,accessories and spare parts inventory at December 31, 2007 and 2006 was$2.8 million and $2.0 million, respectfully.

 

The Company also maintains crude oil inventories in storage barges.These inventories are also stated at the lower of average cost or market value.Cost is determined on a weighted average basis based on production costs.  The product inventory at December 31,2007 consisted of approximately 12,248 barrels of crude oil at an estimatedcost of $548,391 or $44.77 per barrel. There was no product inventory as of December 31, 2006.

 

**Note4 — Prepaid and Other Current Assets**

** **

Below is a summary of other current assets as of December 31,2007 and 2006:

 
| ** **                  | ** ** | **2007**  | ** ** | **2006** | ** ** |
|-----------------------------|------------|-----------|------------|----------|------------|
|                        |       |      |       |     |       |
| Prepaid expenses  and other |       | $         | 590,784    |     | $          | 763,480 |   |
| Deposits                    |       | 51,964    |       | 68,367   |       |
| Prepaid  insurance          |       | 1,015,676 |       | 517,974  |       |
| Insurance  receivable       |       | 612,033   |       | 612,033  |       |
| Interest  receivable        |       | 825       |       | 10,646   |       |
|                        |       | $         | 2,271,282  |     | $          | 1,972,500 |   |

 

Prepaidexpenses and other are primarily related to prepayments for drilling services,equipment rental and material procurement. Deposits are primarily rentdeposits in connection with the Company’s offices in Houston and Peru.  Prepaid insurance consists of premiumsrelated to the Company’s operations as well as general liability and directorsand officer’s insurance policies. Additional coverage was procured in responseto increased business activity for the year ended December

 

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31, 2007.Insurance receivable isrelated to the barge incident which occurred in early August 2006. TheCompany incurred an operational delay of approximately three weeks resultingfrom a navigation incident which caused the BPZ-01 barge to be grounded on asand bank in Talara Bay in northwest Peru during the second mobilization tripto the Corvina platform. As of December 31, 2007, a claim of approximately$712,000 for repairs is expected to be filed with the insurance carrier. Adeductible of $100,000 will be applied to this insurance claim when reimbursed.See Note 14 “Commitments and Contingencies”, included herein, for furtherdiscussion.

 

**Note5 — Property, Equipment and Construction in Progress**

** **

Below is a summary of property, equipment andconstruction in progress as of December 31, 2007 and 2006:

 
| ** **                                              | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|---------------------------------------------------------|------------|------------|-------------|------------|------------|
|                                                    |       |       |        |       |       |
| Construction in  progress:                              |       |       |        |       |       |
| Power plant and  related equipment                      |       | $          | 3,486,309   |       | $          | 3,581,069 |   |
| Platforms and  wells                                    |       | 25,220,425 |        | 25,759,009 |       |
| Pipelines and  processing facilities                    |       | 4,412,677  |        | 2,535,593  |       |
| Producing  properties                                   |       | 56,159,488 |        | —     |       |
| Barge and  related equipment                            |       | 11,970,171 |        | 6,461,877  |       |
| Office  equipment, leasehold improvements, and vehicles |       | 1,040,613  |        | 828,727    |       |
| Accumulated  depreciation and amortization              |       | (1,923,592 | )           | (439,365   | )     |
| Net property,  equipment and construction in process    |       | $          | 100,366,091 |       | $          | 38,726,910 |   |

 

During the year ended December 31,2007, the Company incurred costs of $63.1 million associated with itsdevelopment initiatives for the exploration and production of natural oil andgas reserves and the complementary development of proprietary gas-fired powergeneration for sale in Peru.

 

The Company is in the initial stages of developing itsoil and natural gas reserves and it has begun producing oil under an extendedwell testing program from its recent discoveries.  To date our activities in Peru have beenprimarily limited to analysis and evaluation of technical data on theproperties and preparation of the development plans for the properties,including detailed engineering and design of the power plant and gas processingfacilities, refurbishment of two of our offshore platforms, procuring machineryand equipment for an extended drilling campaign, obtaining all necessaryenvironmental and operating permits and securing the required capital andfinancing to complete the current plan of operation.  In March 2007, after a total ofsix drill stem tests were conducted on separate potential pay zones from the Lowerand Upper Zorritos formations, the CX11-21 XD well, our first well, testedpositive for both gas and oil in quantities that we believe to be commerciallyproducible.  Subsequently, in June 2007we successfully recompleted the Corvina CX11-16X well as a natural gasproducing well and completed a total of four drill stem tests on various zonesin the well including one in a formation previously untested in the entirebasin.  In October, we completed sevendrill stem tests on the CX11—14D well in the Corinva Field.  The CX11-14D well tested positive for bothgas and oil at commercially producible quantities.  The first six tests were conducted in theUpper Zorritos Formation, with the first two testing the oil zone and the otherfour testing the gas zone, while the seventh test targeted the Cardalitosformation located immediately above the Upper Zorritos.  On November 29, 2007, drilling commencedon the CX11-18XD well.  The well reachedtotal depth of 8,792 feet (measured depth) on January 1, 2008, approximatelyone month ahead of schedule.   TheCompany recently performed a series of safety and integrity tests on the CX-11Corvina platform including the surface equipment.  As part of the integrity testing of thesurface equipment, it perforated the lower prospective oil sands identified inthe CX11-18XD well.  The lower sandstested oil and the results assisted in validating our Corvina geologic model.

 

In conjunction with the gas-to-power project, the recentdiscovery of oil reserves in the Corvina field has prompted the Company tosimultaneously direct its attention towards accelerating the development ofpotential oil production in the Corvina field. On June 13, 2007, theCompany entered into a capital lease agreement, with an option topurchase, for two barges to assist in the development of the Corvina oil. Thetwo barges were towed to Peru where they are being fitted with the requiredequipment for their intended use. One of these barges will be moored next tothe CX11 platform, and will act as a floating production, storage andoffloading facility (“FPSO”) for oil produced from the Corvina field. TheCompany has also identified and placed orders for the necessary oil productionfacilities to be installed on the FPSO barge. The second barge will be used tooffload the produced oil from the FPSO and transport it to a refinery locatedapproximately 100 miles to the south in the port of Talara. The capital lease for thetwo barges began in August 2007 and expires in November 2009. 

 

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Lease payments are variable based on the working status ofthe barges with a purchase option of $5.0 million after the first year of thelease and $4.0 million after the maturity date of the lease. The assets will bedepreciated over the term of the capital lease obligation. The capitallease assets were recorded at $6.2 million, which represents the present valueof the minimum lease payments, or the aggregate fair market value of theassets. SeeNote 9 “Debt”, included herein, for further discussion.

 

The Company began producing from the 21XD and the 14D wellsunder an extended well testing program. As a result, the costs associated with both wells, approximately $55.9million was transferred from construction in progress to producing properties.

 

In addition, the Company incurredcosts for office equipment and leasehold improvements for its offices inHouston, Peru and Ecuador. In accordance with “successful efforts” method ofaccounting, the Company capitalized $474,378 of depreciation expense related tosupport equipment to construction in progress as well as capitalized interestof approximately $930,786 to construction in progress during the year ended December 31,2007.

 

**Note6 — Investment in Ecuador Property and Note Payable**

** **

The Company has a 10% net investment interest in anoil and gas property in Ecuador (the “Santa Elena Property”) totaling $1.6million and $1.8 million as of December 31, 2007 and 2006, respectively.The Company accounts for this investment under the cost method and records itsshare of cash received or paid as other income or expense. Since the Company’sinvestment represents ownership of an oil and gas property, which is adepleting asset, the Company is amortizing the cost of the investment on a straight-linebasis over the remaining term of the license agreement which expires in May 2016.Accordingly, the Company recorded amortization expense of $187,584 in each ofthe years ended December 31, 2007 and 2006.

 

**Note7 — Restricted Cash**

** **

In connection with its properties in Peru, the Company hasobtained five performance bonds totaling $6.0 million to insure certainobligations and commitments, of which one relates to a guarantee under aservice contract and four relate to performance obligations under the licensecontracts for Blocks Z-1, XIX, XXII and XXIII.

 

As of December 31,2007, the Companysecured a  $1.0million performance bond to guarantee payment under a service agreement.  The bond expired in January 2008 at which time the cash was refunded.  Accordingly the amount was recorded as acurrent asset at December 31, 2007.

 

Additionally,as of December 31, 2007, the Company had restricted cash deposits of $2.8 million, which partially collateralizes the performance bondsunder the License Contracts. In addition to the cash collateral posted by theCompany, an individual shareholder of the Company had provided a guarantee inthe amount of $200,000 to the financial institution that issued one of thebonds to secure the Company’s performance. During 2004, the Companyissued 236,528 shares to that individual investor for $119,175 of cash proceedsand a subscription receivable of $230,825 for the guarantee. During the year ended December 31, 2007, theguarantee was replaced by a deposit of an additional $95,000 by the Company tothe same financial institution and the Company received the $230,825 cashproceeds related to the subscription receivable.  See, Note 14 “Commitment and Contingencies” below forfurther details of our performance bonds obligation.

 

All of the performance bonds were issued by Peruvianbanks and their terms are governed by the corresponding license contract ortechnical evaluation agreement.

 

**Note8 —Asset Retirement Obligation**

** **

An obligation was recorded for theplug and abandonment of the producing oil wells, the 21XD and the 14D, inaccordance with the provisions of SFAS No 143 “Accounting for Asset RetirementObligations” (“ARO”).  See Note 14 “Commitmentsand Contingencies”, included herein, for further discussion.

 

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***Activity related to the Company’s asset retirementobligation (“ARO”) for December 31, 2007 and 2006 is as follows:***

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| ARO as of the  beginning of the period |       | $        | —     |     | $          | — |   |
| Liabilities  incurred during period    |       | 268,572  |       | —   |       |
| Liabilities  settled during period     |       | —   |       | —   |       |
| Accretion  expense                     |       | 4,476    |       |     |       |
| ARO as of the  end of the period       |       | $        | 273,048    |     | $          | — |   |

*** ***

**Note9 —Debt**

** **

The recentdiscovery of oil reserves in the Corvina field has prompted the Company to directits attention towards accelerating the development of potential oil productionin the Corvina field. On June 13, 2007 the Company entered into a capitallease agreement, with an option to purchase, for two barges to assist in thedevelopment of the Corvina oil. The capital lease for the two barges began in August 2007and expires in November 2009. The lease contains a purchase option whichthe Company anticipates, for accounting purposes, it will exercise on the 15thmonth of the lease term. Lease payments are variable, based on the workingstatus of the barges, with a purchase option of $5 million after the first yearof the lease and $4 million after the maturity date of the lease. The capitallease obligation was recorded at the present value of the minimum leasepayments at an imputed discount rate of 18%, which reflects the Company’sincremental borrowing rate for this transaction. The capital lease obligationwas recorded at $6.2 million, which represents the present value of the minimumlease payments, or the fair market value of the debt obligation.

 

In addition, on December 31,2007, the Company had long-term debt of approximately $15.5 million compared to$55,000 in long-term debt as of December 31, 2006.  The difference in long-term debt is relatedto the IFC convertible debt.  On November 19,2007, a convertible debt agreement between IFC and the Company was entered intofor approximately $15.5 million.  Theterms of the loan agreement stipulate a conversion price of $10.39 per shareand includes a forced convert price of $18.19 per share, based on the averageclosing price over twenty consecutive business days. The instrument has a 10year term with a variable interest rate of 2% per annum above 6-month LIBOR(6.863% at December 31, 2007).   Theloan from the IFC is unsecured, but restricts our ability to pledge assets toanother lender unless certain conditions are met.  The IFC loan does notrestrict our ability to issue additional capital stock, but does call for anadjustment in its conversion price into BPZ common stock based on the terms ofany subsequent equity offering.  The agreement contains customary defaultand cross-default provisions along with covenants restricting our ability topay dividends and the disposition of assets.  We are required to maintaina required ratio of Balance Sheet Liabilities to Tangible Net Worth (as definedin the Loan Agreement), calculated quarterly, of no greater than 70:30. As of December 31, 2007, we were in compliance with all financialcovenants.

 

Long-term debt forboth 2007 and 2006 also includes two secured loans for the purchase of officefurniture. Both loans have a term of 60 months, bearing interest at 5.94% and9.44%, with principal and interest payments due on a monthly basis.

 

Maturities of debtare as follows:

 
| Less than one  year   |   | $          | 6,188,668  |   |
|-----------------------|--------|------------|------------|--------|
| One to three  years   |   | 37,293     |       |
| Three to five  years  |   | —     |       |
| More than five  years |   | 15,500,000 |       |
| Total                 |   | $          | 21,725,961 |   |

 

**Note10 — Stockholders’ Equity**

** **

TheCompany has 25,000,000 shares of preferred stock, no par value and 250,000,000shares of common stock, no par value, authorized for issuance.

 

60

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**Private Placements of Common Stock**

 

On May 4, 2007, with anover-allotment purchase that closed on June 15, 2007, the Companycompleted a private placement of 7,170,000 shares of common stock, no parvalue, to accredited investors pursuant to a Subscription Agreement. The commonstock was priced at $5.25 per share and the over-allotment was priced at $5.40per share resulting in proceeds to the Company of approximately $37.7 million.No warrants or dilutive securities were issued in connection with the offering.The offering was placed directly by the Company. A placement fee of 2% of thegross proceeds of this transaction was paid to Morgan Keegan for investmentservices and consulting related to the offering. The registration statement wasdeclared effective by the Securities and Exchange Commission on June 20,2007.

 

**StockSubscription Receivable**

** **

During2004, the Company issued 236,528 shares to an individual investor for $119,175of cash proceeds and a subscription receivable of $230,825 for a guaranteeletter.The guarantee letter was associated with the first exploration phase of BlockZ-1.  During the year ended December 31,2007, the guarantee was replaced by a deposit of an additional $95,000 by theCompany to the same financial institution. Additionally, during 2007 the Company received the $230,825 cashproceeds related to the subscription receivable.  See Note 7 “Restricted Cash”, included herein,for further discussion.

 

**PotentiallyDilutive Securities**

** **

In addition to the shares issued and outstanding, theCompany has the following potentially dilutive securities. None of thesepotentially dilutive shares have been included in the calculation of earningsper share as the effect would be anti-dilutive.

 
| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Stock options  outstanding                                          |       | 4,175,448             |       | 4,306,152 |   | 2,878,652 |   |
| Warrants  outstanding                                               |       | 250,000               |       | 250,000 |   | 100,000 |   |
| Shares issuable  to consultant for services                         |       | —                |       | — |   | 10,000 |   |
| Contingent  incentive earn-out shares                               |       | —                |       | 450,000 |   | 485,000 |   |
| Earn-out shares                                                     |       | —                |       | — |   | — |   |
| Contingent  Merger earn-out shares                                  |       | —                |       | 9,000,000 |   | 9,000,000 |   |
| Shares issuable  under IFC convertible debt agreement               |       | 1,491,819             |       | — |   | — |   |
| Total  potentially dilutive securities issued                       |       | 5,917,267             |       | 14,006,152 |   | 12,473,652 |   |
| Shares available  pursuant to Long-Term Incentive Compensation Plan |       | 3,152,450             |       | 1,156,000 |   | 2,880,000 |   |

 

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

 

Prior to January 1,2006, the Company accounted for stock-based compensation in accordance withSFAS No. 123.As allowed under SFAS No. 123,the Company accounted for its stock-based compensation to employees using theintrinsic value method of accounting which bases compensation expense on thedifference between the quoted market price of the award at the measurement dateless the amount, if any, the employee is required to pay for the stock. As of January 1,2006, stock-based awards to employees consisted of only restricted sharesvalued using the market price of the Company’s traded common stock on the dateof grant. The fair value method used to value restricted shares would haveyielded the same fair value and compensation expense as the intrinsic valuemethod used; thus, no pro forma results of operations are required to bepresented.

 

In addition, stock-basedawards to non-employees as of January 1, 2006 consisted of options andrestricted shares issued in exchange for various legal and investment bankingservices. Equity instruments issued to non-employees for services wereaccounted for at fair value at the date of grant. The fair value for awardsissued to non-employees was measured using a Black-Scholes valuation model.Expenses determined for employees and non-employees were recognized 

 

61

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in the Company’sfinancial statements over the applicable service period.

 

The Company adopted SFAS No. 123(R) usingthe modified prospective application method and, accordingly, no prior periodshave been restated as a result of the adoption of this pronouncement. Underthis method, compensation cost recognized during the year ended December 31,2006 included: (a) compensation cost for all stock-based payments grantedprior to, but not yet vested as of January 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofSFAS No. 123; and (b) compensation cost for all stock-based paymentsgranted on or after January 1, 2006, based on the grant-date fair valueestimated in accordance with SFAS No. 123(R). SFAS No. 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods to reflect actual forfeitures. Currently, the Company’sforfeiture estimates are 1.5% for both stock options and restricted stockgrants as a result of adopting SFAS No. 123(R).

 

The following table summarizes stock-basedcompensation costs recognized under SFAS 123 for the year ended December 31,2005 and under SFAS 123(R) for year ended December 31, 2007 and 2006:

 
| ** **                                    | ** ** | **Year Ended**   | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **December 31,** | ** ** |
| ** **                                    | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       |                  |       |   |   |   |   |
| Employee  stock—based compensation costs |       | $                     | 5,592,473  |   | $ | 2,657,149 |   | $ | 978,208 |   |
| Non-employee  stock-based compensation        |       | 1,447,130             |       | 568,359 |   | 404,270 |   |
|                                          |       | $                     | 7,039,603  |   | $ | 3,225,508 |   | $ | 1,382,478 |   |

 

**Restricted Stock Awards andPerformance Shares**

 

The Company determinesthe fair value of restricted stock awards and performance shares based on themarket price of the Company’s common stock on the date of grant. Compensationcost for such awards is recognized ratably over the vesting or service period,net of forfeitures; however, compensation cost related to performance shareswill not be recorded or will be reversed if the Company does not believe it isprobable that such performance criteria will be met or if the service provider(employee or otherwise) fails to meet such criteria.

 

A summary of the Company’srestricted stock award activity and related information is presented below:

 
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Non-vested  balance at December 31, 2004 |       | —             |       | $                   | —     |   |
| Granted                                       |       | 1,130,000          |       | $                   | 3.44       |   |
| Vested                                        |       | —             |       | $                   | —     |   |
| Forfeited                                     |       | —             |       | $                   | —     |   |
| Non-vested  balance at December 31, 2005 |       | 1,130,000          |       | $                   | 4.40       |   |
| Granted                                       |       | 301,500            |       | $                   | 3.44       |   |
| Vested                                        |       | (375,000           | )          | $                   | 4.40       |   |
| Forfeited                                     |       | (310,000           | )          | $                   | 4.40       |   |
| Non-vested  balance at December 31, 2006 |       | 746,500            |       | $                   | 4.01       |   |
| Granted                                       |       | 1,353,350          |       | $                   | 8.73       |   |
| Vested                                        |       | (815,000           | )          | $                   | 4.50       |   |
| Forfeited                                     |       | —             |       | $                   | —     |   |
| Non-vested  balance at December 31, 2007 |       | 1,284,850          |       | $                   | 8.82       |   |

----

(1)   In May 2005, the former Chief FinancialOfficer received a restricted stock award of 450,000 shares valued at $4.40 pershare, which was the closing market price of our common stock on the date ofgrant.  This restricted stock award vestsin three equal annual installments beginning on May 16, 2006.  The former CFO resigned from all positionswith the Company and its subsidiaries effective June 15, 2006, thus forfeitinghis remaining 300,000 unvested restricted shares.  An additional 10,000 unvested restrictedshares were forfeited by other employees.

 

As of December 31,2007, there was $9.6 million of total unrecognized compensation cost related tononvested restricted stock awards, which is expected to be recognized over aweighted-average period of 1.8 years.

 

No performance shareswere outstanding as of December 31, 2007.

 

62

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**Stock Options**

 

Incentiveand non-qualified stock options issued to directors, officers, employees andconsultants are issued at an exercise price equal to the fair market value ofthe stock at the date of grant. The Company’s stock options generally vest overa two to three year period and expire ten years from the date of grant.Compensation cost related to stock options is recognized ratably over thevesting or service period and is net of forfeitures.

 

Thefair value of each stock option granted is estimated on the date of grant usinga Black-Scholes option pricing model. The following table presents theweighted-average assumptions used in the option pricing model for optionsgranted during the year ended December 31, 2007. During the year ended December 31,2007, 2,141,700 options were granted by the Company under the 2007 Long-termIncentive Plan. The expected life of the options represents the period of timethe options are expected to be outstanding. For the year ended December 31 2007, the expected term of optionsgranted was derived based on a weighting between (a) the Company’shistorical exercise and forfeiture activity and (b) the average midpointbetween vesting and the contractual term. For the year ended December 31,2006, the expected term of options granted was based on the contractual term.In the future, as information regarding post-vesting termination becomes moreaccessible, the Company may change the method of deriving the expected term.This change could impact the fair value of options granted in the future. TheCompany expects to refine the method of deriving the expected term for 2008.For the year ended December 31, 2007 and December 31, 2006, ourexpected volatility is based on the historical volatility of our stock for aperiod approximating the expected life. The risk-free interest rate is based onthe observed U.S. Treasury yield curve in effect at the time the options weregranted. The dividend yield is based on our history of dividend payouts.

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 6        |       | 6        |       | 10       |       |
| Risk-free  interest rate                             |       | 4        | %          | 5        | %          | 3        | %          |
| Volatility                                           |       | 82.31    | %          | 72.27    | %          | 76.12    | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          | 0        | %          |
| Weighted-average  fair value per share at grant date |       | $        | 7.07       |     | $          | 2.37     |       | $ | 1.30 |   |
|                                                      |            |          |            |          |            |          |            |  |  |  |

 

A summary of our stockoption activity and related information is presented below:

 
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**      | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                                    | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                                    | ** ** | **Options**        | ** ** | **Per Option**     | ** ** |
| Non-vested  balance at December 31, 2003 |       | —             |       | $                       | —     |   |
| Granted                                       |       | 2,500,000          |       | $                       | 1.30       |   |
| Exercised                                     |       | —             |       | $                       | —     |   |
| Forfeited                                     |       | —             |       | $                       | —     |   |
| Non-vested  balance at December 31, 2004 |       | 2,500,000          |       | $                       | 1.30       |   |
| Granted                                       |       | —             |       | $                       | —     |   |
| Exercised                                     |       | —             |       | $                       | —     |   |
| Forfeited                                     |       | —             |       | $                       | —     |   |
| Non-vested  balance at December 31, 2005 |       | 2,500,000          |       | $                       | 1.30       |   |
| Granted                                       |       | 1,752,500          |       | $                       | 3.50       |   |
| Exercised                                     |       | (275,000           | )          | $                       | 2.00       |   |
| Forfeited                                     |       | (50,000            | )          | $                       | 4.00       |   |
| Non-vested  balance at December 31, 2006      |       | 3,927,500          |       | $                       | 3.07       |   |
| Granted                                       |       | 2,141,700          |       | $                       | 9.84       |   |
| Exercised                                     |       | (1,868,752         | )          | $                       | 1.83       |   |
| Forfeited                                     |       | (25,000            | )          | $                       | 3.92       |   |
| Non-vested  balance at December 31, 2007      |       | 4,175,448          |       | $                       | 8.14       |   |

 

During the year ended December 31,2007 a total of 1,868,752 options were exercised. As of December 31, 2007,there was approximately $14.4 million of total unrecognized compensation costrelated to non-vested stock options which is expected to be recognized over aweighted-average period of approximately 1.5 years.

 

63

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The following tablesummarizes information about stock options outstanding as of December 31,2007:

 
| ** **                                  | ** ** | ** **     | ** ** | **Outstanding**     | ** ** | **Exercisable**         | ** ** |
|---------------------------------------------|------------|----------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Weighted-**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Average**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Remaining**           | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Contractual**         | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | **Number of**  | ** ** | **Life**                | ** ** | **Weighted** | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| **Range of Exercise Prices** | ** ** | **Options(1)** | ** ** | **(In years)** | ** ** | **Exercise Price** | ** ** | **Options** | ** ** | **Per Option** | ** ** |
|  Below                                 | to         | $ 2.12    |       |                | 424,248    |                    | 6.7        |   | $ | 1.30 |   | 424,248 |   | $ | 1.30 |   |
|   $ 2.13                     | to         | $ 4.23    |       |                | 1,481,250  |                    | 8.4        |   | $ | 3.40 |   | 760,000 |   | $ | 3.39 |   |
|   $ 4.24                     | to         | $ 6.35    |       |                | 661,250    |                    | 9.5        |   | $ | 4.94 |   | 63,250 |   | $ | 4.51 |   |
|   $ 6.36                     | to         | $ 8.47    |       |                | 77,500     |                    | 9.3        |   | $ | 6.50 |   | — |   | $ | — |   |
|   $ 8.48                     | to         | $ 10.58   |       |                | 211,200    |                    | 9.8        |   | $ | 10.43 |   | — |   | $ | — |   |
| $ 10.59                                | to         | $ 11.88   |       |                | 1,320,000  |                    | 10.0       |   | $ | 11.88 |   | — |   | $ | — |   |
| Total                                       |       |           |       | 4,175,448           |       | 9.0                     |       | $ | 6.52 |   | 1,247,498 |   | $ | 2.74 |   |
|                                             |            |                |            |                     |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The aggregate intrinsic value of stock optionsoutstanding at December 31, 2007 was $20.4 million, of which$10.5 million relates to awards vested and exercisable and$9.9 million relates to awards expected to vest. The intrinsic value forstock options outstanding is calculated as the amount by which the quoted priceof our common stock as of December 31, 2007 exceeds the exercise price ofthe option.

 

**Warrants**

 

As of December 31, 2007, the Company had 250,000warrants outstanding.  For their role asplacement agent, in connection with the private placement of 11,466,000 sharesof common stock in July 2005, Morgan Keegan & Company, Inc.received fully vested warrants to purchase 100,000 shares of the Company’scommon stock at an exercise price of $3.00 per share. Such warrants expire on July 19,2010. These warrants were valued at $325,000 using the Black-Scholes model,which amount was treated as additional non-cash stock offering costs.

 

Additionally, for their financial advisory services,in connection with the private placement of 4,482,000 shares of common stock inJune 2006, Morgan Keegan & Company, Inc. received fullyvested warrants to purchase 150,000 shares of the Company’s common stock at anexercise price of $3.00 per share. Such warrants expire on June 30, 2011.These warrants were valued at $248,645 using the Black-Scholes model, whichamount was treated as additional non-cash stock offering costs.

 

All warrants issued were valued using theBlack-Scholes model, which amount was treated as additional non-cash stockoffering costs.  The following tablepresents the weighted-average assumptions used in the option pricing model foroptions granted during the year ended December 31, 2007 and 2006.  The same methodologies applied to determinethe assumptions used to value the options noted above were also used in valuingthe warrants issued to Morgan Keegan & Company. No warrants wereissued during the year ended December 31, 2007.

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 1.6      |       | 1.6      |       |
| Risk-free interest  rate                             |       | 4.9      | %          | 4.9      | %          |
| Volatility                                           |       | 64.7     | %          | 64.7     | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average  fair value per share at grant date |       | $        | 1.66       |     | $          | 1.66 |   |
|                                                      |            |          |            |          |            |  |  |

 

**Contingent Incentive Earn-Out Shares**

 

During 2005, the Company’s Board ofDirectors awarded a total of 485,000 shares of incentive stock awards to threeof the Company’s officers. The incentive stock awards vest and the earn-outshares are issuable once the Company is entitled to receive as itsproportionate share from gross production from any oil and gas wells owned oroperated by the Company not less than 2,000 barrels of oil per day or itsequivalent (approximately 12 million cubic feet of gas per day) prior 

 

64

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to December 28, 2007,the same target applicable to the Merger earn-out shares (see immediatelybelow). However, one of the Company’s officers entitled to receive earn-outshares resigned from the Company and its subsidiaries effective June 15,2006, and as a result 225,000 of the unvested contingent incentive stockawards, representing $990,000 of future possible compensation expense, wereforfeited. Subsequently, 190,000 shares of those 225,000 shares were awarded tothe officer’s successor to supplement a previous award of 35,000 shares. Thesecond earn-out target provided for in the original merger agreement related toits merger with Navidec, Inc.  In November 2007the production target in the Merger Agreement dated July 8, 2004 wasachieved. The determination was made by the Company’s Board of Directors basedon certification by the independent engineering firm that the Company’sproduction in Peru has met or exceeded the required level of production.

 

Theachievement of the required level of production resulted in the issuance of450,000 shares.  For accounting purposes,duringthe year ended December 31, 2007, $1,980,000 was recorded as compensationexpense.

 

**Merger Earn-Out Shares**

** **

Under the terms of the MergerAgreement, the Company committed to issue 18,000,000 shares to the formershareholders of BPZ-Texas on a contingent earn-out basis if the Companyachieved certain reserve and production goals. The first earn-out targetrelating to reserves was achieved in December 2004 and 9,000,000 of theearn-out shares were issued. The remaining 9,000,000 earn-out shares werecontingent on the Company becoming entitled to receive as its proportionateshare from gross production from any oil and gas wells owned or operated by theCompany not less than 2,000 barrels of oil per day or its equivalent (approximately12 million cubic feet of gas per day) prior to December 28, 2007.  As mentioned above, in November 2007the production target was achieved based on certification by an independentengineering firm that the Company’s production in Peru has met or exceeded therequired level of production.

 

For accounting purposes, theearn-out arrangement is treated as a stock dividend because the earn-out ispayable to the shareholders of the accounting acquirer, BPZ-Texas. Accordingly,except for a retroactive increase in the number of common shares outstandingfor all periods presented, no accounting entry is required upon the issuance ofthe earn-out shares.

 

**Long-Term Incentive CompensationPlan and Directors’ Compensation Incentive Plan**

** **

On August 17,2007, the Company adopted the 2007 Long-Term Incentive Compensation Plan (the “2007LTIP”), which is an amendment and restatement of the BPZ Energy, Inc. 2005Long-Term Incentive Compensation Plan (the “2005 LTIP”). The amendment andrestatement was recommended by the Board of Directors and adopted pursuant tothe approval of the shareholders at the 2007 annual meeting of shareholdersheld on August 17, 2007. The 2007 LTIP supersedes and replaces the 2005LTIP but will not impair the vesting or exercise of any award granted under the2005 LTIP prior to the date the 2007 LTIP became effective. The provisions ofthe 2005 LTIP applicable to directors are set forth in a separate 2007Directors’ Compensation Incentive Plan (the “Directors’ Plan”), which was alsoadopted by the Company pursuant to the approval of the shareholders at the 2007annual meeting of shareholders held August 17, 2007.

 

The2007 LTIP increases the amount of securities available for incentive awards toan aggregate of 4,000,000 shares, subject to adjustment to reflect stock splitsand other similar events. The 2007 LTIP terminates on the earlier of (1) tenyears from the date the 2007 LTIP becomes effective, or (2) at such timeas no shares of common stock of the Company remain available for issuance throughthe plan. The Company’s officers, employees and consultant and the employees ofcertain of the Company’s affiliates are eligible to participate in the 2007LTIP. The 2007 LTIP allows for the award of (1) incentive stock optionsunder Section 422 of the Tax Code, (2) non-statutory stock optionsnot covered under Section 422 of the Tax Code, (3) stock appreciationrights granting the recipient the right to receive an excess in the fair marketvalue (as defined in the 2007 LTIP) of shares of stock over a specifiedreference price, (4) restricted stock, which will be subject to a risk offorfeiture and nontransferable until it vests over time, (5) qualifiedperformance-based incentive to employees who qualify as covered employeeswithin the meaning of Section 162(m) of the Tax Code, as amended, (6) unrestrictedstock, which will be immediately transferable, and (7) other stock-basedincentive awards. Any vesting provisions for an award made under the 2007 LTIPmay be determined by the Compensation Committee. Awards will generally vest infour years unless otherwise determined by the Compensation Committee.

 

**TheDirectors’ Plan supersedes and replaces the portions of the 2005 LTIPapplicable to non-employee directors, but will not impair the vesting orexercise of any incentive granted to a director under the 2005 LTIP prior tothe date the Directors’ Plan became effective. The Directors’ Plan willterminate on the earlier of (1) ten years from the date that the Directors’Plan becomes effective, or (2) at such time as no shares of common stockof the Company remain available for issuance through the plan. The Company’snon-employee directors are eligible to participate in the Directors’ Plan. TheDirectors’ Plan provides for the issuance of up to 2,500,000 shares of theCompany’s common stock to non-employee**

 

65

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**directors,subject to adjustment to reflect stock splits and similar events. The Directors’Plan allows for the award of (1) non-statutory stock options not coveredunder Section 422 of the Tax Code, (2) stock appreciation rights,granting the recipient the right to receive an excess in the fair market value(as defined in the Directors’ Plan) of shares of stock over a specifiedreference price, (3) restricted stock, which will be subject to a risk offorfeiture and nontransferable until it vests over time, (4) unrestrictedstock, which will be immediately transferable, and (5) other stock-basedincentive awards. Vesting under the Directors’ Plan will be determined by theCompensation Committee. Awards will generally vest in four years unlessotherwise determined by the Compensation Committee.**

** **

**Note11 — Affiliate and Related Party Transactions**

** **

As of December 31, 2007 and December 31,2006, the Company had not entered into any transactions with affiliates orrelated parties.

 

**Note 12 — IncomeTaxes**

** **

Forthe year ended December 31, 2007, income tax of approximately $39,001 oftaxes, penalties and interest were incurred related to our investment income inEcuador.  See Note 6 “Investment inEcuador Property and Note Payable” to the Consolidated Financial Statements forfurther discussion regarding the Company’s investment in its Ecuador property.There was no income tax expense or benefit for the years ended December 31,2007, 2006 and 2005 as shown in the following table:

 
| ** **                                       | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
|                                             |       |      |       |      |       |       |       |
| Benefit computed  at the expected statutory rate |       | $         | (7,139,493 | )         | $          | (5,242,737 | )          | $ | (2,178,376 | ) |
| Non-deductible  stock issuance costs and other   |       | 3,653,338 |       | —    |       | —     |       |
| Less: valuation  allowance                       |       | 3,525,156 |       | 5,242,737 |       | 2,178,376  |       |
| Income tax  expense                              |       | $         | 39,001     |      | $          | —     |       | $ | — |   |

 

The tax effects of thetemporary differences that give rise to the significant portion of the deferredtax assets and liabilities are presented below:

 
| ** **                 | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| Deferred tax  assets:      |       |        |       |        |       |       |       |
| Net operating  loss        |       | $           | 12,088,891 |        | $          | 8,885,175  |       | $ | 4,716,112 |   |
| Stock-based  compensation  |       | 6,360,268   |       | 3,966,804   |       | 2,893,130  |       |
| Asset basis  difference    |       | 709,140     |       | —      |       | —     |       |
|                       |       |        |       |        |       |       |       |
| Total deferred  tax assets |       | 19,158,299  |       | 12,851,979  |       | 7,609,242  |       |
|                       |       |        |       |        |       |       |       |
| Deferred tax  liabilities: |       |        |       |        |       |       |       |
| Asset basis  difference    |       | —      |       | —      |       | —     |       |
|                       |       |        |       |        |       |       |       |
| Net deferred tax  asset    |       | 19,158,299  |       | 12,851,979  |       | 7,609,242  |       |
| Less valuation  allowance  |       | (19,158,299 | )          | (12,851,979 | )          | (7,609,242 | )          |
|                       |       | $           | —     |        | $          | —     |       | $ | — |   |

 

The Company recorded avaluation allowance for the full amount of the deferred tax asset resultingfrom the income tax benefit above, as it believes, based on the weight ofavailable evidence, that it is more likely than not that the deferred tax assetwill not be realized due to tax net operating loss carryforwards ofapproximately $35.5 million expiring in various amounts through 2027.

** **

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**Note 13 — Business Segment Information**

 

The Company determinesand discloses its segments in accordance with SFAS No. 131 “Disclosuresabout Segments of an Enterprise and Related Information” which uses a “management”approach for determining segments.  Themanagement approach designates the internal organization that is used bymanagement for making operating decisions and assessing parlance as the sourceof the Company’s reportable segments. SFAS No. 131 also requires disclosures about products or services,geographic areas, and major customers. The Company’s management reporting structure provided for only onesegment for the years ended December 31, 2007, 2006 and 2005 andaccordingly, no separate segment information is presented.  In addition, the Company operates only inPeru and has only one customer for its production.

 

*SegmentInformation:*

 

Operatingand geographic information:  The Companyoperates primarily in one segment which involves the production of oil.  All of the Company’s sales are made under ashort-term contract to the Peruvian national oil company, Petroperu..  The majority of our long-lived assets arelocated in Peru.

 

**Note 14 — Commitments and Contingencies**

** **

*Transfer of NFS*

 

On September 9,2004, the day prior to the effective date of the Merger, Navidec assigned allof its pre-merger business operations, assets and liabilities to NFS and allissued and outstanding shares of NFS were subsequently transferred to theNavidec pre-merger shareholders of record as of September 9, 2004, for nocash consideration.

 

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

 

While federal and stateregulators might conclude that the Company was subject to responsibility forregistration of the shares, the Company regards the possibility of liabilityarising from the distribution of the NFS shares as remote for the followingreasons:  The Company took no action withrespect to the transfer of NFS shares which, pursuant to the terms of theMerger Agreement, was agreed to be handled by NFS, including any necessaryqualifications or registrations under applicable securities laws. Further, theCompany believed, based on information provided by NFS and its advisors thatNFS had undertaken to comply with all applicable registration requirements.Additionally, the transfer, which was tantamount to a stock dividend to thepre-merger shareholders of Navidec, Inc., did not involve cashconsideration, making a finding of any damage to shareholders unlikely.Finally, it is the Company’s understanding that NFS is taking action toregister the NFS shares and is communicating with the SEC to address this issueto the SEC’s satisfaction.

 

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

 

*Peru Properties*

 

As of December 31, 2007, inconnection with its Peru properties, the Company obtained five performancebonds totaling $6.0 million to guarantee certain obligations and commitments,of which four related to performance obligations under the license contractsfor Blocks Z-1, XIX, XXII and XXIII. As of December 31, 2007, the Companyhad restricted cash deposits of approximately $3.8 million which partiallycollateralize the performance bonds. The Company was also required to depositapproximately $0.8 million as restricted cash to collateralize a performancebond of $1.0 million in connection with the beginning of the third explorationperiod under the Block Z-1 license contract, which began in June 2007. Inaddition, it was required to deposit approximately $0.2 million as restrictedcash to collateralize performance bonds of $0.4 million under the Block XIXlicense contract in connection with the first exploration period. The Companywas also required to post a $1.0 million performance bond to guarantee paymentunder a service agreement, which is set to expire in January 2008. Inconnection with signing the license contracts for Blocks XXII and XXIII in November 2007,the Company was required to post $0.3 million and $1.5 million, respectively inrestricted cash to collateralize $0.6 million and $3.1 

 

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million, bonds respectively, in connection with the firstexploration period.  The performancebonds were issued by Peruvian banks and their terms are governed by thecorresponding license contract or agreement.

 

Inconnection with Block Z-1, in December, 2006, as a result of the drilling ofthe first well, the CX11-21XD, the $1.3 million performance bond and relatedcash posted as collateral was released. The third exploration period began in May 2007and is scheduled to expire in December 2008. It will require the drillingof an additional exploratory well or other equivalent work commitments.  A performance bond of $1.0 million was alsoposted for cash collateral of $750,000 as a result. The fourth and finalexploration period is scheduled to begin in December 2008 and expire in December 2009.It will also require the drilling of an additional exploratory well or otherequivalent work commitments and will require a performance bond of $1.0million. The performance bond amounts are not cumulative, and are released atthe end of each exploration period if the work commitment for that period hasbeen satisfied. In addition, we are required to make technology transferpayments related to training costs of Perupetro professional staff during theexploration phase of $50,000 per year. On November 21, 2007, the Company submitted a letter to Perupetrodeclaring a commercial discovery in the Block Z-1 field.  The Company is currently putting together afield development plan which is required to be filed with Perupetro within 180days of the declaration of the commercial discovery.  The commercial development period of thecontract will commence as soon as the Company receives approval of the fielddevelopment plan. Under the contract, oil exploration, development andproduction can continue for a total of up to 30 years from the effective dateof the contract, and gas exploration, development and production can continuefor up to 40 years. Royalties under the contract vary from 5% to 20% based onproduction volumes.

 

Inconnection with the Block XIX license contract, the Company recently completedshooting 200 kilometers of 2-D seismic. The cost to acquire this seismic datawas approximately $3.6 million. The Company has completed the processing andinterpreting the data. Based on the results of the 2-D seismic survey and inorder to comply with the requirements under the next phase of the licensecontract, the Company plans to drill a well in Block XIX in late 2008 at anestimated cost of $8.0 million.  If acommercial discovery is made during the exploration period, the contract willallow for the exploration and production of oil for a period of 30 years fromthe effective date of the contract and the exploration and production of gasfor a period of 40 years. Royalties under the contract vary from 15% to 30%based on production volumes.  Royaltiesstart at 5% if and when production is less than 5,000 barrels of oil equivalentper day (boepd) and are capped at 20% if and when production surpasses 100,000boepd.

 

As part of the Block XXII License Contract which wassigned on November 21, 2007, the Company was required to obtain a cashcollateralized $0.6 million performance bond in connection with the firstexploration period.  The performance bondwas purchased for $0.3 million and was issued bya Peruvian bank under terms governed by the license contract. The term of thelicense contract extends over a seven year period divided into five periods orfour periods of 18 months and a final period of 12 months.  Under certain circumstances, the explorationperiods may be extended for an additional period of up to three years.  Under each exploration period, a performancebond will be required.  The performance bond amounts are notcumulative, and will be released at the end of each exploration period if thework commitment for that period has been satisfied.  Additionally, the first period requires that we purchase, process and interpret 200 kmsof 2-D seismic data.  The Company willalso be required to prepare a comprehensive geological and engineering studyfor the area.  In each subsequent periodafter the first 18 month period we are required to drill an exploratory well.  If a commercial discovery is madeduring the exploration period, the contract will allow for the exploration andproduction of oil for a period of 30 years from the effective date of thecontract and the exploration and production of gas for a period of 40 years.Royalties under the contract vary from 15% to 30% based on productionvolumes.  Royalties start at 15% if andwhen production is less than 5,000 barrels of oil equivalent per day (boepd)and are capped at 30% if and when production surpasses 100,000 boepd.

 

In connection with the Block XXIII License Contract whichwas signed, on November 21, 2007, the Company was required to obtain acash collateralized $3 million performance bond in connection with the firstexploration period.  The bond waspurchased for $1.5 million and was issued bya Peruvian bank under terms governed by the license contract.  The license contract extends overa seven year period divided in to two periods of 18 months and two periods of24 months.  Under each explorationperiod, a performance bond will be required. Theperformance bond amounts are not cumulative, and will be released at the end ofeach exploration period if the work commitment for that period has beensatisfied.  In addition, it commits the Company to drill a certain number of wells,acquire certain amount of either 2-D or 3-D seismic data and prepare anintegrated geological, geochemical and reservoir engineering evaluation of thehydrocarbon prospects in the block. If a commercial discovery is madeduring the exploration period, the contract will allow for the exploration andproduction of oil for a period of 30 years from the effective date of thecontract and the exploration and production of gas for a period of 40 years.Royalties under the contract vary from 15% to 30% based on production volumes.  Royalties start at 15% if and when productionis less than 5,000 barrels of oil equivalent per day (boepd) and are capped at30% if and when production 

 

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surpasses 100,000 boepd.

 

An obligation was recorded for theplug and abandonment of the producing oil wells, the 21XD and the 14D, inaccordance with the provisions of SFAS No 143 “Accounting for Asset RetirementObligations” (“ARO”) related to the plug and abandonment of our wells.  However, the Company also acquired four offshoreplatforms in connection with its Block Z-1 property. The Company completed therefurbishment of one of the offshore platforms and intends to maintain all ofthe platforms for use throughout the life of the Block Z-1 contract. Theseplatforms revert back to the Government of Peru at the end of the contract,provided they are in good working condition, with no further obligation to thecompany to dismantle or remove them. The Company and its legal advisors havereviewed Peruvian law and existing regulations from the Peruvian Ministry ofEnergy and Mines in conjunction with the requirements of SFAS No. 143 asit applies to tangible long lived assets and their future retirement anddismantlement. The Company has concluded there is no legal obligation to dismantlethe platforms, as defined in SFAS No. 143, and therefore recognition of anARO is not required. Accordingly, no such provision for dismantling theplatforms is reflected in the accompanying consolidated financial statements.If, however, current laws or regulations were changed or the platforms were nolonger in good working order, the Company could be obligated to dismantle andremove them. The current estimated cost to dismantle an offshore platform isestimated to be approximately $2.0 million, depending upon the condition of theplatform and the depth of the water.

 

In December 2005, the Companysigned a drilling contract with Petrex S.A., a subsidiary of Saipem SpA ofItaly. Under the contract, Petrex S.A. will provide a platform rig capable of drillingto 16,000 feet and upgrade the rig to meet the Company’s specifications. TheCompany is utilizing the rig for the initial development of the Corvina fieldand may also utilize it for the expected development of the Albacora oil field,and potential appraisal wells in the Piedra Redonda gas field. The Company paida $5.5 million fee to mobilize and upgrade the rig. In exchange, the Companyreceived a discounted fixed day rate and exclusive rights to use the rig, atits option, during the two-year period which commenced in September 2006.In addition, after the guaranteed two-year period, the Company has the optionto extend the contract for an additional year at market rates.

 

*Barge Incident*

 

Inearly August 2006, the Company incurred an operational delay ofapproximately three weeks resulting from a navigation incident which caused theBPZ-01 barge to be grounded on a sand bank in Talara Bay in northwest Peruduring the second mobilization trip to the Corvina CX-11 platform. No injurieswere sustained by any of our employees, nor to any of the tug boat operator’screw members. The BPZ-01 is a U.S. flagged vessel and as such was inspectedafter the incident by the U.S. Coast Guard, to its satisfaction. The bargeresumed normal operations immediately thereafter. Based upon informationcurrently available, the Company estimates that total expenditures related tothis incident will be approximately $1.1 million. As of December 31,2006, approximately $382,000 had been incurred for barge recovery and temporaryrepairs to the vessel. In addition, the Company expects to incur approximately$330,000 in permanent repairs to the barge and approximately $432,000 ofconsequential damages, primarily stand-by charges. As of the March 14,2008, the Company has not presented a final claim to our insurance carrier forthe barge repairs and we are negotiating a settlement agreement with a thirdparty for recovery of any damages not covered through our insurance. Amandatory dry-dock is scheduled for the second quarter 2008 at which time afull survey of the barge will be conducted and an insurance claim is expectedto be filed.  The Company believes themajority of the costs associated with this incident will be reimbursed throughinsurance or through a third party. No assurances can be given, however, thatany such recoveries will be sufficient to cover all costs associated with thisincident or to the timing of any such recoveries. This incident did not have amaterial impact on our operations or business plan.

 

*Charter of Navy Tankers*

 

On October 24,2007, the Company’s primary marine transportation contractor entered into twoshort term agreements with the commercial division of the Peruvian Navy tolease two tankers to transport oil to market earlier than scheduled. The twotankers leased from the Navy each have capacity of approximately 7,000 barrels.

 

On January 30,2008, one of the Navy tankers, the Supe, caught fire and sank into the oceanclose to the CX11 platform.  Although noBPZ employees or subcontractors directly managed by the Company were injured,there were injuries sustained by the Peruvian sailors including twofatalities.  At the time of the incidentthe Supe tanker contained approximately 1,300 barrels of oil, most of which wasburned in the fire.  The Company believes that environmental issues havebeen adequately controlled and is continuing to monitor the situation.  The Company’s platform, barges, drilling andwell testing equipment, and other facilities were not damaged.  Production from the 21XD and 14D wells,approximately 4,200 barrels of oil per day at the time, as well as the testingoperations on the 18XD has been temporarily suspended 

 

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pending a completeinvestigation.

 

Currently all production(which had reached approximately 4,200 barrels of oil per day by late January2008) is shut-in due to the incident involving the Navy tanker.  At therequest of the OSINERGMIN, the government agency responsible for auditing thesafety of energy investments in Peru, we successfully performed a series ofsafety and integrity tests on the facilities at the CX-11 Corvina platform,including the equipment that was being used for the ongoing long-term testingof the 21XD and 14D wells.  We confirmed that the well testing equipmentwas in operational condition.  On March 12, 2008 we received clearancefrom the OSINERGMIN, to resume operations at the CX-11 platform, including thescheduled 18XD well drill stem test.  However, the four Corvina wells arecurrently shut-in while we complete the installation of sea-bed pipelinesconnecting the platform to the transport barge, along with the required mooringsystems, that will allow for an improved long-term testing program.Additionally, we are waiting for final clarification from the appropriateauthorities in Peru regarding the transportation of our crude oil to therefinery. 

 

The Company has submittedall the requested reports and documentation generated during theinvestigation.  A number of organizationsinvolved in the investigation have issued reports concluding there was noenvironmental damage due to the incident. Additionally, the Company assisted the Peruvian Navy in conducting anunderwater survey of the Supe, which established that the vessel does not representa hazard to navigation nor a marine pollution threat, as all its tanks werefound to be empty.  The CX-11 Corvinaplatform and all its facilities, as well as the BPZ-01 tender barge, the fourCorvina wells, and all the vessels supporting the operations have now beencertified to be in operational condition.

 

Theongoing investigation has not resulted in any sanctions against the Company forany wrong doing or for any inadequate safety and/or environmental procedures asa result of the fire.  Nonetheless, theCompany continues to try and improve safety as a result of the vessel incidentand will continue to cooperate with officials who are investigating theincident.  Other than the temporarysuspension of operations, the incident is not expectedto have a material impact on the Company’s future operations or business plan.

 

As noted above, theCompany currently has two additional barges under a capital lease agreement. OnJune 13, 2007, the Company entered into a capital lease agreement, with an option to purchase, for twobarges to assist in the development of the Corvina oil. The two barges weretowed to Peru where one barge, the Nu’ uanu, is currently being used totransport oil between the CX11 platform and the refinery in Talara,approximately 100 miles south.  TheNomoku is currently being out-fitted with the required equipment for itsintended use as a floating production, storage and offloading facility (“FPSO”)that will be moored next to the CX11 platform.  However, we have encountered some delays due to scheduling.  We expect the FPSO to be fully out-fitted andoperational by the end of the first quarter or beginning of the second quarter2008.

 

The Company will continue to make commitments in theordinary course of business as it pursues its development plans for theproperties.

 

*Financing Activities*

 

On October 22, 2007, theCompany entered into a non-binding term sheet agreement with the InternationalFinance Corporation (“IFC”), the private sector arm of the World Bank Groupbased in Washington, D.C., delineating the key terms and conditions for thefirst tranche (see Loan “C” immediately below) of a debt package with IFC. Previously, the Company announced a totaldebt package, approved by IFC, of $100.5 million approved by the IFC but subjectto final due diligence and documentation. The Company is actively negotiatingwith IFC to increase the debt package to an estimated $165 million for furtherdevelopment of our assets.

 

Theinitial $120 million financing package was approved by the Credit Committee ofthe IFC on November 29, 2006, which included an investment by IFC in BPZ’scommon stock and took place on December 18, 2006. Thecommon stock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million. The offering was placed directly by the Companyand there were no placement fees. IFC currently holds approximately a 9% equity positionin the Company with 6.5 million shares of our common stock.  In addition, IFC has a preemptive right topurchase its pro rata share of common stock or securities convertible intocommon stock that are issued and sold by the Company (except for certainissuances of securities, such as pursuant to stock splits, stock dividends,acquisitions by the Company or under the Company’s incentive compensationplan). IFC’s total equity and senior debt investment in the Company, subject toexecution and funding of the increased debt agreement, as described above, willreach approximately $185 million. Any increased debt package will be subject tofinal internal approvals by appropriate representatives of both IFC andBPZ.  It is uncertain if such approvalwill occur, or if approved, the timing or amount of such approvals.  Theproposed $165 million facility is anticipated to consist of the following:

 

·                  Loan “C”, which is comprised of $15.5million of convertible debt, closed in early November 2007.  The 

 

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conversionprice is $10.39 per share and includes a forced conversion price of $18.19 pershare, based on an average closing price over twenty consecutive business days.The instrument has a 10 year term with a variable interest rate of 2% per annumabove 6-month LIBOR.  The loan from theIFC is unsecured, but restricts our ability to pledge assets to another lenderunless certain conditions are met.  The IFC loan does not restrict ourability to issue additional capital stock, but does call for an adjustment inits conversion price into BPZ common stock based on the terms of any subsequentequity offering.  The agreement contains customary default andcross-default provisions along with covenants restricting our ability to paydividends and the disposition of assets.  We are required to maintain arequired ratio of Balance Sheet Liabilities to Tangible Net Worth (as definedin the Loan Agreement), calculated quarterly, of no greater than 70:30. As of December 31, 2007, we were in compliance with all financialcovenants.

 

·                  Loan “A”, which is for IFC’s own account,is expected to consist of $34.5 million in long-term senior debt. This secondtranche is expected to be closed during the second quarter of 2008.  The terms of the instrument are still beingnegotiated.

 

·                  Loan “B”, comprised of senior debt to besyndicated by IFC, is projected to be approximately $115 million. This thirdtranche is expected to close in the third quarter 2008. This remaining debtportion of the financing will be subject to identification of the lendingsyndicate members and subsequent negotiation and approval of the necessary loandocumentation.

 

As of March 14, 2008, thefinal loan documents for the “A” and “B” Loans have not been completed.

 

In conjunctionwith the gas-to-power project, the recent discovery of oil reserves in theCorvina field has prompted the Company to simultaneously direct its attentiontowards accelerating the development of potential oil production in the Corvinafield. On June 13, 2007 the Company entered into a capital leaseagreement, with an option to purchase, for two barges to assist in thedevelopment of the Corvina oil. The capital lease for the two barges began in August 2007and expires in November 2009. Lease payments are variable, based on theworking status of the barges with a purchase option of $5,000,000 after thefirst year of the lease and $4,000,000 after the maturity date of the lease.The capital lease obligation was recorded at the present value of the minimumlease payments at an imputed discount rate of 18%, which reflects the Company’sincremental borrowing rate for this transaction. The assets will be depreciatedover the term of the capital lease obligation. The capital lease assets wererecorded at $6,180,679, which represents the present value of the minimum leasepayments, or the aggregate fair market value of the assets.

 

**Note15 — Legal Proceedings**

** **

*SECInquiry of Navidec*

 

Navidec was advised in February 2004that the SEC was conducting an informal inquiry to determine whether Navidechad violated federal securities laws. Based on the information made availableto the Company, it believes the SEC’s investigation relates, at least in part,to the restatement of Navidec’s reported earnings for the first and secondquarters of 2003. This restatement was reported in Navidec’s Form 10-Q forthe third quarter of 2003 filed on December 11, 2003.  Pursuant to the Merger Agreement, the Companyhas been indemnified by NFS for the costs of the SEC investigation, and NFS hasborne the costs incurred to date. The Company is not aware of the futureactions, if any, which the SEC intends to pursue in this matter, but noassurance can be given that the investigation has been and will be resolvedwithout negative consequences to the Company.

 

*Transferof Ownership in NFS*

 

On July 8,2004, Navidec and BPZ-Texas entered into a Merger Agreement which wasconsummated on September 10, 2004. The Merger Agreement provided that allof the pre-merger business operations, assets and liabilities of Navidec wouldbe transferred to a wholly-owned subsidiary, Navidec Financial Services, Inc.(“NFS”), followed by the transfer of NFS to the pre-merger shareholders ofrecord as of September 9, 2004, the day prior to the consummation of theMerger. See “*Business—Navidec Merger Transaction*,”“*Risk Factors—Risk Relating to the Offering—Thetransfer of NFS could result in liability to us because the shares transferredwere not registered with the SEC,*” and Note 2 to theConsolidated Financial Statements, included in this filing, for detaileddiscussion regarding the Merger.  Basedupon this provision of the Merger Agreement, the Company believed that it hadno continuing ownership of NFS and, therefore, did not account for thepost-merger operations of NFS in the presentation of its financial statements.After receipt of comments from the SEC in connection with its review of theCompany’s registration statement filed on July 27, 2005 and further review

 

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of this issue, theCompany concluded it was the record, but not beneficial, owner of NFS shares,and that any ownership interest was at most temporary.

 

TheCompany commenced an action against NFS (the “Action”) on or about February 13,2006, in District Court, Arapahoe County, Colorado (the “Court”), seeking ajudicial resolution of this matter. The Action was settled amongst the partieson May 19, 2006. In connection with the settlement, a Finding of Fact andConclusions of Law (the “Order”) was issued by the Court stating that theCompany was not a shareholder of NFS at any time after September 9, 2004.

 

**Note16 — Minimum Lease Payments**

** **

TheCompany leases office space in Houston, Texas under a five-year operatinglease.  We also have offices in Lima,Peru and Quito, Ecuador, both of which are under a month-to-month operatinglease. Total rent expense incurred for the years ended December 31, 2007,2006 and 2005 was approximately $$324,000, $252,000 and $98,000,respectively.  Minimum non-cancelablelease commitments under these agreements for the years ending December 31are as follows:

 
| 2008                          |   | $       | 239,817 |   |
|-------------------------------|--------|---------|---------|--------|
| 2009                          |   | 193,974 |    |
| 2010                          |   | 138,385 |    |
| 2011                          |   | —  |    |
| 2012                          |   | —  |    |
| Thereafter                    |   | —  |    |
| Total minimum  lease payments |   | $       | 572,176 |   |

 

**Note17 — Subsequent Events**

** **

In January 2008,250,000 common stock warrants with a strike price of $3.00 per share whereexercised by Morgan Keegan & Company, Inc. These warrants hadbeen issued to Morgan Keegan & Company, Inc. in connection withits role as financial advisor to the Company, in connection with the privateplacements of 11,466,000 and 4,482,000 shares of common stock in July of2005 and June of 2006, respectively.  Net proceeds to the Company as a result of the exercise of thesewarrants were approximately $750,000. For more detail, see Note 10 “Stockholders’ Equity”to the Consolidated Financial Statements under “Warrants” above.

 

In February 2008, we enteredinto a lease-purchase agreement to acquire a deck barge (“BPZ 02”), ofapproximately 330 feet in length, to assist in the drilling activities in theAlbacora field as well as to assist in future drilling and developmentactivities.  In the near term, the BPZ 02will be used to act as a tender assist for the Petrex drilling rig as it ismoved to the Albacora field in third quarter 2008.  During that time, as mentioned in Note 14 “Commitmentand Contingencies”, the BPZ 01 will be placed in drydock to repair damagessustained when it ran aground in late 2006. The acquisition of the BPZ 02 allows the Company better assetmaintenance scheduling and will aid in the support of increased offshoreexploration and development activities. The terms of the lease-purchase stipulate a 19% rate of interest over aone year term at which point, title to the BPZ 02 will transfer to the Companyupon final payment of the lease.  TheCompany will account for the transaction as a Capital Lease in accordance toSFAS 13, “Accounting For Leases (As Amended)” under the criteria the barge willtransfer title at the end of the lease period and, as a result, depreciationwill be calculated over the economic life of the asset.

 

**Note18 — Supplemental Oil and Gas Disclosures (Unaudited)**

** **

**Oil and Natural Gas Producing Activities**

 

Thefollowing disclosures for the Company are made in accordance with SFAS No. 69,“Disclosures About Oil and Natural Gas Producing Activities (an amendment ofFASB Statements 19, 25, 33 and 39)”. Users of this information should be awarethat the process of estimating quantities of proved, proved developed andproved undeveloped crude oil and natural gas reserves is very complex,requiring significant subjective decisions in the evaluation of all availablegeological, engineering and economic data for each reservoir. The data for agiven reservoir may also change substantially over time as a result of numerousfactors including, but not limited to, additional development activity,evolving production history and continual reassessment of the viability ofproduction under varying economic conditions. Consequently, material revisionsto existing reserve estimates occur from time to time. Although everyreasonable effort is made to ensure that reserve estimates 

 

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reported represent themost accurate assessments possible, the significance of the subjectivedecisions required and variances in available data for various reservoirs makethese estimates generally less precise than other estimates presented inconnection with financial statement disclosures.

 

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

 

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

 

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

 

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

 

·                  controls over and processes for the collection andprocessing of all pertinent operating data and documents needed by ourindependent reservoir engineers to estimate our proved reserves;

 

·                  engagement of well qualified and independent reservoirengineers for review of our operating data and documents and preparation ofreserve reports annually in accordance with all SEC reserve estimationguidelines; and

 

·                  review by our senior reservoir engineer and his staffof the independent reservoir engineers’ reserves reports for completion andaccuracy.

 

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

 

***Capitalized Costs Relating to Oil and Gas ProducingActivities***

 

Thefollowing table sets forth the capitalized costs relating to the Company’snatural gas and crude oil producing activities at December 31, 2007 and2006:

 

73

----

 
| ** **                                                                                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **2007**              | ** ** | **2006**              | ** ** |
|                                                                                                                 |       |                  |       |                  |       |
| Proved  properties                                                                                                   |       | $                     | 73,447,919 |                  | $          | — |   |
| Unproved  properties                                                                                                 |       | 23,780,837            |       | 34,406,767            |       |
| Total                                                                                                                |       | 97,228,756            |       | 34,406,767            |       |
| Less:  Accumulated depreciation, depletion and amorization                                                           |       | (764,724              | )          | —                |       |
| Net capitalized  cost                                                                                                |       | 96,464,032            |       | 34,406,767            |       |
|                                                                                                                 |       |                  |       |                  |       |
| Company’s share  of cost method investees’ costs of property acquisition, exploration and  development (1) |       | $                     | —     |                  | $          | — |   |

 

----

(1)    BPZ Energy purchased the Investment inEcuador Property in 2004.

 

Pursuantto SFAS No. 143 “Accounting for Asset Retirement Obligations”, netcapitalized cost includes asset retirement cost of $0.3 million as of December 31,2007.  No ARO was recorded as of December 31,2006.

 

***Costs Incurred in Oil and NaturalGas Property Acquisition, Exploration and Development Activities***

 

The following table sets forth costs incurred relatedto the Company’s oil and natural gas activities for the year ended December 31,2007 and 2006:

 
| ** **                                                                                                           | ** ** | **Continuing** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                                           | ** ** | **Operations** | ** ** |
| **Year  Ended December 31, 2007:**                                                                              |       |           |       |
| Acquisition  costs of properties                                                                                     |       |           |       |
| Proved                                                                                                               |       | $              | —     |   |
| Unproved                                                                                                             |       | 10,964         |       |
|                                                                                                                 |       |           |       |
| Subtotal                                                                                                             |       | 10,964         |       |
| Exploration  costs                                                                                                   |       | 19,122,831     |       |
| Development  costs                                                                                                   |       | 47,733,574     |       |
|                                                                                                                 |       |           |       |
| Total                                                                                                                |       | $              | 66,867,369 |   |
|                                                                                                                 |       |           |       |
| Company’s share  of cost method investees’ costs of property acquisition, exploration and development  (1) |       | $              | —     |   |
|                                                                                                                 |       |           |       |
| **Year  Ended December 31, 2006:**                                                                              |       |           |       |
| Acquisition  costs of properties                                                                                     |       |           |       |
| Proved                                                                                                               |       | $              | —     |   |
| Unproved                                                                                                             |       | —         |       |
|                                                                                                                 |       |           |       |
| Subtotal                                                                                                             |       | —         |       |
| Exploration  costs                                                                                                   |       | 26,421,288     |       |
| Development  costs                                                                                                   |       | 8,495,113      |       |
|                                                                                                                 |       |           |       |
| Total                                                                                                                |       | $              | 34,916,401 |   |
|                                                                                                                 |       |           |       |
| Company’s share  of cost method investees’ costs of property acquisition, exploration and  development (1) |       | $              | —     |   |

 

----

(1)    BPZ Energy purchased the Investment inEcuador Property in 2004.

 

74

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*** ***

***Results of Operations for Oil and Natural GasProducing Activities***

 

Theresults of operations for oil and natural gas producing activities excludeinterest charges and general and administrative expenses. Sales are based onmarket prices.

 
| ** **                                                                                             | ** ** | **Year**              | ** ** | **Year**              | ** ** | **Year**              | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                             | ** ** | **Ended**             | ** ** | **Ended**             | ** ** | **Ended**             | ** ** |
| ** **                                                                                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                             | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Oil and natural  gas production revenues                                                               |       |                  |       |                  |       |                  |       |
| Third-party                                                                                            |       | $                     | 2,350,388  |                  | $          | —                |       | $ | — |   |
| Affiliate                                                                                              |       | —                |       | —                |       | —                |       |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Total revenues                                                                                         |       | 2,350,388             |       | —                |       | —                |       |
| Exploration  expenses                                                                                  |       | 4,045,381             |       | 2,048,742             |       | 998,131               |       |
| Production costs                                                                                       |       | 754,833               |       | —                |       | —                |       |
| Depreciation,  depletion and amortization                                                              |       | 537,892               |       | —                |       | —                |       |
| Oil and natural  gas impairment                                                                        |       | —                |       | —                |       | —                |       |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Income (loss)  before income taxes                                                                     |       | (2,987,718            | )          | (2,048,742            | )          | (998,131              | )          |
| Income tax  provision (benefit)                                                                        |       | —                |       | —                |       | —                |       |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Results of  continuing operations                                                                      |       | $                     | (2,987,718 | )                     | $          | (2,048,742            | )          | $ | (998,131 | ) |
|                                                                                                   |       |                  |       |                  |       |                  |       |
| Company’s share  of cost method investees’ results of operations for producing activities(1) |       | $                     | 451,615    |                  | $          | 1,590,882             |       | $ | 605,278 |   |

 

----

(1)    Investment in Ecuador Property

 

75

----

 

***Net Proved and Proved Developed Reserve Summary***

 

The following table sets forth the Company’s netproved and proved developed reserves at December 31, 2007, 2006 and 2005,and the changes in the net proved reserves for each of the three years in theperiod then ended.

 
| ** **                                                                                                                            | ** ** | **Operations**                    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                            | ** ** | **Natural gas  (Mcf)(1)(7)** | ** ** | **Natural gas  liquids and  crude oil  (Bbl)(2)(3)** | ** ** | **(Bbl)(2)  equivalents(4)** | ** ** |
|                                                                                                                                  |       |                              |       |   |   |   |   |
| Net proved  reserves at January 1, 2005 (8)                                                                                      |       | —                            |       | — |   | — |   |
| Revisions of  previous estimates                                                                                                      |       | —                            |       | — |   | — |   |
| Purchases in  place                                                                                                                   |       | —                            |       | — |   | — |   |
| Extensions,  discoveries and other additions                                                                                          |       | —                            |       | — |   | — |   |
| Sales in place                                                                                                                        |       | —                            |       | — |   | — |   |
| Production                                                                                                                            |       | —                            |       | — |   | — |   |
|                                                                                                                                  |       |                              |       |   |   |   |   |
| Net proved  reserves at December 31, 2005 (8)                                                                                    |       | —                            |       | — |   | — |   |
| Revisions of  previous estimates                                                                                                      |       | —                            |       | — |   | — |   |
| Purchases in  place                                                                                                                   |       | —                            |       | — |   | — |   |
| Extensions,  discoveries and other additions                                                                                          |       | —                            |       | — |   | — |   |
| Sales in place                                                                                                                        |       | —                            |       | — |   | — |   |
| Production                                                                                                                            |       | —                            |       | — |   | — |   |
|                                                                                                                                  |       |                              |       |   |   |   |   |
| Net proved  reserves at December 31, 2006                                                                                        |       | —                            |       | — |   | — |   |
| Revisions of  previous estimates                                                                                                      |       | —                            |       | — |   | — |   |
| Purchases in  place                                                                                                                   |       | —                            |       | — |   | — |   |
| Extensions,  discoveries and other additions                                                                                          |       | —                            |       | 11,980,822 |   | 11,980,822 |   |
| Sales in place                                                                                                                        |       | —                            |       | — |   | — |   |
| Production                                                                                                                            |       | —                            |       | (41,090 | ) | (41,090 | ) |
| Other                                                                                                                                 |       | —                            |       | — |   | — |   |
|                                                                                                                                  |       |                              |       |   |   |   |   |
| Net proved  reserves at December 31, 2007                                                                                        |       | —                            |       | 11,939,732 |   | 11,939,732 |   |
|                                                                                                                                  |       |                              |       |   |   |   |   |
| Company’s  proportional interest in reserves of investees accounted for by the cost  method—December 31, 2007 (6) |       | —                            |       | 384,447 |   | 384,447 |   |

*** ***

***Net Proved Developed Reserves Summary***

 
| ** **                  | ** ** | **Natural gas  (Bcf) (7)** | ** ** | **Natural gas  liquids and  crude oil  (Bbl)** | ** ** | **Bcf  equivalents(5)** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|
|                        |       |                                 |       |                                                          |       |                    |       |
| December 31,  2005 (8) |       | —                               |       | —                                                        |       | —                  |       |
|                        |       |                                 |       |                                                          |       |                    |       |
| December 31,  2006 (8) |       | —                               |       | —                                                        |       | —                  |       |
|                        |       |                                 |       |                                                          |       |                    |       |
| December 31,  2007     |       | —                               |       | 2,976,868                                                     |       | 17.9                    |       |

 

----

| (1) |   | Thousands of cubic  feet.                                                                                                                                                                                                  |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Barrels.                                                                                                                                                                                                                   |
| (3) |   | Includes crude oil,  condensate and natural gas liquids.                                                                                                                                                                   |
| (4) |   | Natural gas volumes  have been converted to equivalent natural gas liquids and crude oil volumes  using a conversion factor of six thousand cubic feet of natural gas to one  barrel of natural gas liquids and crude oil. |

 

76

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| (5) |   | Billion cubic feet or  billion cubic feet equivalent, as applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) |   | Based on a rollforward  of the independent reservoir engineer’s report provided by the operator of  the Santa Elena property.                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (7) |   | We  do not currently have the financial capacity or commitments for a development  program of this magnitude for our gas reserves. Accordingly, the Company has  not disclosed amounts of proved gas reserves in its SEC filings. At such time  as we obtain sufficient financial commitments to proceed with the full  development of the gas to power project and all other conditions necessary to  record proved reserves are met, we expect to record SEC proved gas reserves  as permitted under SEC rules and disclose such reserves in future SEC  filings. |
| (8) |   | We  did not have the financial capacity or commitments for a development program  of this magnitude. Accordingly, the Company did not disclose amounts of  proved reserves in its SEC filings for the years ended December 31, 2006  and 2005.                                                                                                                                                                                                                                                                                                                      |

 

***Standardized Measure of Discounted Future Net CashFlows Relating to Proved Oil and Natural Gas Reserves***

 

The following information has been developedutilizing procedures prescribed by SFAS No. 69 and based on natural gasand crude oil reserve and production volumes estimated by the independentpetroleum reservoir engineers. This information may be useful for certaincomparison purposes but should not be solely relied upon in evaluating theCompany or its performance. Further, information contained in the followingtable should not be considered as representative of realistic assessments offuture cash flows, nor should the standardized measure of discounted future netcash flows be viewed as representative of the current value of the Company’soil and natural gas assets.

 

The future cash flows presented below are based onsales prices, cost rates and statutory income tax rates in existence as of thedate of the projections. It is expected that material revisions to someestimates of natural gas and crude oil reserves may occur in the future, developmentand production of the reserves may occur in periods other than those assumed,and actual prices realized and costs incurred may vary significantly from thoseused. Income tax expense has been computed using expected future tax rates andgiving effect to tax deductions and credits available, under current laws, andwhich relate to oil and natural gas producing activities.

 

Management does not rely upon the followinginformation in making investment and operating decisions. Such decisions arebased upon a wide range of factors, including estimates of probable as well asproved reserves and varying price and cost assumptions considered morerepresentative of a range of possible economic conditions that may beanticipated.

 

The following table sets forth the standardizedmeasure of discounted future net cash flows from projected production of theCompany’s natural gas and crude oil reserves for the years ended December 31,2007, 2006 and 2005:

 

77

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| **December 31, 2007**                                                                                                            |   |         |          |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|---------------|
| Future cash inflows                                                                                                                   |   | $            | 1,020,728,000 |   |
| Future production costs                                                                                                               |   | (135,262,500 | )             |
| Future development costs                                                                                                              |   | (79,400,000  | )             |
| Future income taxes                                                                                                                   |   | (155,081,716 | )             |
| Future net cash flows                                                                                                                 |   | 650,983,784  |          |
| Discount to present value at 10% annual rate                                                                                          |   | (94,301,509  | )             |
| Standardized measure of discounted future net cash  flows relating to proved natural gas, natural gas liquids and crude oil  reserves |   | $            | 556,682,275   |   |
|                                                                                                                                  |   |         |          |
| Company’s share of cost method investees’  standardized measure of discounted future net cash flows (1)(2)                  |   | $            | 3,400,241     |   |
|                                                                                                                                  |   |         |          |
| **December 31, 2006**                                                                                                            |   |         |          |
| Future cash inflows                                                                                                                   |   | $            | —        |   |
| Future production costs                                                                                                               |   | —       |          |
| Future development costs                                                                                                              |   | —       |          |
| Future income taxes                                                                                                                   |   | —       |          |
| Future net cash flows                                                                                                                 |   | —       |          |
| Discount to present value at 10% annual rate                                                                                          |   | —       |          |
| Standardized measure of discounted future net cash  flows relating to proved natural gas, natural gas liquids and crude oil  reserves |   | $            | —        |   |
|                                                                                                                                  |   |         |          |
| Company’s share of cost method investees’  standardized measure of discounted future net cash flows (1)(2)                  |   | $            | 4,191,079     |   |
|                                                                                                                                  |   |         |          |
| **December 31, 2005**                                                                                                            |   |         |          |
| Future cash inflows                                                                                                                   |   | $            | —        |   |
| Future production costs                                                                                                               |   | —       |          |
| Future development costs                                                                                                              |   | —       |          |
| Future income taxes                                                                                                                   |   | —       |          |
| Future net cash flows                                                                                                                 |   | —       |          |
| Discount to present value at 10% annual rate                                                                                          |   | —       |          |
| Standardized measure of discounted future net cash  flows relating to proved natural gas, natural gas liquids and crude oil  reserves |   | $            | —        |   |
|                                                                                                                                  |   |         |          |
| Company’s share of cost method investees’  standardized measure of discounted future net cash flows (1)(2)                  |   | $            | 2,165,389     |   |

 

----

(1)             Investmentin Ecuador Property

(2)             Basedon a rollforward of the independent reservoir engineer’s report provided by theoperator of the Santa Elena property.

 

78

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**Note19 — Quarterly Results of Operations**

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2007**                                   |       |                             |       |   |   |   |   |   |   |
| Revenue, net                               |       | $                                | —     |   | $ | — |   | $ | — |   | $ | 2,350,388 |   |
| Operating loss                             |       | (3,251,880                       | )          | (5,687,688 | ) | (7,586,791 | ) | (5,264,463 | ) |
| Other income  (expense)                    |       | 52,862                           |       | 248,685 |   | 416,270 |   | 602,023 |   |
| Net loss                                   |       | $                                | (3,205,392 | ) | $ | (5,482,931 | ) | $ | (7,159,220 | ) | $ | (4,662,440 | ) |
| Basic and  diluted net loss per share      |       | $                                | (0.05      | ) | $ | (0.08 | ) | $ | (0.10 | ) | $ | (0.06 | ) |
| Weighted average  common share outstanding |       | 63,309,294                       |       | 67,685,317 |   | 72,222,433 |   | 73,265,471 |   |

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2006**                                   |       |                             |       |   |   |   |   |   |   |
| Revenue, net                               |       | $                                | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Operating loss                             |       | (2,621,926                       | )          | (3,126,947 | ) | (3,955,706 | ) | (4,089,842 | ) |
| Other income  (expense)                    |       | (616,740                         | )          | (512,866 | ) | (608,100 | ) | 44,668 |   |
| Net loss                                   |       | $                                | (3,238,666 | ) | $ | (3,639,813 | ) | $ | (4,563,806 | ) | $ | (4,045,174 | ) |
| Basic and  diluted net loss per share      |       | $                                | (0.06      | ) | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.07 | ) |
| Weighted average  common share outstanding |       | 49,845,270                       |       | 51,470,985 |   | 56,320,202 |   | 57,188,441 |   |

*** ***

As restated forretroactive stock dividend, see Note 10, “Merger Earn-out Shares” above foradditional information.

 

**ITEM 9. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES**

** **

None.

 

**ITEM 9A. CONTROLS ANDPROCEDURES**

** **

**(a)   Evaluation of Disclosure Controls andProcedures**

 

We performed an evaluation,under the supervision and with the participation of our management, includingour principal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our principalexecutive officer and principal financial officer have concluded that as of December 31,2007 our disclosure controls and procedures, as defined in Rule 13a-15(e),are effective to ensure that information we are required to disclose in thereports we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Ourdisclosure controls and procedures include controls and procedures designed toensure that information required to be disclosed in reports filed or submittedunder the Exchange Act is accumulated and communicated to our management,including our principal executive officer and principle financial officer, asappropriate, to allow timely decisions regarding required disclosures.

 

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

 

There was no change in the Company’s internalcontrol over financial reporting during the quarter ended December 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**(c)   Management’sReport on Internal Control over Financial Reporting and Report of IndependentRegistered Public Accounting Firm on Internal Control over Financial Reporting**

 

Management of theCompany, including our principal executive officer and principal financialofficer, is responsible for establishing and maintaining adequate internalcontrols over financial reporting, as defined in Rule  13a-15(f) ofthe Securities Exchange Act of 1934, as amended. Our internal controls aredesigned to provide reasonable assurance as to the 

 

79

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reliability of ourfinancial reporting and the preparation and presentation of the consolidatedfinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States, as well as to safeguardassets from unauthorized use or disposition.

 

Management conducted anevaluation of the effectiveness of our internal controls over financialreporting based on the framework in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. This evaluation included review ofthe documentation of controls, evaluation of the design effectiveness ofcontrols, testing of the operating effectiveness of controls and a conclusionon this evaluation. We did not identify any material weaknesses in our internalcontrols as a result of this evaluation. Based on this evaluation, managementhas concluded that our internal controls over financial reporting wereeffective as of December 31, 2007.

 

Johnson Miller &Co., CPA’s PC, the independent registered public accounting firm who alsoaudited our Consolidated Financial Statements, has issued an attestation reporton management’s assessment of the effectiveness of internal control overfinancial reporting as of December 31, 2007, which is set forth belowunder “Attestation Report”.

 

**(d)   Attestation Report**

 

Report ofIndependent Registered Public Accounting Firm on Internal Control over Financial Reporting

 

To the Board of Directorsand Shareholders BPZ Resources, Inc. and Subsidiaries

 

We have audited BPZResources, Inc. and Subsidiaries’ internal control over financialreporting as of December 31, 2007, based on criteria established in *Internal Control — Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). BPZ Resources, Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying “Item 9A, Management’s Annual Report onInternal Control Over Financial Reporting”. Our responsibility is to express anopinion on the Company’s internal control over financial reporting based on ouraudit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, BPZResources, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2007, based on theCOSO criteria*.*

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of BPZ Resources, Inc.and Subsidiaries as of December 31, 2007 and 2006, and the related 

 

80

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consolidated statementsof operations, stockholders’ equity (deficit), and cash flows for each of thethree years in the period ended December 31, 2007 and our report dated March 12,2008 expressed an unqualified opinion thereon.

 

 

Johnson Miller &Co., CPA’s PC Midland, Texas March 12, 2008

 

**ITEM9B.  OTHER INFORMATION**

 

None.

 

**PART III**

** **

**ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

** **

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

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

The information required bythis item is incorporated by reference from our definitive proxy statement tobe filed with the SEC within 120 days after the end of our fiscal year coveredby this Annual Report on Form 10-K.

 

**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

** **

The information required bythis item is incorporated by reference from our definitive proxy statement tobe filed with the SEC within 120 days after the end of our fiscal year coveredby this Annual Report on Form 10-K.

 

**ITEM 13. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**

** **

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

 

**ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**

** **

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

 

81

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** **

**PART IV**

** **

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 
|            | (a) The following  documents are filed as part of this report: | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** |
|------------|---------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** **                                                          | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** ** |
| ** ** | **1.**                                                              | **Financial Statements.**                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** ** |
| ** ** | ** **                                                          | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** ** |
| ** ** | ** **                                                          | **Our consolidated financial statements are  included in Part II, Item 8 of this report:**                                                                                                                                                                                                                                                                                                                                               | ** ** | **46** |
| ** ** | ** **                                                          | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** ** |
|       |                                                                | Report of Independent Registered Public Accounting  Firm                                                                                                                                                                                                                                                                                                                                                                                      |       | 46 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 47 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | Consolidated Statements of Operations                                                                                                                                                                                                                                                                                                                                                                                                         |       | 48 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | Consolidated Statements of Stockholders’ Equity  (Deficit)                                                                                                                                                                                                                                                                                                                                                                               |       | 49 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                                                                                                                                                         |       | 50 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | Notes to the Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                |       | 51 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | Management’s Report on Internal Control Over  Financial Reporting                                                                                                                                                                                                                                                                                                                                                                        |       | 79 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | Report of Independent Registered Public Accounting  Firm                                                                                                                                                                                                                                                                                                                                                                                      |       | 80 |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       | **2.**                                                              | **Financial Statements Schedules and supplementary  information required to be submitted:**                                                                                                                                                                                                                                                                                                                                                   |       |   |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | None.                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |   |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       | **3.**                                                              | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |   |
|       |                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |   |
|       |                                                                | A list of the exhibits filed or furnished with this  report on Form 10-K/A (or incorporated by reference to exhibits  previously filed or furnished by us) is provided in the Exhibit Index  beginning on page 85 of this report.   Those exhibits incorporated by reference herein are indicated as such  by the information supplied in the parenthetical thereafter.  Otherwise, the exhibits are filed herewith. |       |   |

 

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**GLOSSARY OF OIL AND NATURAL GASTERMS**

 

The following are abbreviations and definitions ofterms commonly used in the oil and natural gas industry that are used in thisreport.

 

*Bbl*. One stock tank barrel or 42 U.S. gallons liquidvolume.

 

*Bcf*. Billion cubic feet of natural gas.

 

*Bcfe*. Billion cubic feet equivalent determined using theratio of approximately six Mcf of natural gas to one Bbl of crude oil,condensate or natural gas liquids.

 

*Bopd*. Barrels of oil per day.

 

*Development well*. A well drilled within the proved area of anoil or natural gas reservoir to the depth of a stratigraphic horizon known tobe productive.

 

*Drill Stem Test*.  Atest of the flow rates of a formation thru the drill pipe to determine thefluid and gas content, pressure and estimated production rates of the reservoir.

 

*Dry hole or well*. A well found to be incapable of producinghydrocarbons in sufficient quantities such that proceeds from the sale of suchproduction would exceed production expenses and taxes.

 

*Exploitation*. A drilling or other project which may targetproven or unproven reserves (such as probable or possible reserves), but whichgenerally has a lower risk than that associated with exploration projects.

 

*Exploratory well*. A well drilled to find and produce oil ornatural gas reserves not classified as proved, to find a new reservoir in afield previously found to be productive of oil or natural gas in anotherreservoir or to extend a known reservoir.

 

*Field*. An area consisting of a single reservoir ormultiple reservoirs all grouped on or related to the same individual geologicalstructural feature and/or stratigraphic condition.

 

*Gross acres or gross wells*. The total acres or wells,as the case may be, in which a working interest is owned.

 

*MBbls*. One thousand barrels of crude oil or other liquidhydrocarbons.

 

*Mcf*. One thousand cubic feet.

 

*Mcfe*. One thousand cubic feet equivalent, determinedusing the ratio of approximately six Mcf of natural gas to one Bbl of crude oilor other hydrocarbon.

 

*MMBbls*. One million barrels of crude oil or other liquidhydrocarbons.

 

*MMBtu*. One million British thermal units.

 

*MMcf*. One million cubic feet.

 

*MMcfe*. One million cubic feet equivalent, determinedusing a ratio of six Mcf of natural gas to one Bbl of crude oil condensate ornatural gas liquids.

 

*Net acres or net wells*. The sum of the fractionalworking interests owned in gross acres or gross wells, as the case may be.

 

*Oil*. Crude oil, condensate and natural gas liquids.

 

*Productive well*. A well that is found to be capable ofproducing hydrocarbons.

 

*Proved developed reserves*. Reserves that can beexpected to be recovered through existing wells with existing equipment andoperating methods. Additional oil and gas expected to be obtained through theapplication of fluid injection or other improved recovery techniques forsupplementing the natural forces and mechanisms of primary recovery areincluded in “proved developed reserves” only after testing by a pilot projector after the operation of an installed program has 

 

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confirmedthrough production response that increased recovery will be achieved. The SECprovides a complete definition of proved developed reserves in Rule 4-10(a)(3) ofRegulation S-X.

 

*Proved reserves*. Proved oil and gas reserves are the estimatedquantities of crude oil, natural gas and natural gas liquids which geologicaland engineering data demonstrates with reasonable certainty to be recoverablein future years from known reservoirs under existing economic and operatingconditions, i.e., prices and cost as of the date the estimate is made. Pricesinclude consideration of changes in existing prices provided only bycontractual arrangements, but not on escalations based on future conditions.The SEC provides a complete definition of proved reserves in Rule 4-10(a)(2) ofRegulation S-X.

 

*Proved undeveloped reserves*. Proved oil and gasreserves that are expected to be recovered from new wells on undrilled acreageor from existing wells where a relatively major expenditure is required forrecompletion. Reserves on undrilled acreage shall be limited to those drillingunits offsetting productive units that are reasonably certain of productionwhen drilled. Proved reserves for other undrilled units can be claimed onlywhere it can be demonstrated with certainty that there is continuity ofproduction from the existing productive formation. Under no circumstancesshould estimates for proved undeveloped reserves be attributable to any acreagefor which an application of fluid injection or other improved recoverytechnique is contemplated, unless such techniques have been proved effective byactual tests in the area and in the same reservoir. The SEC provides a completedefinition of proved undeveloped reserves in Rule 4-10(a)(4) ofRegulation S-X.

 

*PV-10 value*. The present value of estimated future net revenuesto be generated from the production of proved reserves, determined inaccordance with the rules and regulations of the SEC (using prices andcosts in effect as of the date of estimation) without giving effect tonon-property related expenses such as general and administrative expenses, debtservice and future income tax expenses or to depreciation, depletion andamortization and discounted using an annual discount rate of 10%.

 

*Recompletion*. The completion for production of an existing wellbore in another formation from that which the well has been previouslycompleted.

 

*Reservoir*. A porous and permeable underground formationcontaining a natural accumulation of producible oil and/or natural gas that isconfined by impermeable rock or water barriers and is individual and separatefrom other reserves.

 

*Workover*.  A remedialoperation on a completed well to restore, maintain or improve the well’sproduction.

 

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** **

**SIGNATURES**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on August 29, 2008.

 
|   | BPZ Resources, Inc. |
|--------|--------------------------|
|   |                     |   |
|   | By:                      | */s/ Manuel Pablo  Zúñiga-Pflücker* |
|   |                     | Manuel Pablo  Zúñiga-Pflücker |
|   |                     | President &  Chief Executive Officer |

 

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**INDEX OF EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Plan of Conversion for BPZ Energy, Inc.  (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K  filed on August 17, 2007).                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 3.1                 |       | Certificate of Formation of BPZ Resources, Inc.  (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K  filed on August 17, 2007).                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 3.2                 |       | Bylaws of BPZ Resources, Inc. (incorporated by  reference to Exhibit 3.2 to the Company’s Form 8-K filed on  August 17, 2007).                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 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  Resources, Inc., a Texas corporation (incorporated by reference to  Exhibit 99.1 to the Company’s Form 10-Q filed on November 8,  2007).                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 4.2*                |       | BPZ Energy, Inc. 2005 Long-Term Incentive  Compensation Plan (incorporated by reference to Exhibit 4.1 to the  Company’s Form S-8 filed on July 5, 2005 (SEC File No. 333-  126388)).                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 4.3*                |       | BPZ Energy, Inc. 2007 Long-Term Incentive  Compensation Plan (incorporated by reference to Exhibit 10.1 to the  Company’s Form 8-K filed on August 24, 2007).                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 4.4*                |       | BPZ Energy, Inc. 2007 Directors Compensation  Incentive Plan (incorporated by reference to Exhibit 10.2 to the  Company’s Form 8-K filed on August 24, 2007).                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.1                |       | Merger Agreement between Navidec, Inc. and BPZ  Energy, Inc. dated July 8, 2004 (incorporated by reference to  Exhibit 10.1 from the Company’s Form 8-K filed July 13, 2004).                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.2                |       | Closing Agreement between Navidec, Inc. and  BPZ, Inc. dated September 8, 2004(incorporated by reference to  Exhibit 10.1 from the Company’s Form 8-K filed September 14,  2004).                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.3                |       | Business Consulting Agreement dated July 8,  2004 by and between BPZ Energy, Inc., a Colorado corporation, and  Navidec Financial Services, Inc., a Colorado corporation (incorporated  by reference to Exhibit 10.3 to the Company’s Form SB-2 filed on February 14,  2005 (SEC File No. 333-122816)). |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.4                |       | License Contract from the Government of Peru for  Block Z-1 dated November 30, 2001 (incorporated by reference to  Exhibit 10.5 to the Company’s Form SB-2 filed on February 14,  2005 (SEC File No. 333-122816)).                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.5                |       | Amendment to License Contract from the Government of  Peru for Block Z-1 dated February 3, 2005 (incorporated by reference to  Exhibit 10.5 of the Company’s Annual Report on Form 10-KSB for the  year ended December 31, 2004).                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.6                |       | License Contract from the Government of Peru for  Block XIX dated December 12, 2003 (incorporated by reference to  Exhibit 10.6 to the Company’s Form SB-2 filed on February 14,  2005 (SEC File No. 333-122816)).                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.7                |       | Technical Evaluation Agreement from the Government  of Peru for Area VI dated December 12, 2003 (incorporated by reference  to Exhibit 10.7 to the Company’s Form SB-2 filed on  February 14, 2005 (SEC File No. 333-122816)).                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.8                |       | Promotional Technical Evaluation Agreement from the  Government of Peru for Area XVI dated December 12, 2003 (incorporated by  reference to Exhibit 10.8 to the Company’s Form SB-2 filed on  February 14, 2005 (SEC File No. 333-122816)).                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                            |
| 10.9                |       | License Contract from the Government of Peru for  Block XXII dated November 21, 2007 (incorporated by reference to Exhibit  10.9 to the Company’s Form 10-K filed on March 14, 2008)                                                                                                                                             |

 

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| 10.10  |   | License Contract from the Government of Peru for  Block XXIII dated November 21, 2007 (incorporated by reference to  Exhibit 10.10 to the Company’s Form 10-K filed on March 14, 2008) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                  |
| 14.1   |   | Code of Ethics for Executive Officers (incorporated  by reference to Exhibit 14.1 to Form 10-KSB/A filed on  September 26, 2006).                                                      |
|   |   |                                                                                                                                                                                                  |
| 21.1   |   | Subsidiaries of the Registrant (incorporated by  reference to Exhibit 21.1 to Form 10-K filed on March 14, 2008).                                                                                |
|   |   |                                                                                                                                                                                                  |
| 23.1   |   | Consent of Independent Registered Public Accounting  Firm (filed herewith).                                                                                                                           |
|   |   |                                                                                                                                                                                                  |
| 23.2   |   | Consent of Independent Petroleum Engineers and  Geologists (filed herewith).                                                                                                                          |
|   |   |                                                                                                                                                                                                  |
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed  herewith).                                                                      |
|   |   |                                                                                                                                                                                                  |
| 31.2   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed  herewith).                                                                      |
|   |   |                                                                                                                                                                                                  |
| 32.1   |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith).               |
|   |   |                                                                                                                                                                                                  |
| 32.2   |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith).               |

 

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* - ManagementContract or Compensatory Plan or Arrangement.

 

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