** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q/A**

**AMENDMENT NO. 1**

 

**(Mark One)**

** **
| **x**                                                    | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                               | ** **                                                                                               |
| **For the  quarterly period ended: March 31, 2008** |
| ** **                                               |
| **or**                                                   |
| ** **                                               | ** **                                                                                               |
| **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.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Texas**                                                       | ** ** | **33-0502730**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization) |       | (I.R.S.  Employer Identification No.) |

 

**580 Westlake Park Blvd., Suite 525Houston, Texas 77079**(Address of Principal Executive Office)

 

Registrant’sTelephone Number, Including Area Code:** (281) 556-6200**

 

**N/A**

(Former Name,Former Address and Former Fiscal Year, If Changed Since Last Report)

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

As of April 30,2008, there were 76,638,471 shares of common stock, no par value, outstanding.

 

 

----

 

**EXPLANATORY NOTE**

 

BPZ Resources, Inc. (“BPZ” or “the Company”) isfiling this amendment to its Quarterly Report on Form 10-Q for the quarterended March 31, 2008 that was originally filed on May 9, 2008 (the“Original 10-Q”) in response to comments received from the Securities andExchange Commission’s Division of Corporation Finance. This amendment includesthe following:

 

·      additionaldisclosures of risk factors associated with the future marketability of our gasand future gas to power project;

 

·      presentationof  stock -based compensation expense aspart of general and administrative expenses in all applicable sections; and

 

·      additionaldisclosures with respect to our disclosure controls and procedures.

 

**Other than as specified above, thisamendment does not modify or affect the financial statements or the notesthereto in the Original 10-Q*.***This amendment does not reflect eventsoccurring after the filing of the Original 10-Q and does not modify or updatethe disclosures therein in any way other than as required to reflect theamendments as described above and set forth below. Unless the statementsindicate otherwise, as used in this amendment, the terms “Company,” “we,” “us”and “our” refer collectively to BPZ and its subsidiaries.

 

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**TABLE OF CONTENTS**

 
|            | **PART I**                                                                             | 3      |
|------------|---------------------------------------------------------------------------------------------|--------|
|       |                                                                                        |   |
| Item 1.    | Financial Statements                                                                        | 3      |
|       |                                                                                        |   |
|       | Consolidated  Balance Sheets                                                                | 3      |
|       |                                                                                        |   |
|       | Consolidated Statements of  Operations                                                      | 4      |
|       |                                                                                        |   |
|       | Consolidated Statements of  Cash Flows                                                      | 5      |
|       |                                                                                        |   |
|       | Notes to Consolidated Financial Statements                                                  | 6      |
|       |                                                                                        |   |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17     |
|       |                                                                                        |   |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                 | 23     |
|       |                                                                                        |   |
| Item 4.    | Controls and  Procedures                                                                    | 24     |
|       |                                                                                        |   |
| ** ** | **PART II**                                                                            | 25     |
|       |                                                                                        |   |
| Item 1.    | Legal Proceedings                                                                           | 25     |
|       |                                                                                        |   |
| Item 1A.   | Risk Factors                                                                                | 25     |
|       |                                                                                        |   |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 26     |
|       |                                                                                        |   |
| Item 3.    | Defaults  Upon Senior Securities                                                            | 26     |
|       |                                                                                        |   |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                        | 26     |
|       |                                                                                        |   |
| Item 5.    | Other Information                                                                           | 26     |
|       |                                                                                        |   |
| Item 6.    | Exhibits                                                                                    | 26     |
|       |                                                                                        |   |
| ** ** | **SIGNATURES**                                                                              | 27     |

 

2

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**PART I**

 

**Item 1. Financial Statements**

 

**BPZ Resources, Inc. and Subsidiaries**

**Consolidated BalanceSheets**

 
| ** **                                                                                                                                                                    | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2008**           | ** **  | **2007**              | ** ** |
| ** **                                                                                                                                                                    | ** ** | **(Unaudited)**    | ** **  | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                                    |       |               |        |                  |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Current assets:                                                                                                                                                               |       |               |        |                  |       |
| Cash and cash equivalents                                                                                                                                                     |       | $                  | 36,840,878  |                  | $          | 7,514,188 |   |
| Restricted cash                                                                                                                                                               |       | —             |        | 1,013,152             |       |
| Accounts receivable                                                                                                                                                           |       | —             |        | 2,950,089             |       |
| Value added tax receivable                                                                                                                                                    |       | 9,747,235          |        | 7,496,547             |       |
| Inventory                                                                                                                                                                     |       | 5,032,477          |        | 3,372,883             |       |
| Prepaid and other current assets                                                                                                                                              |       | 3,048,595          |        | 2,271,282             |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Total current assets                                                                                                                                                          |       | 54,669,185         |        | 24,618,141            |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Property, equipment and construction in progress, net                                                                                                                         |       | 121,200,425        |        | 100,366,091           |       |
| Restricted cash                                                                                                                                                               |       | 3,574,623          |        | 2,834,519             |       |
| Prepaid and other non-current assets                                                                                                                                          |       | 224,621            |        | 230,433               |       |
| Investment in Ecuador property, net                                                                                                                                           |       | 1,523,124          |        | 1,570,020             |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Total assets                                                                                                                                                                  |       | $                  | 181,191,978 |                  | $          | 129,619,204 |   |
|                                                                                                                                                                          |       |               |        |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                |       |               |        |                  |       |
| ** **                                                                                                                                                                    |       |               |        |                  |       |
| Current liabilities:                                                                                                                                                          |       |               |        |                  |       |
| Accounts payable                                                                                                                                                              |       | $                  | 17,826,695  |                  | $          | 11,774,316 |   |
| Accrued liabilities                                                                                                                                                           |       | 5,031,037          |        | 4,384,049             |       |
| Other liabilities                                                                                                                                                             |       | 280,017            |        | 263,439               |       |
| Accrued interest payable                                                                                                                                                      |       | 370,147            |        | 458,279               |       |
| Current maturity of long-term debt and capital lease obligation                                                                                                               |       | 15,243,400         |        | 6,188,668             |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Total current liabilities                                                                                                                                                     |       | 38,751,296         |        | 23,068,751            |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Asset retirement obligation                                                                                                                                                   |       | 279,763            |        | 273,048               |       |
| Long-term debt                                                                                                                                                                |       | 15,532,469         |        | 15,537,293            |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Total long-term liabilities                                                                                                                                                   |       | 15,812,232         |        | 15,810,341            |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Commitments and contingencies (Note 13)                                                                                                                                       |       |               |        |                  |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Stockholders’ equity:                                                                                                                                                    |       |               |        |                  |       |
| Preferred stock, no par value, 25,000,000 authorized; none issued and  outstanding                                                                                            |       | —             |        | —                |       |
| Common stock, no par value, 250,000,000 authorized; 76,438,471 and  73,914,471 shares issued and outstanding at March 31, 2008 and  December 31, 2007, respectively |       | 192,360,564        |        | 149,050,032           |       |
| Accumulated deficit                                                                                                                                                           |       | (65,732,114        | )           | (58,309,920           | )          |
|                                                                                                                                                                          |       |               |        |                  |       |
| Total stockholders’ equity                                                                                                                                               |       | 126,628,450        |        | 90,740,112            |       |
|                                                                                                                                                                          |       |               |        |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                               |       | $                  | 181,191,978 |                  | $          | 129,619,204 |   |

 

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

 

3

 

**BPZ Resources, Inc. and Subsidiaries**

**Consolidated Statements ofOperations**

**(Unaudited)**

 
| ** **                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Revenue                                                                 |       | $                                                    | 4,367,262  |   | $ | — |   |
|                                                                    |       |                                                 |       |   |   |
| Operating and  administrative expenses:                                 |       |                                                 |       |   |   |
| General and administrative                                              |       | 8,314,916                                            |       | 3,095,795 |   |
| Lease operating expense                                                 |       | 2,219,291                                            |       | — |   |
| Geological, geophysical  and engineering                                |       | 180,697                                              |       | 101,588 |   |
| Depreciation, depletion  and amortization expense                       |       | 1,191,398                                            |       | 54,497 |   |
|                                                                    |       |                                                 |       |   |   |
| Total operating expenses                                                |       | 11,906,302                                           |       | 3,251,880 |   |
|                                                                    |       |                                                 |       |   |   |
| Operating loss                                                          |       | (7,539,040                                           | )          | (3,251,880 | ) |
|                                                                    |       |                                                 |       |   |   |
| Other income (expense):                                                 |       |                                                 |       |   |   |
| Income/(loss) from  investment in Ecuador property, net of amortization |       | 253,104                                              |       | (183,943 | ) |
| Interest expense                                                        |       | —                                               |       | (1,178 | ) |
| Interest income                                                         |       | 49,480                                               |       | 240,307 |   |
| Other income/(expense)                                                  |       | (93,337                                              | )          | (2,324 | ) |
|                                                                    |       |                                                 |       |   |   |
| Total other income                                                      |       | 209,247                                              |       | 52,862 |   |
|                                                                    |       |                                                 |       |   |   |
| Loss before income taxes                                                |       | (7,329,793                                           | )          | (3,199,018 | ) |
|                                                                    |       |                                                 |       |   |   |
| Income taxes                                                            |       | 92,401                                               |       | 6,374 |   |
|                                                                    |       |                                                 |       |   |   |
| Net loss                                                                |       | $                                                    | (7,422,194 | ) | $ | (3,205,392 | ) |
|                                                                    |       |                                                 |       |   |   |
| Basic and diluted net loss  per share                                   |       | $                                                    | (0.10      | ) | $ | (0.05 | ) |
|                                                                    |       |                                                 |       |   |   |
| Weighted average common  shares outstanding                             |       | 74,525,279                                           |       | 63,309,294 |   |

 

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

 

4

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**BPZ Resources, Inc. andSubsidiaries**

**Consolidated Statements ofCash Flows**

**(Unaudited)**

 
| ** **                                                                              | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                              | ** ** | **March 31,**               | ** ** |
| ** **                                                                              | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net loss                                                                                |       | $                                | (7,422,194 | ) | $ | (3,205,392 | ) |
| Adjustments to reconcile net loss to net cash provided/(used) by  operating activities: |       |                             |       |   |   |
| Stock-based compensation                                                                |       | 4,562,230                        |       | 959,559 |   |
| Depreciation, depletion and amortization expense                                        |       | 1,191,398                        |       | 54,497 |   |
| Net loss on the retirement of assets                                                    |       | —                           |       | 8,985 |   |
| Amortization of investment in Ecuador property                                          |       | 46,896                           |       | 46,896 |   |
| Changes in operating assets and liabilities:                                            |       |                             |       |   |   |
| Decrease in accounts receivable                                                         |       | 2,950,089                        |       | — |   |
| Increase in value added tax receivable                                                  |       | (2,250,688                       | )          | (1,575,860 | ) |
| Increase/(decrease) in inventory                                                        |       | (1,889,997                       | )          | 75,370 |   |
| Decrease in other assets                                                                |       | 235,839                          |       | 157,420 |   |
| Increase in accounts payable                                                            |       | 6,052,379                        |       | 2,065,281 |   |
| Increase in accrued liabilities                                                         |       | 188,709                          |       | 372,674 |   |
| Increase in other liabilities                                                           |       | 16,578                           |       | 8,309 |   |
| Net cash provided by/(used by) operating activities                                     |       | 3,681,239                        |       | (1,032,261 | ) |
|                                                                                    |       |                             |       |   |   |
| Cash flows from investing activities:                                                   |       |                             |       |   |   |
| Property and equipment additions                                                        |       | (14,499,642                      | )          | (11,466,381 | ) |
| Restricted cash                                                                         |       | (740,104                         | )          | — |   |
| Net cash used by investing activities                                                   |       | (15,239,746                      | )          | (11,466,381 | ) |
|                                                                                    |       |                             |       |   |   |
| Cash flows from financing activities:                                                   |       |                             |       |   |   |
| Borrowings                                                                              |       | 2,800,000                        |       | — |   |
| Repayments of borrowings                                                                |       | (663,105                         | )          | (4,517 | ) |
| Proceeds from the exercise of stock subscriptions                                       |       | 750,000                          |       | — |   |
| Proceeds from exercise of options, net                                                  |       | 491,187                          |       | 202,460 |   |
| Proceeds from sale of common stock, net                                                 |       | 37,507,115                       |       | — |   |
| Net cash provided by financing activities                                               |       | 40,885,197                       |       | 197,943 |   |
|                                                                                    |       |                             |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                    |       | 29,326,690                       |       | (12,300,699 | ) |
| Cash and cash equivalents at beginning of period                                        |       | 7,514,188                        |       | 25,324,233 |   |
| Cash and cash equivalents at end of period                                              |       | $                                | 36,840,878 |   | $ | 13,023,534 |   |
|                                                                                    |       |                             |       |   |   |
| Supplemental cash flow information:                                                     |       |                             |       |   |   |
| **Cash paid for:**                                                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest                                                                                |       | $                                | 1,005,127  |   | $ | 1,178 |   |
| Foreign income tax                                                                      |       | 92,401                           |       | 6,374 |   |
| **Non — cash items:**                                                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Purchase and additions to equipment with the issuance of a capital lease obligation     | ** ** | $                                | 6,915,298  | ** ** | $ | — | ** ** |
| Interest capitalized to construction in progress                                        |       | 370,147                          |       | — |   |
| Depletion capitalized to production inventory, net                                      |       | (234,873                         | )          | — |   |
| Depreciation on support equipment capitalized to construction work in  progress         |       | 138,484                          |       | 115,159 |   |

 

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

 

5

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**BPZ Resources, Inc. and Subsidiaries**

**Notes To ConsolidatedFinancial Statements**

**(Unaudited)**

 

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

** **

**Organization**

 

BPZ Resources, Inc., (the “Company” or “BPZ”) aTexas corporation, is based in Houston, Texas with offices in Lima, Peru andQuito, Ecuador.  The Company is focusedon the exploration, development and production of oil and natural gas in Peruand Ecuador.  It also intends to utilizepart of its future natural gas production as a supply source for thecomplementary development of a Company owned gas-fired power generationfacility.

 

TheCompany maintains a Peruvian subsidiary through its wholly owned subsidiary BPZEnergy, Inc., a Texas corporation (“BPZ — Texas”).  Currently, it has exclusive rights andlicense agreements for oil and gas exploration and production covering a totalof approximately 2.4 million acres, in four blocks, in northwest Peru.  The license contracts cover 100% ownership ofBlock Z-1 (739,205 acres), Block XIX (472,860 acres), Block XXII (948,000acres) and Block XXIII (248,000 acres). The Block Z-1 contract was signed in November 2001, the Block XIXcontract was signed in December 2003 and Blocks XXII and XXIII were bothsigned in November 2007.  The Company’s license contracts provide foran initial exploration period of seven to thirteen years for Block Z-1 andseven to ten years for Blocks XIX, XXII and XXIII.  In addition, thecontracts require that the Company conduct specified activities on theproperties during this period.  If theexploration activities are successful, the total contract term can extend up to30 years for oil exploration and production and up to 40 years for gasexploration and production.

 

Additionally, through the Company’s wholly owned subsidiary,SMC Ecuador Inc., a Delaware corporation, and its registered branch inEcuador, it owns a 10% non-operated working interest in an oil and gasproducing property, Block 2, located in the southwest region of Ecuador (the “SantaElena Property”).  The license agreementcovering the property extends through May 2016.

 

The Company is in the initial stages of developing andproducing its oil and natural gas reserves.  To date its activities inPeru have been primarily limited to analysis and evaluation of technical dataon its properties, preparation of the development plans for the properties,including detailed engineering and design of the power plant and gas processingfacilities, refurbishment of two of its offshore platforms, procuring machineryand equipment for an extended drilling campaign, obtaining all necessaryenvironmental and operating permits, bringing production on-line and securingthe required capital and financing to conduct the current plan of operation.

 

**Corvina Field**

 

***Oil Development***

 

The Company started producing oil from its recent discoveries at theCX11 platform, located in the Corvina field in its offshore Block Z-1, under anextended well testing program which began on November 1, 2007.  Theoil is delivered to the refinery by barge approximately 100 miles south of theplatform.  The remainder is kept in production inventory until such timeit is delivered to Talara.

 

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. On January 30, 2008, one of the tankers, the Supe, sank aftercatching fire.  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.  Environment impact assessments show thatenvironmental issues have been adequately controlled.  No Company employees were injured.  Consequently, the Contract with thecommercial branch of the Peruvian Navy was allowed to expire in March 2008.  The Company has not entered into any newcontracts with the Peruvian Navy.  As aresult of the incident, the Company’s operations were voluntarily suspended atthe CX-11 platform.

 

On March 14, 2008, the Company was notified by OSINERGMIN, thegovernment regulatory agency in Peru responsible for monitoring industrialsafety, that it could resume operations at the CX-11 platform.  As a result, the Company began testing the CX11-18XDwell.  The well tested positive for oiland gas at quantities the Company believes to be commercially produciblepending final analysis of the four drill stem tests conducted in March andApril of 2008.  Three drill stemtests were conducted in the Upper Zorritos formation.  The first two drill stem tests targeted thelower sands in zones that had not previously been tested.  The third drill stem test targeted sands thathad tested oil in the Company’s CX11-21XD well. Initial test results indicate flow rates of up to 5,350 barrels of oilper day.  However, the Companycautions readers that test data from this well is not necessarily indicative ofactual results.

 

6

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The Company finished drilling and testing the CX11-18XD well.  After using tubing-conveyed perforating guns,the final cumulative test rates on the 18xD increased to 5,950 bopd.  In addition, the Company has resumedproduction from the CX11 platform. However, it is waiting for final approval from the appropriateauthorities in Peru regarding the transportation of its crude oil to therefinery in Talara.

 

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

 

The CorvinaGas-to-Power project, with an estimated capital budget of $115 million, entailsthe installation of a 10-mile gas pipeline from the CX-11 platform to shore,construction of gas processing facilities and an approximately 160 megawatt(“MW”) simple-cycle electric generating plant. The proposed power plant site is located adjacent to an existingsubstation and power transmission lines which, with certain upgrades, areexpected to be capable of handling up to 360 MW of power. In order to supportthe Company’s proposed electric generation project, it commissioned anindependent power market analysis for the region. The Peruvian electricitymarket is deregulated and power is transported through an interconnectednational grid managed by the Committee for Economic Dispatching of Electricity(known as COES). Based on this study, the Company believes it will be able tosell economic quantities of electricity from the initial 160 MW power plant.The market study also indicates that there may be future opportunities for theCompany to generate and sell significantly greater volumes of power into thePeruvian and Ecuadorian power markets. The Company plans to own 100% of the power plant. Accordingly, itsrevenues from the natural gas delivered to the power plant will be derived fromthe sale of electricity, which is currently projected for early 2010, thoughthis schedule is subject to many factors outside its control, includingobtaining all necessary financing, equipment and no assurance can be given thatthe Company can meet this schedule.

 

The Company iscurrently working on securing and finalizing funding for its gas to powerinitiatives comprised of approximately $120 million of senior debt to besyndicated by IFC, which is expected to close in August of 2008. This financingwill be subject to identification of the lending syndicate members andsubsequent negotiation and approval of the necessary loan documentation.

 

**Basis of Presentation and Principles of Consolidation**

 

TheCompany’s unaudited consolidated financial statements included herein have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission as they pertain to Form 10-Q.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations.  The unaudited financial statements reflectall adjustments which are, in the opinion of management, necessary for a fairpresentation of the financial position and results of operations for the interimperiods on a basis consistent with the annual audited financialstatements.  All such adjustments are ofa normal recurring nature.  The Companybelieves that the disclosures contained herein are adequate to make theinformation presented not misleading. The consolidated balance sheet at December 31, 2007, as presentedherin, is derived from the December 31, 2007 audited consolidatedfinancial statements.  These interimfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2007.  The results of operations for interim periodsare not necessarily indicative of the results to be expected for the full year.

 

***Reclassifications***

 

Certain reclassifications of prior year balanceshave been made to conform such amounts to corresponding 2008classifications.  These reclassificationshave no impact on net income.

 

**Summaryof Significant Accounting Policies**

 

The Company has provided asummary discussion of significant accounting policies, estimates and judgmentsin Note 1 to the Notes to the Consolidated Financial Statements included in itsAnnual Report on Form 10-K for the year ended December 31, 2007.

 

***Principlesof Consolidation***

*** ***

Our consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries and branch offices.  All intercompany balances and transactionshave been eliminated.

 

**Recent Accounting Pronouncements**

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combinations*(“SFAS No. 141(R)”), whichreplaces FASB Statement No. 141. SFAS No. 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any non- controlling interest in the acquiree and the goodwill acquired.  SFAS No. 141(R) also establishesdisclosure requirements that will enable users to evaluate the nature andfinancial effects of the business combination. SFAS No. 141(R) is effective for acquisitions that occur in anentity’s fiscal year that begins after December 15, 2008, which will bethe Company’s fiscal year 2009.  TheCompany does not expect the adoption of SFAS No. 141R to have a materialimpact on its consolidated financial position, results of operations or cashflows.

 

In September 2006, the FASB issued SFAS No. 157 — *Fair Value Measurement* (“SFAS No. 157”).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 iseffective for financial statements issued for periods beginning after November 15,2007.  SFAS No. 157 applies underother accounting pronouncements that require or permit fair value measurements,the FASB having previously concluded in those accounting pronouncements thatfair value is the relevant measurement attribute.  Accordingly, SFAS No. 157 does notrequire any new fair value measurements. However, for some entities, the application of this SFAS No. 157will change current practice.  Thedefinition of fair value focuses on the price that would be received to sellthe asset or paid to transfer the liability (an exit price), not the price thatwould be paid to acquire the asset or received to assume the liability (anentry price).  SFAS No. 157emphasizes that fair value is a market-based measurement, not anentity-specific measurement.  In February 2008,the FASB issued FASB Staff Position (FSP) SFAS 157-2 (“SFAS 157-2”) whichdefers the effective date of SFAS No. 157 for non-financial assets andliabilities that are not recorded at fair value on a recurring basis untilperiods beginning after November 15, 2008. The Company adopted SFAS No. 157 effective January 1, 2008, exceptfor those provisions permitted to be delayed by SFAS No. 157-2.  Accordingly, the Company has not applied theprovisions of SFAS No. 157 to non-financial assets and liabilities initiallymeasured at fair value.  In general, 

 

7

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fairvalue measurements and disclosures are made in accordance with the provisionsof SFAS No. 157.  The adoption of SFASNo. 157 had no impact on our consolidated financial position, results ofoperations or cash flows.

 

InFebruary 2007, FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115* (“SFAS No. 159”).  This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value.  Most of the provisions in SFAS No. 159are elective; however, the amendment to FASB Statement No. 115, Accountingfor Certain Investments in Debt and Equity Securities, applies to all entitieswith available-for-sale and trading securities. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  On January 1, 2008,the Company adopted SFAS No. 159 and elected not to measure any of itscurrently eligible assets and liabilities at fair value.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements—an Amendment of ARB No. 51*.  SFAS No. 160 requires that accountingand reporting for minority interests will be recharacterized as noncontrollinginterests and classified as a component of equity.  SFAS No. 160 also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners.  SFAS No. 160applies to all entities that prepare consolidated financial statements, exceptnot-for-profit organizations, but will affect only those entities that have anoutstanding noncontrolling interest in one or more subsidiaries or thatdeconsolidate a subsidiary.  Thisstatement is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 to have amaterial impact on its consolidated financial position, results of operationsor cash flows.

 

***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.***

*** ***

**Note 2 — Value Added Tax Receivable**

 

Value-added tax (referred to as “IGV”in Peru) is generally imposed on goods and services at a rate of 19%.  Peru currently has an IGV early recoveryprogram for companies during the exploration phase.  Under this program, IGV paid on theacquisition of certain goods and services used directly in hydrocarbonexploration activities can be recovered prior to a commercial discovery takingplace or production and revenue billings begin. Because the Company has oil sales, it is no longer eligible for the IGVearly recovery program on IGV receivables generated after November 2007.

 

The Company’s value added taxreceivable balance as of March 31, 2008 was $9.7 million.  Approximately $0.8 million has been collectedduring the three months ended March 31, 2008 under the IGV early recoveryprogram and approximately $0.4 million was offset by IGV payables generated byoil sales during the three months ended March 31, 2008.  Of the ending balance on March 31, 2008,the Company has filed claims with the Peruvian tax authority to recoverapproximately $3.2 million under the IGV early recovery program generated byaccounts payable for payments made prior to November 2007.  Of the $3.2 million, approximately $0.7million was collected in April 2008. As referred to above, the Company has approximately $6.5 million at March 31,2008 which is not eligible for early recovery due to the inititation of oilrevenue.  However, the $6.5 million willbe recovered against IGV payables associated with future oil sales under thenormal IGV recovery process.

 

As of March 31, 2008, the Company had short-termloans outstanding to Peruvian Banks of approximately $2.8 millioncollateralized by IGV receivables eligible for early recovery.  See Note9 “Debt”, included herein, for further discussion.

 

**Note 3 — Inventories**

 

Inventoriesconsist primarily of tubular goods, accessories and spare parts for productionequipment, stated at the lower of average cost or market.  The balance in inventory at March 31,2008 and December 31, 2007 was $5,016,046 and $2,824,492,respectively.  The increase is due toadditional production and drilling activity primarily related to the Corvinafield.

 

The Company also maintainscrude oil inventories in storage barges. These inventories are also stated at the lower of average cost or marketvalue.  Cost is determined on a weightedaverage basis based on production costs. There was 

 

8

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approximately $16,431 ofproduction inventory on hand at March 31, 2008, or 238 barrels of oil atan estimated cost of $69.04 per barrel. This is down from December 31, 2007 which consisted ofapproximately 12,248 barrels of crude oil at an estimated cost of $548,391 or$44.77 per barrel due to production delays associated with the Navy tankerincident.

 

**Note 4 — Prepaid and Other Current Assets**

 

Belowis a summary of prepaid and other current assets as of March 31, 2008 and December 31,2007:

 
| ** **                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                       |       |               |       |                  |       |
| Prepaid expenses and other |       | $                  | 495,794    |                  | $          | 590,784 |   |
| Deposits                   |       | 57,786             |       | 51,964                |       |
| Prepaid insurance          |       | 1,882,383          |       | 1,015,676             |       |
| Insurance receivable       |       | 612,033            |       | 612,033               |       |
| Interest receivable        |       | 599                |       | 825                   |       |
|                       |       | $                  | 3,048,595  |                  | $          | 2,271,282 |   |

 

Prepaid and other expenses and other are primarilyrelated to prepayments for drilling services, equipment rental and materialprocurement.  Depositsare primarily rent deposits in connection with the Company’s offices in Houstonand Peru.  Prepaid insurance consists ofpremiums related to the Company’s operations as well as general liability anddirectors and officer’s insurance policies.

 

Insurancereceivable is related to a navigation incident which caused the BPZ-01 barge tobe grounded on a sand bank in Talara Bay in northwest Peru during the secondmobilization trip to the Corvina platform in early August 2006.  As of March 31, 2008 the Company expectsto file a claim of approximately $712,000 for repairs with the insurancecarrier.  A deductible of $100,000 willbe applied to this insurance claim when reimbursed.  As of May 9, 2008 we have not presented afinal claim to our insurance carrier for the barge repairs.  A mandatory dry-dock originally scheduled forthe second quarter 2008, has been postponed to the fourth quarter 2008.  As a result, we have allowed the Certificateof Inspection from the U.S. Coast Guard to expire which, by doing so, prohibitsthe BPZ-01 from transporting hazardous cargo within U.S. federal waters.  Because we do not intend to take the BPZ-01out of Peruvian waters and we intend to re-flag the vessel under a non-U.S.jurisdiction, the lapse of the certified document should have no impact on ouroperations as currently envisioned.  See Note 13 “Commitments and Contingencies”, includedherein, for further discussion.

 

**Note 5 — Property, Equipment and Construction in Progress**

 

Below is a summary of property, equipment and construction in progress as of March 31, 2008 and December 31, 2007:

 
| ** **                                             | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                             | ** ** | **2008**           | ** **  | **2007**              | ** ** |
| ** **                                             | ** ** | ** **         | ** **  | ** **            | ** ** |
| Construction in progress:                              |       |               |        |                  |       |
| Power plant and related equipment                      |       | $                  | 4,741,532   |                  | $          | 3,486,309 |   |
| Platforms and wells                                    |       | 38,745,853         |        | 25,220,425            |       |
| Pipelines and processing facilities                    |       | 4,471,922          |        | 4,412,677             |       |
| Producing properties                                   |       | 56,196,646         |        | 56,159,488            |       |
| Barge and related equipment                            |       | 18,961,691         |        | 11,970,171            |       |
| Office equipment, leasehold improvements, and vehicles |       | 1,094,228          |        | 1,040,613             |       |
| Accumulated depreciation, depletion and amortization   |       | (3,011,447         | )           | (1,923,592            | )          |
|                                                   |       |               |        |                  |       |
| Net property, equipment and construction in process    |       | $                  | 121,200,425 |                  | $          | 100,366,091 |   |

 

Duringthe three months ended March 31, 2008, the Company incurred costs of $21.9million associated with its development initiatives for the exploration andproduction of oil and natural gas reserves and the complementary development ofproprietary gas-fired power generation of electricity for sale in Peru.

 

TheCompany incurred capital expenditures related to the drilling and testing ofthe CX 11-18XD of approximately $9.5 million during the three months ended March 31,2008.  The Company performed three drillstem tests of the CX11-18XD.  The welltested positive for oil and gas at quantities the Company believes to becommercially producible.   The three 

 

9

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drill stem tests were conducted in the Upper Zorritos formation.  The first two drill stem test targeted thelower sands in zones that had not previously been tested.  The third drill stem test targeted sands thathad tested oil in the Company’s CX11-21XD well. Initial test results indicate flow rates of up to 5,350 barrels of oilper day.  However, the Companycautions readers that test data from this well is not necessarily indicative ofactual results.  The Company has notdrilled any other wells or recognized significant revenues from operations, andit does not anticipate generating significant revenues from its propertiesprior to third quarter 2008.  Inaddition, the Company incurred costs of$2.9 million during the three months ended March 31, 2008 for theinstallation of sea-bed pipelines and the new mooring system.  The Company is now in the final stages ofcompleting the installation of sea-bed pipelines and mooring systems that willallow for an improved long-term testing program.  The new program should enable the Company toinitiate production in a more efficient manner, allowing for a better understandingof the behavior and characteristics of the Corvina oil field.

 

In February 2008, we entered into a lease-purchase agreement toacquire a deck barge (“BPZ-02”), of approximately 330 feet in length, to assistin the platform refurbishment and drilling activities in the Albacora field aswell as to assist in future offshore drilling and development activities. In the near term, the BPZ-02 will be used to act as a tender assist for thePetrex drilling rig as it is moved to the Albacora field in fourth quarter2008.  During that time the BPZ-01 will be placed in dry-dock to repairdamages sustained when it ran aground in late 2006.  The acquisition ofthe BPZ-02 allows the Company better asset maintenance scheduling and will aidin the support of increased offshore exploration and developmentactivities.  The terms of the lease-purchase stipulate a 19% rate ofinterest (33% effective rate of interest) over a one year term ending February 2009,at which point, title to the BPZ-02 will transfer to the Company upon finalpayment of the lease.  The Company accounted for the transaction as aCapital Lease in accordance to SFAS 13, “Accounting For Leases (As Amended)”under the criteria the barge will transfer title at the end of the lease periodand, as a result, depreciation will be calculated over the economic life of theasset.  Lease payments are fixed at$694,167 per month.  The capital leaseasset was recorded at approximately $7.0 million, which represents the presentvalue of the minimum lease payments, or the fair market value of the asset.

 

On June 13,2007, the Company entered into a capital lease agreement, with anoption to purchase, for two barges to assist in the development of the Corvinaoil.  The two barges were towed to Peruwhere they are being fitted with the required equipment for their intendeduse.  One of these barges will be moorednext to the CX11 platform, and will act as a floating production and storagefacility (“FPSO”) for oil produced from the Corvina field.  The second barge will be used to offload theproduced oil from the FPSO and transport it to a refinery located approximately100 miles to the south in the port of Talara. The capital lease for thetwo barges began in August 2007 and expires in November 2009.  The Company is in the final stages ofconstructing its FPSO.  The Companyexpects the FPSO to be fully operational around mid May 2008.  The FPSO equipment will be financed through aseparate capital lease that will commence when construction is complete.

 

The Company continues to work on the development of aCompany owned gas-fired power generation facility.  The Company incurred approximately $1.0million related to the drafting of certain design specifications for the powerplant.

 

TheCompany also incurred costs for office equipment and leasehold improvements forits offices in Houston, Peru and Ecuador of approximately $0.1 million and forthe purchase of machinery and equipment used in operations in Peru ofapproximately $0.4 million.

 

Inaccordance with “successful efforts” method of accounting, the Companycapitalized approximately $138,484 of depreciation expense related to supportequipment to construction in progress as well as capitalized interest ofapproximately $922,554 to construction in progress during the three monthsended March 31, 2008.

 

**Note 6 — Asset Retirement Obligation**

 

Anobligation was recorded for the plug and abandonment of the producing oilwells, the 21XD and the 14D, in accordance with the provisions of SFAS No 143 “Accountingfor Asset Retirement Obligations” (“ARO”).

 

***Activity related to the Company’s ARO is as follows:***

 

10

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| ** **                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                  |       |               |       |                  |       |
| ARO as of the beginning of the period |       | $                  | 273,048    |                  | $          | — |   |
| Liabilities incurred during period    |       | —             |       | 268,572               |       |
| Liabilities settled during period     |       | —             |       | —                |       |
| Accretion expense                     |       | 6,715              |       | 4,476                 |       |
|                                  |       |               |       |                  |       |
| ARO as of the end of the period       |       | $                  | 279,763    |                  | $          | 273,048 |   |

 

**Note 7 — Investment in Ecuador Property**

 

TheCompany has an investment in an oil and gas property in Ecuador (the “SantaElena Property”) totaling $1,523,124 and $1,570,020 as of March 31, 2008and December 31, 2007, respectively. The Company accounts for this investment under the cost method andrecords its share of cash received or paid as other income or expense.  Since the Company’s investment representsownership of an oil and gas property, which is a depleting asset, the Companyis amortizing the cost of the investment on a straight-line basis over theremaining term of the license agreement which expires in May 2016.  Accordingly, the Company recordedamortization expense for the three months ended March 31, 2008 and for thesame period in 2007 of approximately $46,896 and $46,896, respectively.

 

**Note 8 — Restricted Cash and Performance Bonds**

 

In connection with itsproperties in Peru, the Company has obtained five performance bonds totaling$5.7 million to insure certain obligations and commitments, of which onerelates to the guarantee of import duties related to the FPSO and transporttanker and four relate to performance obligations under the license contractsfor Blocks Z-1, XIX, XXII and XXIII.  As of March 31, 2008, the Company had restricted cashdeposits of $3.6 million, which partially collateralizes the performance bonds.

 

During the three months ended March 31, 2008 the Company wasrefunded $0.2 million related to the second exploration phase under the BlockXIX license contract and approximately $1.0 million related to a performancecommitment under a drilling services contract. The Company was required to post a $0.6 million performance bond inconnection with the third phase of exploration under the Block XIX licensecontract.  The Company also posted a $0.4million bond to guarantee import duties for the FPSO barge and transporttanker.

 

All ofthe performance bonds are issued by Peruvian banks and their terms are governedby the corresponding license contract.

 

**Note 9 — Debt**

** **

In February 2008,we entered into a lease-purchase agreement to acquire a deck barge (“BPZ-02”)to assist in the platform refurbishment and drilling activities in the Albacorafield as well as to assist in future offshore drilling and developmentactivities.  See Note 5 “Property, Equipment and Work in Progress”,included herein, for further discussion.  The terms of the lease-purchasestipulate a 19% rate of interest (33% effective rate of interest) over a oneyear term ending February 2009 at which point, title to the BPZ-02 willtransfer to the Company upon final payment of the lease.  The Companyaccounted for the transaction as a Capital Lease in accordance to SFAS No. 13, “AccountingFor Leases (As Amended)” under the criteria the barge will transfer title atthe end of the lease period and, as a result, depreciation will be calculatedover the economic life of the asset. Lease payments are fixed at $694,167 per month.  The capital lease asset was recorded atapproximately $7.0 million, which represents the present value of the minimumlease payments, or the fair market value of the asset.

 

The discovery ofoil reserves in the Corvina field has prompted the Company to direct itsattention towards accelerating the development of oil production in the Corvinafield.  On June 13, 2007 the Companyentered into a capital lease agreement, with an option to purchase, for two bargesto assist in the development of the Corvina oil.  The capital lease for the two barges began inAugust 2007 and 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 paymentsare variable, based on the working status of the barges, with a purchase optionof $5,000,000 after the first year of the lease and $4,000,000 after thematurity 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 obligation was recorded atapproximately $6.2 million which represents the present value of the minimumlease payments, or the fair market value of the debt obligation.  The FPSO equipment will be financed 

 

11

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through a separatecapital lease that will commence when construction is complete.

 

In addition, as of March 31,2008, the Company had long-term debt of approximately $15.5 million related tothe IFC convertible note.  On November 19, 2007, a convertible debtagreement between IFC and the Company was entered into for approximately $15.5million.  The terms of the loan agreement stipulate a conversion price of$10.39 per share and includes a forced conversion exercisable at the Company’soption if the closing price of the Company’s common stock exceeds a price of$18.19 per share, based on the average closing price over twenty consecutivebusiness days.  Currently, the twentyconsecutive business day average of the Company’s common stock has been greaterthan $18.19 per share.  The Companyintends to exercise its conversion option during the 2nd quarter2008 assuming the twenty consecutive business day average continues to exceedthe forced conversion price.  Theinstrument has a 10 year term with a variable interest rate of 2% per annumabove 6-month LIBOR (6.863% at March 31, 2008).   The loan fromthe IFC is unsecured, but restricts our ability to pledge assets to anotherlender unless certain conditions are met.  The IFC loan does not restrictour ability to issue additional capital stock, but does call for an adjustmentin its conversion price into BPZ common stock based on the terms of anysubsequent equity 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 March 31,2008, we were in compliance with all financial covenants.

 

Long-term debt as of March 31,2008 and December 31, 2007 also includes two secured loans for thepurchase of office furniture.  Both loanshave a term of 60 months, bearing interest at 5.94% and 9.44%, with principaland interest payments due on a monthly basis.

 

During the firstquarter ended March 31, 2008, the Company entered into two loan agreementswith Peruvian banks to borrow approximately $2.8 million.  The amounts are included in currentmaturities of long-term debt as they are collateralized by IGV receivables andmature upon receipt of the IGV payment. The loans are fixed and bear interest rates of approximately 8% each.

 

Maturities ofnotes payable as of March 31, 2008 are as follows:

 
| Less than one year |   | $          | 15,243,400 |   |
|-----------------------------------|--------|------------|------------|--------|
| One to three years                |   | 32,469     |       |
| Three to five years               |   | —     |       |
| More than five years              |   | 15,500,000 |       |
| Total                             |   | $          | 30,775,869 |   |

 

**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.

 

**Public Offering of Common Stock**

 

On March 25, 2008,the Company closed a common stock offering of 2.0 million shares.  The offering was priced to the public at$20.00 per share and underwritten by Canaccord Adams, Inc. (“Canaccord”)on a firm commitment basis.  The Companyreceived proceeds after underwriting fees and discounts of approximately $37.5million.  In addition, the Companygranted Canaccord a 30-day option to purchase up to 200,000 additional sharesto cover any over-allotments.  On April 19,2008, the over-allotment option was executed and Canaccord bought an additional200,000 shares resulting in proceeds to the Company after underwriting fees anddiscounts of approximately $3.6 million. A financial advisory fee of $150,000 was paid to Morgan Keegan forinvestment services and consulting related to the offering.

 

The Company intends touse the proceeds from the offering for general corporate purposes, including:the reduction of outstanding indebtedness, or other corporate obligations,capital expenditures and general working capital requirements, includingtesting and drilling operations and commencement of development of the Company’sAlbacora Field property.

 

**Potentially Dilutive Securities**

 

In addition to its shares issued and outstanding, the Company has the following potentially dilutive securities as of March 31, 2008 and December 31, 2007.  None of these potentially dilutive shares have been included in the calculation of earnings per share as the effect would be anti-dilutive.

 

12

 
| ** **                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Stock options outstanding                                          |       | 3,955,448          |       | 4,175,448             |       |
| Warrants outstanding                                               |       | —             |       | 250,000               |       |
| Shares issuable under IFC convertible debt agreement               |       | 1,491,819          |       | 1,491,819             |       |
| Over-allotment shares under public offerring                       |       | 200,000            |       | —                |       |
| Total potentially dilutive securities issued                       |       | 5,647,267          |       | 5,917,267             |       |
|                                                               |       |               |       |                  |       |
| Shares available pursuant to Long-Term Incentive Compensation Plan |       | 3,098,450          |       | 3,152,450             |       |

 

On January 1, 2006, theCompany adopted SFAS No. 123 — Revised 2004,*Share—BasedPayment* (“SFAS No. 123(R)”), which establishes accounting forstock-based payment transactions for employee services and goods and servicesreceived 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 compensationcost is measured at the date of grant, based on the calculated fair value ofthe award, and is recognized as expense over the employee’s or non-employee’sservice period, which is generally the vesting period of the equity grant.

 

TheCompany adopted SFAS No. 123(R) using the modified prospectiveapplication method and, accordingly, no prior periods have been restated as aresult of the adoption of this pronouncement. Under this 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.

 

Thefollowing table summarizes stock-based compensation costs recognized under SFAS123(R) for the three months ended March 31, 2008 and March 31,2007, respectively:

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| ** **                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                         |       |                             |       |   |   |
| Employee stock—based compensation costs |       | $                                | 3,252,871  |   | $ | 942,459 |   |
| Non-employee stock-based compensation        |       | 1,309,359                        |       | 17,100 |   |
|                                         |       | $                                | 4,562,230  |   | $ | 959,559 |   |

 

Seebelow for a detailed discussion regarding the Company’s employee long-termincentive compensation plan and stock-based payments to non-employees.

 

**Restricted Stock Awards and Performance Shares**

 

TheCompany determines the fair value of restricted stock awards and performanceshares based on the market price of the Company’s common stock on the date ofgrant.  Compensation cost for such awardsis recognized ratably over the vesting or service period, net of forfeitures;however, compensation cost related to performance shares will not be recordedor will be reversed if the Company does not believe it is probable that suchperformance criteria will be met or if the service provider (employee orotherwise) fails to meet such criteria.

 

A summaryof the Company’s restricted stock award activity and related information ispresented below:

 
| ** **                                   | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                   | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                   | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Non-vested balance at December 31, 2007 |       | 1,284,850          |       | $                   | 8.82       |   |
| Granted                                      |       | —             |       | $                   | —     |   |
| Vested                                       |       | —             |       | $                   | —     |   |
| Forfeited                                    |       | (6,000             | )          | $                   | 4.10       |   |
| Non-vested balance at March 31, 2008    |       | 1,278,850          |       | $                   | 8.84       |   |

 

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As of March 31,2008, there was approximately $9.8 million of total unrecognized compensationcost related to non-vested restricted stock awards, which is expected to berecognized over a weighted-average period of approximately 1.5 years.

** **

**Stock Options**

 

Incentive and non-qualified stock options issued todirectors, officers, employees and consultants are issued at an exercise priceequal to the fair market value of the stock at the date of grant.  The majority of the Company’s stock optionsvest pro-rata over three years from the grant date and generally expire tenyears from the date of grant. Compensation cost related to stock options is recognized on astraight-line basis over the vesting or service period and is net offorfeitures.

 

The fair value of each stock option granted isestimated on the date of grant using a Black-Scholes option pricing model.  The following table presents theweighted-average assumptions used in the option pricing model for options grantedduring the three months ended March 31, 2008.  During the three months ended March 31,2008, 65,000 options were granted by the Company under the 2007 Long-termIncentive Plan.  The expected life of theoptions represents the period of time the options are expected to beoutstanding.  For the three months ended March 31,2008, the expected term was derived using the facts and circumstances relevantto the Company, from the analysis of other companies of a similar size andoperational life cycle as well as the limited Company history of stockexercises.  For the three months ended March 31,2007, the expected term of options granted was derived based on a weightingbetween (a) the Company’s historical exercise and forfeiture activity and (b) theaverage midpoint between vesting and the contractual term.  For the three months ended March 31,2008 and March 31, 2007, our expected volatility is based on thehistorical volatility of our stock for a period approximating the expectedlife.  The risk-free interest rate isbased on the observed U.S.  Treasuryyield curve in effect at the time the options were granted.  The dividend yield is based on the fact theCompany does not anticipate paying any dividends.

 
| ** **                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life (years)                               |       | 4.5      |       | 6        |       |
| Risk-free interest rate                             |       | 3.5      | %          | 4.7      | %          |
| Volatility                                          |       | 81.57    | %          | 86.00    | %          |
| Dividend yield                                      |       | 0        | %          | 0        | %          |
| Weighted-average fair value per share at grant date |       | $        | 14.37      |     | $          | — |   |
|                                                     |            |          |            |          |            |  |  |

 

A summaryof our stock option activity and related information is presented below:

 

Duringthe three months ended March 31, 2008 a total of 280,000 options wereexercised.  As of March 31, 2008,there was approximately $12.8 million of total unrecognized compensation costrelated to non-vested stock options which is expected to be recognized over aweighted-average period of approximately 1.3 years.

 

Thefollowing tables summarize information about stock options outstanding as of March 31,2008:

 
| ** **                                  | ** ** | ** **  | ** ** | ** **          | ** ** | **Outstanding**         | ** ** | **Exercisable** | ** ** |
|---------------------------------------------|------------|-------------|------------|---------------------|------------|-------------------------|------------|-----------------|------------|
| ** **                                  | ** ** | ** **  | ** ** | ** **          | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **  | ** ** | ** **          | ** ** | ** **              | ** ** | **Average**     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **  | ** ** | ** **          | ** ** | ** **              | ** ** | **Remaining**   | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **  | ** ** | ** **          | ** ** | ** **              | ** ** | **Contractual** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | ** **  | ** ** | ** **          | ** ** | **Number of**      | ** ** | **Life**        | ** ** | **Weighted** | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| **Range of Exercise Prices** | ** ** | **Options** | ** ** | **(In years)** | ** ** | **Exercise Price** | ** ** | **Options**     | ** ** | **Per Option** | ** ** |
| Below                                       |       | to          |       | $2.12               |       | 199,248                 |       | 5.7             |       | $ | 1.30 |   | 199,248 |   | $ | 1.30 |   |
| $2.13                                       |       | to          |       | $4.23               |       | 1,422,000               |       | 7.4             |       | $ | 3.39 |   | 707,000 |   | $ | 3.37 |   |
| $4.24                                       |       | to          |       | $6.35               |       | 660,500                 |       | 8.5             |       | $ | 4.94 |   | 62,500 |   | $ | 4.51 |   |
| $6.36                                       |       | to          |       | $8.47               |       | 77,500                  |       | 8.3             |       | $ | 6.50 |   | — |   | $ | — |   |
| $8.48                                       |       | to          |       | $10.58              |       | 211,200                 |       | 8.8             |       | $ | 10.43 |   | — |   | $ | — |   |
| $10.59                                      |       | to          |       | $11.88              |       | 1,385,000               |       | 9.0             |       | $ | 12.37 |   | — |   | $ | — |   |
| Total                                       |       |        |       |                |       | 3,955,448               |       | 8.2             |       | $ | 7.12 |   | 968,748 |   | $ | 3.02 |   |

 

14

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| ** **                                            | ** ** | ** **         | ** ** | **Weighted—**      | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                                            | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                                            | ** ** | **Options**        | ** ** | **Per Option**     | ** ** |
| Options outstanding at December 31, 2007         |       | 4,175,448          |       | $                       | 8.14       |   |
| Granted                                               |       | 65,000             |       | $                       | 22.34      |   |
| Exercised                                             |       | (280,000           | )          | $                       | 1.75       |   |
| Forfeited                                             |       | (5,000             | )          | $                       | 4.10       |   |
| Options outstanding at March 31, 2008            |       | 3,955,448          |       | $                       | 7.12       |   |
|                                                  |       |               |       |                    |       |
| Options vested and exercisable at March 31, 2008 |       | 968,748            |       | $                       | 3.02       |   |

 

The aggregateintrinsic value of stock options outstanding at March 31, 2008 wasapproximately $57.8 million, of which approximately $18.1 million relates toawards vested and exercisable and approximately $39.7 million relates to awardsexpected to vest.  The intrinsic valuefor stock options outstanding is calculated as the amount by which the quotedprice of our common stock as of March 31, 2008 exceeds the exercise priceof the option.

 

**Warrants**

 

Nowarrants were granted during the three months ended March 31, 2008 or March 31,2007.  As of March 31, 2008, theCompany had no warrants outstanding.

 

For theirrole as placement agent, in connection with the private placement of 11,466,000shares of 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.  These warrants expire on July 19, 2010and were valued at $325,000 using the Black-Scholes model, which amount wastreated as additional non-cash stock offering costs. Additionally, for theirfinancial advisory services, in connection with the private placement of4,482,000 shares of common stock in June 2006, Morgan Keegan &Company, Inc. received fully vested warrants to purchase 150,000 shares ofthe Company’s common stock at an exercise price of $3.00 per share.  These warrants expire on June 30, 2011and were valued at $248,645 using the Black-Scholes model, which amount wastreated as additional non-cash stock offering costs.  During the three months ended March 31,2008, Morgan Keegan exercised warrants to purchase 250,000 shares of theCompany’s common stock at an exercise price of $3.00.  As a result, the Company received proceeds of$750,000.

 

**Note 11 — Income Tax**

*** ***

***As of March 31, 2008,t***heCompany had a valuation allowance for the full amount of the deferred tax assetresulting from the income tax benefit generated from net losses, as itbelieves, based on the weight of available evidence, that it is more likelythan not that the deferred tax asset will not be realized prior to theexpiration of net operating loss carryforwards in various amounts through2027.  However, the Company did pay aminimum foreign income tax of $92,401 in Peru as a result of its oil revenues.

*** ***

Estimated interest andpenalties related to potential underpayment on unrecognized tax benefits, ifany, are classified as a component of tax expense in the Consolidated Statementof Operations. As of the date of adoption of FIN 48, the Company did not haveany accrued interest or penalties associated with any unrecognized taxbenefits, nor was any interest expense recognized during the quarter.

 

**Note 12 — Affiliate and Related Party Transactions**

** **

As of March 31, 2008 and December 31, 2007, theCompany had no outstanding balances with affiliates or related parties.

 

15

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**Note 13 — Commitments and Contingencies**

 

*Charter of Navy Tankers*

* *

On October 24, 2007, the Company’s primary marine transportationcontractor entered into two short term agreements with the commercial divisionof the Peruvian Navy to lease two tankers to transport oil to market.  However, on January 30, 2008, one of thetankers, the Supe, sank after catching fire.  At the time of the incidentthe Supe tanker contained approximately 1,300 barrels of oil, most of which isbelieved to have been burned in the fire.  Environment impact assessmentsshow that environmental issues have been adequately controlled.   NoCompany employees were injured. Consequently, the Contract with the commercial branch of the PeruvianNavy was allowed to expire in March 2008. The Company has not entered into any new contracts with the PeruvianNavy.

 

*Barge Incident*

 

In early August 2006, we incurred an operational delay resultingfrom a navigation incident which caused the BPZ-01 barge to be grounded on asand bank in Talara Bay in northwest Peru. As of March 31, 2008, we had recorded approximately $612,000 ininsurance receivable pending the submission of an insurance claim.  As of May 9, 2008, we have not presenteda final claim to our insurance carrier for the barge repairs.  A mandatory dry-dock originally scheduled forthe second quarter 2008, has been postponed to the fourth quarter 2008.  As a result, we have allowed the Certificateof Inspection from the U.S. Coast Guard to expire which, by doing so, prohibitsthe BPZ-01 from transporting hazardous cargo within U.S. federal waters.  Because we do not intend to take the BPZ-01out of Peruvian waters, the lapse of the certified document should have noimpact on our operations as currently envisioned.

 

We believe the majority of the costsassociated with the grounding incident will be reimbursed through insurance orthrough a third party.  No assurances canbe given, however, that any such recoveries will be sufficient to cover allcosts associated with the incident or to the timing of any suchrecoveries.  We intend to file aninsurance claim with our underwriters by the end of the second quarter 2008 aswell as finalize the reimbursement agreement with the third party.

 

*Peru Properties*

 

In connection with itsproperties in Peru, the Company has obtained five performance bonds totaling$5.7 million to insure certain obligations and commitments, of which onerelates to the guarantee of import duties related to the FPSO and transporttanker and four relate to performance obligations under the license contractsfor Blocks Z-1, XIX, XXII and XXIII.  As of March 31, 2008, the Company had restricted cashdeposits of $3.6 million, which partially collateralizes the performance bonds.

 

During the three months ended March 31, 2007 the Company wasrefunded $0.2 million related to the second exploration phase under the BlockXIX license contract and approximately $1.0 million related to a performancecommitment under a drilling services contract. The Company was required to post a $0.6 million bond in connection withthe third phase of exploration under the Block XIX License Contract.  The Company also posted a $0.4 million bondto guarantee import duties for the FPSO barge and transport tanker.

 

*Barge Capital Lease*

 

In February 2008, we entered into a lease-purchase agreement toacquire a deck barge (“BPZ-02”) to assist in the platform refurbishment anddrilling activities in the Albacora field as well as to assist in futureoffshore drilling and development activities.  In the near term, theBPZ-02 will be used to act as a tender assist for the Petrex drilling rig as itis moved to the Albacora field in fourth quarter 2008.  During that timethe BPZ-01 will be placed in drydock to repair damages sustained when it ranaground in late 2006.  The acquisition of the BPZ-02 allows the Companybetter asset maintenance scheduling and will aid in the support of increasedoffshore exploration and development activities.  The terms of thelease-purchase stipulate a 19% rate of interest over a one year term at whichpoint, title to the BPZ-02 will transfer to the Company upon final payment ofthe lease.  The Company will account for the transaction as a CapitalLease in accordance to SFAS No. 13, “Accounting For Leases (As Amended)” underthe criteria the barge will transfer title at the end of the lease period and,as a result, depreciation will be calculated over the economic life of theasset.

* *

*Financing Activities*

 

The Company is actively negotiating with IFC to increase the total debtpackage to an estimated $355 million for further development of its assets, ofwhich $120 million of the total financing package was approved by the CreditCommittee of the IFC on November 29, 2006. Please see Note 14 “Commitments and Contingencies” – *Financing Activities* in the Notes to the ConsolidatedFinancial Statements included in the Company’s Form 10-K for the yearended December 31, 2007 for further discussion.  The financing package includes an investmentof $19.5 million by IFC in BPZ’s common stock which took place on December 18,2006, with the remaining 

 

16

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portion to be financedthrough debt issuance.  Part of thedebt issuance has been funded through a “C” Loan, which is comprised of $15.5million of convertible debt and was closed in early November 2007.  The terms of the “C” Loan agreement stipulatea conversion price of $10.39 per share and include a forced conversionexercisable at the Company’s option if the average closing price of the Company’scommon stock exceeds a price of $18.19 per share based on the average closingprice over twenty consecutive business days. Currently, the twenty consecutive business day average of the Company’scommon stock has been greater than $18.19 per share.  The Company intends to exercise itsconversion option during the second quarter 2008 assuming the twentyconsecutive business day average continues to exceed the forced conversionprice.  This is will bring IFC’s totalownership in BPZ Resource common stock to approximately 10%.  The Company anticipates the remaining debtissuance balance to be funded through the following two facilities:

 

·                 Upto a $200 million credit agreement to fund the Company’s exploration anddevelopment activities.  The company iscurrently negotiating the term sheet with IFC on the credit facility.  The facility will be subject to a borrowingbase calculation that will be a function of semi-annual oil reservereports.  The Company expects to closethis agreement by the end of the second quarter.

 

·                  TheCompany is negotiating an additional $120 million debt facility to fund thedevelopment of its gas-to-power project. The final amount will be a function of the type of generation equipmentultimately selected.  The Company iscurrently negotiating the engineering, procurement and construction contractsthat will be conditions precedent to this credit facility.  The Company anticipates closing this loan bythe end 2008.

 

As of May 9, 2008, the final loan documents for the $200 millionand $120 million loans have not been completed.

 

**Note 14 — Legal Proceedings**

 

See Note 15 “Legal Proceedings” in the Company’sConsolidated Financial Statements included in its Form 10-K for the year ended December 31, 2007, for detailed discussion.  There have been no materialchanges regarding legal proceedings as previously described in our AnnualReport on Form 10-K for the year ended December 31, 2007.

** **

**Note 15 — Subsequent Events**

 

*Public Offering of Common Stock*

 

On April 18, 2008, an over-allotment option wasexecuted and Canaccord bought an additional 200,000 shares resulting inproceeds to the Company after underwriting fees and discounts of approximately$3.6 million  SeeNote 10 “Stockholders’ Equity”, included herein, for further discussion.

 

*Convertible Debt*

 

On May 2,2008, the Company notified IFC of its intent to exercise its conversion optionunder the convertible debt agreement. Conversion will take place on or about May 15, 2008.  SeeNote 9 “Debt” and Note 13 “Commitments and Contingencies”, included herein, forfurther discussion.

** **

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**Overview**

 

You should read the following discussion andanalysis together with our consolidated financial statements and notes theretoand the discussion Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” Item 7A, “Quantitative and QualitativeDisclosures About Market Risk” and Item 1A.  “Risk Factors” includedin our Annual Report on Form 10-K for the year ended December 31,2007.  The following information containsforward-looking statements that involve risks, uncertainties andassumptions.  Should one or more of theserisks or uncertainties materialize, our actual results may differ from thoseexpressed or implied by the forward-looking statements.  See “Disclosure Regarding Forward-LookingStatements” below.

 

BPZ Resources, Inc., (the “Company” or “BPZ”) aTexas corporation, is based in Houston, Texas with offices in Lima, Peru andQuito, Ecuador.  We are focused on theexploration, development and production of oil and natural gas in Peru andEcuador.  We also intend to utilize partof our future natural gas production as a supply source for our complementarydevelopment of a Company owned gas-fired power generation facility.

 

Wemaintain a Peruvian subsidiary through our wholly owned subsidiary BPZ Energy, Inc.,a Texas corporation (“BPZ — Texas”). Currently, we have exclusive rights and license agreements for oil andgas exploration and production 

 

17

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covering a total of approximately 2.4 million acres, in four blocks, innorthwest Peru.  The license contractscover 100% ownership of Block Z-1 (739,205 acres), Block XIX (472,860 acres),Block XXII (948,000 acres) and Block XXIII (248,000 acres).  The Block Z-1 contract was signed in November 2001,the Block XIX contract was signed in December 2003 and Blocks XXII andXXIII were both signed in November 2007.  Our license contractsprovide for an initial exploration period of seven to thirteen years for BlockZ-1and seven to ten years for Blocks XIX, XXII and XXIII.  In addition, thecontracts require that we conduct specified activities on the properties duringthis period.  If the explorationactivities are successful, the total contract term can extend up to 30 yearsfor oil exploration and production and up to 40 years for gas exploration andproduction.

 

Additionally, through our wholly owned subsidiary,SMC Ecuador Inc., a Delaware corporation, and its registered branch inEcuador, it owns a 10% non-operated working interest in an oil and gasproducing property, Block 2, located in the southwest region of Ecuador (the “SantaElena Property”).  The license agreementcovering the property extends through May 2016.

 

We are in the initial stages of developing and producing itsoil and natural gas reserves.  To date our activities in Peru have beenprimarily limited to analysis and evaluation of technical data on itsproperties, preparation of the development plans for the properties, includingdetailed engineering and design of the power plant and gas processingfacilities, refurbishment of two of its offshore platforms, procuring machineryand equipment for an extended drilling campaign, obtaining all necessaryenvironmental and operating permits, bringing production on-line and securingthe required capital and financing to conduct the current plan of operation.

 

**Corvina Field**

 

***Oil Development***

 

We started producing oil from fromour recent discoveries at the CX11 platform, located in the Corvinafield in our offshore Block Z-1, under an extended well testing program whichbegan on November 1, 2007.  The oil is delivered to the refinery bybarge approximately 100 miles south of the platform.  The remainder iskept in production inventory until such time as it is delivered to Talara.

 

Our 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 of the tankers, the Supe, sankafter 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.  Initial assessments show that environmentalissues have been adequately controlled.   No Company employees wereinjured.  Consequently, the Contract withthe commercial branch of the Peruvian Navy was allowed to expire in March 2008.  We have not entered into any new contractswith the Peruvian Navy.  As a result ofthe incident, our operations were voluntarily suspended at the CX-11 platform.

 

On March 14, 2008, we were notified by OSINERGMIN, the governmentregulatory agency in Peru responsible for monitoring industrial safety, that wecould resume operations at the CX-11 platform. As a result, we began testing the CX11-18XD well.  The well tested positive for oil and gas atquantities we believe to be commercially producible pending final analysis ofthe four drill stem tests conducted in March and April of 2008.  Three drill stem tests were conducted in theUpper Zorritos formation.  The first twodrill stem tests targeted the lower sands in zones that had not previously beentested.  The third drill stem testtargeted sands that had had tested oil in the Company’s CX11-21XD well.  Initial test results indicate flow rates ofup to 5,350 barrels of oil per day.  However,we caution readers that test data from this well is not necessarily indicativeof actual results.

 

Wefinished drilling and testing the CX11-18XD well.  After using tubing-conveyed perforating guns,the final cumulative test rates on the 18xD increased to 5,950 bopd.  In addition, we have resumed production fromthe CX11 platform.  However, we arewaiting for final approval from the appropriate authorities in Peru regardingthe transportation of our crude oil to the refinery in Talara.

** **

***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 processing facilitiesand an approximately 160 megawatt (“MW”) simple-cycle electric generatingplant.  The proposed power plant site islocated adjacent to an existing substation and power transmission lines which,with certain upgrades, are expected to be capable of handling up to 360 MW ofpower. In order to support our proposed electric generation project, wecommissioned an independent power market analysis for the region. The Peruvianelectricity market is deregulated and power is transported through an interconnectednational grid managed by the Committee for Economic Dispatching of Electricity(known as COES). Based on this study, we believe we will be able to selleconomic quantities of electricity from the initial 160 MW power plant. Themarket study also indicates that there may be future opportunities for us togenerate and sell significantly greater volumes of power into the Peruvian andEcuadorian power markets.  Our plan is toown 100% of the power plant. Accordingly, our revenues from the natural gasdelivered to the power plant will be derived from the sale of electricity,which is currently projected for early 2010, though this schedule is subject tomany factors outside our control, including obtaining all necessary financing,equipment and no assurance 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.

 

**Results ofOperations**

 
| ** **                               | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                               | ** ** | **2007** | ** ** | **Increase/  (Decrease)** | ** ** |
| General and administrative               |       | $                                                                      | 3,752,686  |   | $ | 2,136,236 |   | $ | 1,616,450 |   |
| Stock-based compensation                 |       | 4,562,230                                                              |       | 959,559 |   | 3,602,671 |   |
| Lease operating expense                  |       | 2,219,291                                                              | ** ** | **—** |   | 2,219,291 |   |
| Geological, geophysical and engineering  |       | 180,697                                                                |       | 101,588 |   | 79,109 |   |
| Depreciation, depletion and amortization |       | 1,191,398                                                              |       | 54,497 |   | 1,136,901 |   |
| Total operating expenses                 |       | $                                                                      | 11,906,302 |   | $ | 3,251,880 |   | $ | 8,654,422 |   |

 

18

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Ouroperating and administrative expenses consist principally of general andadministrative costs as well as geological, geophysical and engineering costsand lease operating costs. 

 

Generaland administrative costs have increased from $3,095,795 during the three monthsended March 31, 2007 to $8,314,916 during the three months ended March 31,2008.  The increase is as a result of ourincreased activity levels, necessary additional personnel and costs associatedwith being a public company.  Included ingeneral and administrative expense is stock-based compensation expense.  Stock-based compensationexpense for the three months ended March 31, 2008 was approximately$4,562,230 compared to $959,559 during the same period in 2007.  Stock based compensation expense is primarilyrelated to our restricted stock grants, and accrued stock-based compensationunder our 2007 Long-Term Incentive Plan and 2007 Directors CompensationIncentive Plan.  

 

Weincurred lease operating costs during the three months ended March 31,2008 of $2,219,291 due to the commencement of oil production in November 2007.  This amount includes approximately $38,000related to the cost of the approximately 1,300 barrels of oil that was lost asa result of the Supe incident.

 

Geological,geophysical and engineering cost for the three months ended March 31, 2008as compared to March 31, 2007 increased from $101,588 to $180,697 as aresult of increased personnel and associated costs. 

 

Depreciation,depletion and amortization increased by $1,136,901 from $54,497 for the threemonths ended March 31, 2007 to $1,191,398 for the three months ended March 31,2008.  The difference is primarilyrelated to depletion expense related to the production of oil.  This amount includes approximately $24,000related to the cost of the approximately 1,300 barrels of oil that was lost asa result of the Supe incident.

 

Wereceived net cash distributions from our investment in Ecuador property ofapproximately $300,000 during the three months ended March 31, 2008,compared to net cash distributions of approximately $160,000during the three months ended March 31,2007.  Since our investment consists ofan interest in a producing oil and gas property, we are amortizing theinvestment on a straight-line basis over the remaining term of the licenseagreement covering the property. Accordingly, we recorded $46,896 of amortization expense during thethree months ended March 31, 2008, and $46,896 during the three monthsended March 31, 2007.

 

Wecapitalized interest expense of $922,554 during the three months ended March 31,2008, primarily related to our capital lease obligations and the IFCconvertible debt.  We incurred interestexpense of $1,178 during the three months ended March 31, 2007.

 

Wereceived interest income of approximately $49,480 during the three months endedMarch 31, 2008, as compared to $240,307 during the three months ended March 31,2007 as a result of the increased cash balance from the various privateplacements of our common stock during 2006.

 

Werealized foreign tax expense of $92,401 during the three months ended March 31,2008 compared to tax expense of $6,374 for the same period ended March 31,2007.  Tax expense during the threemonths ended March 31, 2008 is primarily related to the minimum Peruvianfederal income taxes payable under the Block Z-1 license contract as a resultof oil sales under an extended well test program.  The tax expense in 2007 is related to therevenues from our 10% non-operated working interest in the Santa ElenaProperty in southwestern Ecuador and its affect on our US non-consolidatedreturns.  We were unable to offset theoperating losses generated from our Peruvian branch with the revenues from ourEcuador branch.

 

Werealized a net loss of $7,422,194 or $(0.10) per share during the three monthsended March 31, 2008 compared to a net loss of $3,205,392 or $(0.05) pershare for the same period in 2007.

 

**2008 Project Capital Budget**

 
| ** **                                 | ** ** | **($ 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 (1)                     |       | 115.0                         |       |
| Total estimated capital budget             |       | $                             | 215.0      |   |

 

19

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----

(1) Anticipated financing provided by International Finance Committee — capitalbudget covers entire construction period which will extend into 2009.

 

**Liquidity,Capital Resources and Capital Expenditures**

* *

*Production*

 

In November 2007, webegan producing oil from the CX11-21XD and 14D wells in the Corvina Field underan extended well testing program.  Forthe three months ended March 31, 2008, we produced approximately 45,176barrels of oil and sold approximately 55,886 barrels to a refinery in Talarawhich included oil inventory of approximately 10,710 barrels from 2007production.  The oil is delivered to the refinery by barge approximately100 miles south of the platform. The remainder is kept in production inventoryuntil we begin production, increasing the inventory quantities to a sufficientlevel that the refinery in Talara will accept delivery.  On January 30, 2008, approximately 1,300barrels of oil were lost in the fire aboard the Supe.  The cost of the crude oil lost wasapproximately $62,000 and was expensed through lease operating expense anddepreciation, depletion and amortization.

 

We currently have twoadditional barges under a capital lease agreement.  We intend to use the tank barges as floatingproduction and storage facility (“FPSO”) and transport barges in our oilproduction operations.  These barges arecurrently being outfitted with equipment in the port of Paita, but haveencountered some delays due to scheduling. The two barges under a capital lease, the Nomoku and the Nu’uanu, eachhave a capacity of approximately 40,000 barrels.  The Nomoku will be used as a FPSO, mooredadjacent to the CX11 platform, while the Nu’uanu will be used to transport oilbetween the offshore Corvina field in the Z-1 block in northwest Peru and therefinery in Talara approximately 100 miles south of the Company’soperations.  We expect to have productionof approximately 6,000 bopd using these two barges when they become available,which is now expected to be around the middle of May 2008.

 

*Capital Raises and Debt Activity*

 

Apart from our limited revenue from oil sales, ourprimary source of cash flow has been cash proceeds from private and publicplacements of our common stock.  As of April 30,2008, our cash balance was approximately $36.2 million.

 

On March 25, 2008,the Company closed on a common stock offering of 2.0 million shares.  The offering was priced to the public at$20.00 per share and underwritten by Canaccord Adams, Inc. (“Canaccord”)on a firm commitment basis.  The Companyreceived proceeds after underwriting fees and discounts of approximately $37.5million.  In addition, the Companygranted Canaccord a 30-day option to purchase up to 200,000 additional sharesto cover any over-allotments.   On April 18,2008, the over-allotment option was executed and Canaccord bought an additional200,000 shares resulting in proceeds to the Company after underwriting fees anddiscounts of approximately $3.6 million. A financial advisory fee of $150,000 was paid to Morgan Keegan forinvestment services and consulting related to the offering.

 

The Company intends to use the proceeds from theoffering for general corporate purposes, including: the reduction ofoutstanding indebtedness, or other corporate obligations, capital expendituresand general working capital requirements, including testing and drilling operationsand commencement of development of the Company’s Albacora Field property.

 

On March 31,2008, the Company had long-term debt of approximately $15.5 million related tothe IFC convertible note.  On November 19, 2007, a convertible debtagreement between IFC and the Company was entered into for approximately $15.5million.  The terms of the loan agreement stipulate a conversion price of$10.39 per share and includes a forced conversion exercisable at the Company’soption if the average closing price of the Company’s common stock exceeds aprice of $18.19 per share based on the average closing price over twentyconsecutive business days.  Currently,the twenty consecutive business day average of the Company’s common stock hasbeen greater than $18.19 per share.  TheCompany intends to exercise its conversion option during the second quarter2008 assuming the twenty consecutive business day average continues to exceedthe forced conversion price, which will bring IFC’s total investment in BPZResource stock to approximately 10%.  Theinstrument has a 10 year term with a variable interest rate of 2% per annumabove 6-month LIBOR (6.863% at March 31, 2008).   The loan fromthe IFC is unsecured, but restricts our ability to pledge assets to anotherlender unless certain conditions are met.  The IFC loan does not restrictour ability to issue additional capital stock, but does call for an adjustmentin its conversion price into BPZ common stock based on the terms of anysubsequent equity 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 March 31, 2008, we were in compliance with all financialcovenants.

 

On May2, 2008, we notified IFC of our intent to exercise our conversion option underthe convertible debt agreement.

 

20

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The Company is actively negotiating with IFC to increase the debtpackage to an estimated $335 million for further development of its assets, ofwhich $120 million of the total financing package was approved by the CreditCommittee of the IFC on November 29, 2006. Please see Note 14 “Commitments and Contingencies” – *Financing Package* in the Company’s form 10-K for the periodended December 31, 2007 for further discussion.  The financing package includes an investmentof $19.5 million by IFC in BPZ’s common stock which took place on December 18,2006, with the remaining portion to be financed through debt issuance.  Part of the debt issuance has beenfunded through a “C”Loan, as described above. The Company anticipates the remaining debt issuance balance to be fundedthrough the following two debt facilities:

 

·                 Upto a $200 million credit agreement to fund the Company’s exploration anddevelopment activities.  The company iscurrently negotiating the term sheet with IFC on the credit facility.  The facility will be subject to a borrowingbase calculation that will function of semi-annual oil reserve reports.  The Company expects to close this agreementby the end of the second quarter.

 

·                  TheCompany is negotiating an additional $120 million debt facility to fund thedevelopment of its gas-to-power project. The final number will be a function the type of generation equipmentultimately selected.  The Company iscurrently negotiating the engineering, procurement and construction contractsthat will be conditions precedent to this credit facility.  The Company anticipates closing this loan bythe end of 2008.

 

As of May 9, 2008, the final loan documents for the $200 millionand $120 million loans have not been completed.

 

During the first quarter ended March 31,2008, we entered into two loan agreements with Peruvian banks to borrowapproximately $2.8 million.  The amountsare included in current maturities of long-term debt as they are collateralizedby IGV receivables eligible for early recovery and mature upon receipt of theIGV payment.  The loans are fixed andbear interest rates of approximately 8% each.

 

*EquipmentActivity*

 

During the three months ended March 31,2008, we incurred capital expenditures of approximately $14.9 millionprimarily related to drilling, completion and testing activity on the threeCorvina wells as well as approximately $7.0 million related to thelease-purchase of a deck barge (BPZ-02”). In February 2008, we entered into a lease-purchase agreementto acquire the BPZ-02.  The BPZ-02 is a deck barge approximately 330 feet in length.  It will assist in the platform refurbishmentand drilling activities in the Albacora field as well as to assist in futureoffshore drilling and development activities.  In the near term, theBPZ-02 will be used to act as a tender assist for the Petrex drilling rig as itis moved to the Albacora field in fourth quarter 2008.  During that time,as mentioned in Note 13 “Commitment and Contingencies”, the BPZ-01 will beplaced in dry-dock to repair damages sustained when it ran aground in late2006.  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-purchasestipulate a 19% rate of interest (33% effective rate of interest) over a oneyear term at which point, title to the BPZ-02 will transfer to the Company uponfinal payment of the lease.  The Company will account for the transactionas a Capital Lease in accordance to SFAS 13, “Accounting For Leases (AsAmended)” under the criteria the barge will transfer title at the end of thelease period and, as a result, depreciation will be calculated over the economiclife of the asset.

 

*PerformanceBonds*

 

In connection with itsproperties in Peru, the Company has obtained five performance bonds totaling$5.7 million to insure certain obligations and commitments, of which onerelates to the guarantee of import duties related to the FPSO and transporttanker and four relate to performance obligations under the license contractsfor Blocks Z-1, XIX, XXII and XXIII.  As of March 31, 2008, the Company had restricted cashdeposits of $3.6 million, which partially collateralizes the performance bonds.

 

During the three months ended March 31, 2008 the Company wasrefunded $0.2 million related to the second exploration phase under the BlockXIX license contract and approximately $1.0 million related to a performancecommitment under a drilling services contract. The Company was required to post a $0.6 million performance bond inconnection with the third phase of exploration under the Block XIX LicenseContract.  The Company also posted a $0.4million bond to guarantee import duties for the floating production and storage facility (“FPSO”)and transporttanker, the Nomoku and Nu’uanu, respectively.

 

All ofthe performance bonds are issued by Peruvian banks and their terms are governedby the corresponding license contract.

 

21

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*Exploration Activity*

* *

In connection with the Block XIX license contract,we recently completed shooting 200 kilometers of 2-D seismic. The cost toacquire this seismic data was approximately $3.6 million.  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 million.

 

With our current cash balance, proceeds from theexpected IFC debt facilities, anticipated upcoming Corvina Oil development cashflow, other potential third-party financing and potentially from future equityraises, we believe we will have sufficient capital resources to execute ourinitial Corvina oil development project, Albacora oil development project andgas-to-power project as we currently envision them.  However, the timing and execution of ourproject is dependent on a variety of factors, including the technical design offacilities, permitting, availability of equipment, time and costs required fordelivery and construction, performance by contractors and the success ofplanned financing, many of which are factors outside our control and cannot beassured.

 

**Off-BalanceSheet Arrangements**

 

As of March 31,2008, we had no transactions, agreements or other contractual arrangements withunconsolidated entities or financial partnerships, often referred to as specialpurpose entities, which generally are established for the purpose offacilitating off-balance sheet arrangements.

 

**ContractualObligations**

 
| ** **                    | ** ** | **Payments Due by Period at March 31, 2008** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | ** **                                                                      | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| ** **                    | ** ** | **Total**                                                                       | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| **Contractual Obligations:**  |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Operating lease obligation(1) |       | $                                                                               | 517,074    |   | $ | 240,303 |   | $ | 276,771 |   | $ | — |   | $ | — |   |
| Debt obligation(2)            |       | 43,397,009                                                                      |       | 18,288,833 |   | 2,161,821 |   | 2,127,530 |   | 20,818,825 |   |
| Total                         |       | $                                                                               | 43,914,083 |   | $ | 18,529,136 |   | $ | 2,438,592 |   | $ | 2,127,530 |   | $ | 20,818,825 |   |

 

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(1)           Operating leases for our executive office in Houston,Texas, our branch office in Quito, Ecuador, and our branch office and corporateapartments in Lima, Peru.

 

(2)           Includes IFC convertible debt agreementof $15.5 million which began on November 19, 2007 and matures in 10years.  Interest is paid annually and principal is paid on the maturitydate.  Also, includes capital lease for two production and storage bargeswhich began in August 2007 and is set to expire 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 thelease.  Additionally, includeslease-purchase of the BPZ-02 which stipulates a 19% rate of interest (33%effective rate of interest) over a one year term at a fixed rate of payment of$694,167.  At the end of the term, titleto the BPZ-02 will transfer to the Company upon final payment of thelease.  Lastly, the capital lease foroffice furniture in our executive office in Houston, Texas expiring in 2010 aswell as short-term loans of approximately $2.8 million collateralizedby IGV receivables are also included. Interest rates on the IGVcollateralized short-term loans are at fixedrates of approximately 8% each.

 

**Critical Accounting Policies andRecent Accounting Pronouncements**

 

Thediscussion and analysis of our financial condition and results of operations isbased on our consolidated financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles (“GAAP”).Management uses estimates and assumptions in preparing the consolidatedfinancial statements in accordance with GAAP. Those estimates and assumptionsaffect the reported amounts of assets, liabilities, revenues and expenses inthe consolidated financial statements, and the disclosure of contingent assetsand liabilities.  

 

In Item7 “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of our Annual Report on Form 10-K for the year ended December 31,2007, we identified our most critical accounting policies upon which ourfinancial condition depends as those relating to oil reserves, successfulefforts method of accounting, revenue recognition, impairment of long-livedassets, future dismantlement, restoration, and abandonment costs, as well asstock-based compensation.

 

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**Disclosure Regarding Forward-LookingStatements**

 

Wecaution that this document contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  All statements, other thanstatements of historical facts, included in or incorporated by reference intothis Form 10-Q/A which address activities, events or developments which weexpect, believe or anticipate will or may occur in the future areforward-looking statements.  The words “believes,”“intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” “plans”and similar expressions, or the negative thereof, are also intended to identifyforward-looking statements.  Inparticular, statements, expressed or implied, concerning future operatingresults, the ability to replace or increase reserves, or to increaseproduction, or the ability to generate income or cash flows are by nature,forward-looking statements.  Thesestatements are based on certain assumptions and analyses made by the managementof BPZ in light of its experience and its perception of historical trends,current conditions and expected future developments as well as other factors itbelieves are appropriate in the circumstances. However, forward-looking statements are not guarantees of performanceand no assurance can be given that these expectations will be achieved.

 

Important factors thatcould cause actual results to differ materially from the expectations reflectedin the forward-looking statements include, but are not limited to any of thefollowing in the jurisdictions in which BPZ or its subsidiaries are doingbusiness:  the timing and extent ofchanges in commodity prices for crude oil, natural gas and related products,currency exchange rates, interest rates, inflation, the availability of goodsand services, drilling and other operational risks, availability of capitalresources, timing of syndication of and disbursements under the anticipated IFCdebt facility, resumption of transportation of our oil production, legislativeor regulatory changes, political developments, acts of war and terrorism.  A more detailed discussion on risks relatingto the oil and natural gas industry and to us is included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.

 

In light of these risks,uncertainties and assumptions, we caution the reader that these forward-lookingstatements are subject to risks and uncertainties, many of which are beyond ourcontrol, which could cause actual events or results to differ materially fromthose expressed or implied by the statements. All subsequent written and oral forward-looking statements attributableto us or persons acting on our behalf are expressly qualified in their entiretyby the cautionary statements.  Weundertake no obligations to update or revise its forward-looking statements,whether as a result of new information, future events or otherwise.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Theprimary objective of the following information is to provide forward-lookingquantitative and qualitative information about our potential exposure to marketrisks.  The term “market risk” refers tothe risk of loss arising from adverse changes in interest rates, oil andnatural gas prices and foreign currency exchange rates.  The disclosures are not meant to be preciseindicators of expected future losses, but rather indicators of reasonablepossible losses.  This forward-lookinginformation provides indicators of how we view and manage our ongoing marketrisk exposures.  All of our market risksensitive instruments were entered into for purposes other than speculativetrading.

 

*Interest Rate Risk.*

 

As of March 31,2008, the Company had long-term debt of approximately $15.5 million and currentmaturities of long-term debt of approximately $12.4 million, consisting of twocapital lease obligations for three barges, two loans for office furniture andequipment and two loans with Peruvian banks collateralized by IGVreceivables.  The first capital leaseobligation for the floating storage and production facility has an imputedinterest rate of 18.00% over a lease term of 27 months and includes a purchaseoption which we anticipate,for accounting purposes we will exercise on the 15th month of the lease term.  The second capital lease contains a lease-purchase option and stipulates a19% rate of interest over a one year term, at which point title to the BPZ-02will transfer to the Company upon final payment of the lease.  Theother two loans have a term of 60 months and bear interest at fixed rates of 5.94%and 9.44%, with principal and interest payments due on a monthly basis.  Lastly, the IGV collateralized short-termloans mature upon our receipt of the IGV payment from Peru and bear fixedinterest rates of approximately 8% each. We do not expect a significant change in the market interest rate toimpact the interest on our term debt. However, significant changes in market interest rates may significantlyaffect the level of financing that the IFC will structure with respect to ourproject in Peru.

 

*Commodity Price Risk.*

 

Withrespect to our oil and gas business, any revenues, cash flow, profitability andfuture rate of growth we achieve will be greatly dependent upon prevailingprices 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.  Oil and natural gas are commodities, and,therefore, their prices are subject to wide fluctuations in response torelatively minor changes in supply and demand. Historically, oil and gas prices and markets have been volatile and arelikely to 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 

 

23

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anddemand for oil and gas, market uncertainty, and a variety of additional factorsthat are beyond our control.

 

Lower oiland natural gas prices may not only decrease our revenues on a per unit basis,but may also reduce the amount of oil and natural gas we can produceeconomically, if any.  A substantial orextended decline in oil and natural gas prices may materially affect our futurebusiness, financial condition, results of operations, liquidity and borrowingcapacity, and we may require a reduction in the carrying value of our oil andgas properties.  While our revenues mayincrease if prevailing oil and gas prices increase significantly, explorationand production costs and acquisition costs for additional properties andreserves may also increase.

 

Withrespect to our planned electricity generation business, the price we can obtainfor the sale of power may not rise at the same rate, or may not rise at all, tomatch a rise in the Company’s cost to produce and transport gas reserves to ourinitial 160MW power plant in Caleta Cruz. Prices for both electricity and natural gas have been very volatile inthe past year and have increase significantly over the past two years.  The profitability of this business depends inlarge part on the difference between the price of power and the price of fuelused to generate power, or “spark spread.”

 

*Foreign Currency Exchange RateRisk.*

 

The U.S.Dollar is the functional currency for our operations in both Peru andEcuador.  Ecuador has adopted the U.S.Dollar as its official currency.  Peru,however, still uses its local currency, Nuevo Soles, in addition to the U.S.Dollar, and therefore, our financial results are subject to favorable orunfavorable fluctuations in the exchange rate and inflation of thatcountry.  Transaction differences havebeen nominal to-date but are expected to increase as our activities in Perucontinue to escalate.  During the threemonths ended March 31, 2008, we incurred an exchange rate gain ofapproximately $90,000 primarily related to the early recovery of IGV or ValueAdded Taxes in Peru.

 

**Item 4. Controls and Procedures**

 

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

 

As of the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand procedures as defined in Rule 13a-15(e) of the Exchange Act.  Based upon that evaluation our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures as defined in Rule 13a-15(e) of the Exchange Act wereeffective as of the end of the period covered by this report to ensure thatinformation required to be disclosed by the Company in the reports that theCompany files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. Our disclosure controls and procedures include controls and proceduresdesigned to ensure that information required to be disclosed in reports filedor submitted under the Exchange Act is accumulated and communicated to ourmanagement, including our principal executive officer and principle financialofficer, as appropriate, to allow timely decisions regarding required disclosure.

 

**(b) Changes in Internal Control over Financial Reporting**

 

During the quarter ended March 31, 2008, there wasno change in internal control over financial reporting that materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

24

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**PART II**

 

**Item 1. Legal Proceedings**

 

See Note 13 of the Notes to Consolidated FinancialStatements included in Part I, Item I, which is incorporated herein byreference.

 

**Item 1A. Risk Factors**

 

Item 1A, “Risk Factors” ofour Annual Report on Form 10-K for the year ended December 31, 2007,includes a detailed discussion of our risk factors.  Except as set forth below, there are nomaterial changes in our risk factors as previously described in our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

***Construction and operation of power generation and gas processingfacilities and pipelines involve significant risks and delays that cannotalways be covered by insurance or contractual protections.***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 required governmentalpermits and approvals,

 

·     weather interferences,

 

·     unforeseen engineering, environmental andgeological problems,

 

·     unanticipated cost overruns,

 

·     possible delays in the acquisition of thenecessary gas turbines,

 

·     possible delays in connection with powerplant construction,

 

·     possible delays or difficulties in completingfinancing arrangements for the gas-to-power project, and

 

·     possible difficulties or delays with respectto any necessary Peruvian regulatory compliance.

 

The ongoing construction andfuture operation of these facilities involves all of the risks described above,in addition to risks relating to the breakdown or failure of equipment orprocesses and performances below expected levels of output or efficiency. Weintend to maintain commercially reasonable levels of insurance where such insuranceis available and cost-effective, obtain warranties from vendors and obligatecontractors to meet certain performance levels. However, the coverage orproceeds of any such insurance, warranties or performance guarantees may not beadequate to cover lost revenues or increased expenses. Any of these risks couldcause us to operate below expected capacity levels, which in turn could resultin lost revenues, increased expense and higher maintenance costs.

 

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***Our success depends in part on theexistence and growth of markets for natural gas and electricity in Peru andEcuador.***Peru hasa relatively well-developed and stable market for electricity, while the powermarket in Ecuador is not as well-developed or stable. Both countries rely onhydro-electric generating capacity for a significant portion of their powerdemand. Hydro plants are much less expensive to operate than plants thatutilize natural gas, but they are subject to variable output based on rainfalland reservoir levels. The majority of the non-hydro, or thermal, power capacityin both countries consists of generating plants that utilize diesel or fueloil, which are significantly more costly than natural gas at this time. Bothcountries have natural gas reserves and production, but neither has awell-developed natural gas infrastructure. Our immediate business plan relieson the continued stability of the power market in Peru (and Ecuador for thepurpose of gas sales to third-party power producers in Ecuador), and ourlonger-term plans depend on the further development of the electricity marketin Ecuador. We currently do not expect to complete our power plant until2010.  Our assessment of the future power market and demand in Peru andEcuador could be inaccurate.  We are subject to the risks that:

 

·     Relatively more favorable business conditionsfor hydro plants, a material reduction in power demand or other competitiveissues may adversely affect the demand and prices for the electricity that we expectto produce by the time our power plant is completed.

 

·     Our lifting costs could exceed the minimumwholesale power prices available, making the sale of our gas uneconomical.

 

·     Potential disruptions or changes toregulations of the natural gas or power markets in these countries could occurby the time our power plant is completed, or we may not receive the necessaryenvironmental or other permits and governmental approvals to operate our powerplant.

 

·     Although we plan to enter into long-termcontracts to sell a significant part of our future power production, there canbe no assurance that we will be successful in obtaining such contracts or thatthey will be on favorable terms.

 

·     Wewill also be subject to the general commercial issues related to being in thepower business, including the credit-worthiness of, and collections from futurecustomers and the ability to profitably operate our future power plants.

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

None.

** **

**Item 5. Other Information**

 

None.

** **

**Item 6. Exhibits**

 
| 1.1    |   | “Bought Deal” Equity Financing Letter, dated March  18, 2008, by and among BPZ Resources, Inc., Canaccord Adams, Inc. and  Canaccord Capital Corporation (incorporated by reference to Exhibit 1.1 of  the Company’s Current Report on Form 8-K filed on March 24, 2008) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                    |
| 1.2    |   | Underwriting Agreement, dated March 19, 2008, by and  among BPZ Resources, Inc., Canaccord Adams, Inc. and Canaccord Capital  Corporation (incorporated by reference to Exhibit 1.2 of the Company’s  Current Report on Form 8-K filed on March 24, 2008)                          |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of  2002. (Filed herewith)                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                    |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of  2002. (Filed herewith)                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                    |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                    |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                                                                        |

 

26

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
| Date: August 29, 2008 |     |                                              |
|-----------------------|----------|---------------------------------------------------|
|                  |     |                                              |
|                  |     | BPZ RESOURCES, INC.                               |
|                  |     |                                              |
| * *              | * * | */s/ Manuel Pablo Zúñiga-Pflücker* |
|                  |     | Manuel Pablo Zúñiga-Pflücker       |
|                  |     | President and Chief Executive Officer             |

 

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