**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

**(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, 2007** |
| ** **                                                |
| **or**                                                    |
|                                                      |
| **o**                                                     | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                           |
| ** **                                                | ** **                                                                                                                                         |
| ** **                                                | **For the  transition period  from         to         ** |

 

**Commission File Number: 001-12697**

**BPZ ENERGY, INC.**

(Exactname of registrant as specified in its charter)

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

 

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

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

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

LargeAccelerated Filer oAccelerated Filer x   Non-Accelerated Filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yeso No x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:

As of April 30, 2007, there were 54,497,869 sharesof common stock, no par value, outstanding.

 

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**TABLE OF CONTENTS**
| **PART I**  |   |                                                                                        |
|------------------|--------|---------------------------------------------------------------------------------------------|
|             |   |                                                                                        |   |   |
| Item 1.          |   | Financial Statements                                                                        |   |   |
|             |   |                                                                                        |   |   |
|             |   | 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 |   | 18 |
|             |   |                                                                                        |   |   |
| Item 3.          |   | Quantitative  and Qualitative Disclosures About Market Risk                                 |   | 26 |
|             |   |                                                                                        |   |   |
| Item 4.          |   | Controls and  Procedures                                                                    |   | 27 |
|             |   |                                                                                        |   |   |
| **PART II** |   |                                                                                        |
|             |   |                                                                                        |   |   |
| Item 1.          |   | Legal Proceedings                                                                           |   | 28 |
|             |   |                                                                                        |   |   |
| Item  1A.        |   | Risk  Factors                                                                               |   | 28 |
|             |   |                                                                                        |   |   |
| Item 2.          |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 28 |
|             |   |                                                                                        |   |   |
| Item 3.          |   | Defaults Upon  Senior Securities                                                            |   | 28 |
|             |   |                                                                                        |   |   |
| Item 4.          |   | Submission of  Matters to a Vote of Security Holders                                        |   | 28 |
|             |   |                                                                                        |   |   |
| Item 5.          |   | Other Information                                                                           |   | 28 |
|             |   |                                                                                        |   |   |
| Item  6.         |   | Exhibits                                                                                    |   | 28 |
|             |   |                                                                                        |   |   |
| **SIGNATURES**   |   |                                                                                        |

 

2

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**PART I**

**Item 1.  Financial Statements**

**BPZ Energy, Inc. and Subsidiaries(An Exploratory Stage Company)Consolidated Balance Sheets**
| ** **                                                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                          | ** ** | **(Unaudited)**    | ** ** | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                          | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                                                |       |               |       |                  |       |
| Current assets:                                                                                                                                                     |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                           |       | $                  | 13,023,534 |                  | $          | 25,324,233 |   |
| Value added tax  receivable                                                                                                                                         |       | 4,735,558          |       | 3,159,698             |       |
| Inventory                                                                                                                                                           |       | 1,870,411          |       | 1,945,781             |       |
| Prepaid and  other current assets                                                                                                                                   |       | 1,815,080          |       | 1,972,500             |       |
| Total current  assets                                                                                                                                               |       | 21,444,583         |       | 32,402,212            |       |
|                                                                                                                                                                |       |               |       |                  |       |
| Property, equipment and  construction in progress, net                                                                                                              |       | 50,129,809         |       | 38,726,910            |       |
| Restricted cash                                                                                                                                                     |       | 1,150,000          |       | 1,150,000             |       |
| Investment in Ecuador  property, net                                                                                                                                |       | 1,710,708          |       | 1,757,604             |       |
|                                                                                                                                                                |       |               |       |                  |       |
| Total assets                                                                                                                                                        |       | $                  | 74,435,100 |                  | $          | 74,036,726 |   |
|                                                                                                                                                                |       |               |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                                                |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                                                                                    |       | $                  | 9,441,591  |                  | $          | 7,376,310 |   |
| Accrued  liabilities                                                                                                                                                |       | 3,222,050          |       | 2,849,376             |       |
| Other  liabilities                                                                                                                                                  |       | 127,629            |       | 119,320               |       |
|                                                                                                                                                                |       |               |       |                  |       |
| Total current  liabilities                                                                                                                                          |       | 12,791,270         |       | 10,345,006            |       |
|                                                                                                                                                                |       |               |       |                  |       |
| Long-term debt                                                                                                                                                      |       | 51,298             |       | 55,815                |       |
|                                                                                                                                                                |       |               |       |                  |       |
| Commitments and  contingencies (See Note 11)                                                                                                                        |       |               |       |                  |       |
|                                                                                                                                                                |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                          |       |               |       |                  |       |
| Preferred stock,  no par value, 25,000,000 authorized, none issued and outstanding                                                                                  |       | —             |       | —                |       |
| Common stock, no  par value, 250,000,000 authorized; 54,497,869 and 54,143,717 shares issued  and outstanding at March 31, 2007 and December 31, 2006, respectively |       | 97,162,961         |       | 96,574,326            |       |
| Additional paid  in capital                                                                                                                                         |       | 5,665,725          |       | 5,092,341             |       |
| Stock  subscription receivable                                                                                                                                      |       | (230,825           | )          | (230,825              | )          |
| Deficit  accumulated during the exploratory stage                                                                                                                   |       | (41,005,329        | )          | (37,799,937           | )          |
|                                                                                                                                                                |       |               |       |                  |       |
| Total  stockholders’ equity                                                                                                                                    |       | 61,592,532         |       | 63,635,905            |       |
|                                                                                                                                                                |       |               |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                                                                    |       | $                  | 74,435,100 |                  | $          | 74,036,726 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

3

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**BPZ Energy, Inc. and Subsidiaries(An Exploratory Stage Company)Consolidated Statements of Operations(Unaudited)**
| ** **                                  | ** ** | **Cumulative**                | ** **  | ** **                                           | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-------------------------------|-------------|------------------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **Amounts from**         | ** **  | ** **                                           | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **August 20, 2001** | ** **  | ** **                                           | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **(Inception) to**       | ** **  | ** **                                           | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **March 31,**            | ** **  | **Three Months Ended March 31,** | ** ** |
| ** **                                  | ** ** | **2007**                      | ** **  | **2007**                                             | ** ** | **2006**   | ** ** |
| ** **                                  | ** ** | ** **                    | ** **  | ** **                                           | ** ** | ** ** | ** ** |
| Revenue                                     |       | $                             | —      |                                                 | $          | —     |       | $ | — |   |
|                                        |       |                          |        |                                                 |       |       |       |
| Operating and  administrative expenses:     |       |                          |        |                                                 |       |       |       |
| General and administrative                  |       | 17,620,369                    |        | 2,136,236                                            |       | 1,575,440  |       |
| Stock-based compensation                    |       | 12,626,627                    |        | 959,559                                              |       | 542,915    |       |
| Geological, geophysical and engineering     |       | 3,509,426                     |        | 101,588                                              |       | 466,403    |       |
| Depreciation expense                        |       | 298,107                       |        | 54,497                                               |       | 37,168     |       |
|                                        |       |                          |        |                                                 |       |       |       |
| Total operating expenses                    |       | 34,054,529                    |        | 3,251,880                                            |       | 2,621,926  |       |
|                                        |       |                          |        |                                                 |       |       |       |
| Operating loss                              |       | (34,054,529                   | )           | (3,251,880                                           | )          | (2,621,926 | )          |
|                                        |       |                          |        |                                                 |       |       |       |
| Other income  (expense):                    |       |                          |        |                                                 |       |       |       |
| Income (Loss) from investment in Ecuador    |       |                          |        |                                                 |       |       |       |
| property, net of amortization               |       | 1,835,942                     |        | (183,943                                             | )          | 189,655    |       |
| Interest expense                            |       | (95,101                       | )           | (1,178                                               | )          | (1,452     | )          |
| Amortization of deferred financing costs    |       | (428,000                      | )           | —                                               |       | —     |       |
| Registration delay expense                  |       | (4,068,480                    | )           | —                                               |       | (1,031,946 | )          |
| Interest income                             |       | 1,537,570                     |        | 240,307                                              |       | 222,003    |       |
| Merger costs                                |       | (5,470,455                    | )           | —                                               |       | —     |       |
| Net loss on sale of asset                   |       | (8,835                        | )           | (8,985                                               | )          | —     |       |
| Miscellaneous income                        |       | (247,067                      | )           | 6,661                                                |       | 5,000      |       |
|                                        |       |                          |        |                                                 |       |       |       |
| Total other income (expense)                |       | (6,944,426                    | )           | 52,862                                               |       | (616,740   | )          |
|                                        |       |                          |        |                                                 |       |       |       |
| Loss before income taxes                    |       | (40,998,955                   | )           | (3,199,018                                           | )          | (3,238,666 | )          |
|                                        |       |                          |        |                                                 |       |       |       |
| Income taxes                                |       | 6,374                         |        | 6,374                                                |       | —     |       |
|                                        |       |                          |        |                                                 |       |       |       |
| Net loss                                    |       | $                             | (41,005,329 | )                                                    | $          | (3,205,392 | )          | $ | (3,238,666 | ) |
|                                        |       |                          |        |                                                 |       |       |       |
| Basic and  diluted net loss per share       |       |                          |        | $                                                    | (0.06      | )          | $          | (0.08 | ) |
|                                        |       |                          |        |                                                 |       |       |       |
| Weighted average common  shares outstanding |       |                          |        | 54,309,294                                           |       | 40,845,270 |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

4

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**BPZEnergy, Inc. and Subsidiaries(An Exploratory Stage Company)Consolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                   | ** ** | **Cumulative  Amounts from  August 20, 2001  (Inception) to** | ** **  | ** **                                           | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|-------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**                                                                | ** **  | **Three months ended March 31,** | ** ** |
| ** **                                                                   | ** ** | **2007**                                                                          | ** **  | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | ** **                                                                        | ** **  | ** **                                           | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                                                                 | (41,005,329 | )                                                    | $          | (3,205,392 | ) | $ | (3,238,666 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                                                              |        |                                                 |       |   |   |
| Stock-based  compensation                                                    |       | 12,626,627                                                                        |        | 959,559                                              |       | 542,915 |   |
| Stock issued in  merger                                                      |       | 979,981                                                                           |        | —                                               |       | — |   |
| Options assumed  in merger                                                   |       | 4,490,474                                                                         |        | —                                               |       | — |   |
| Stock issued for  registration delay expense                                 |       | 2,602,739                                                                         |        | —                                               |       | 543,920 |   |
| Depreciation  expense                                                        |       | 298,107                                                                           |        | 54,497                                               |       | 37,168 |   |
| Net loss on the  retirement of assets                                        |       | 8,835                                                                             |        | 8,985                                                |       | — |   |
| Amortization of  investment in Ecuador property                              |       | 413,792                                                                           |        | 46,896                                               |       | 46,896 |   |
| Amortization of  deferred financing fees                                     |       | 428,000                                                                           |        | —                                               |       | — |   |
| Expenses paid by  affiliate                                                  |       | 629,596                                                                           |        | —                                               |       | — |   |
| Changes in  operating assets and liabilities:                                |       |                                                                              |        |                                                 |       |   |   |
| Increase value added tax receivable                                          |       | (4,373,003                                                                        | )           | (1,575,860                                           | )          | (761,256 | ) |
| Increase in inventory                                                        |       | (1,870,411                                                                        | )           | 75,370                                               |       | — |   |
| Increase in prepaid and other current assets                                 |       | (2,177,635                                                                        | )           | 157,420                                              |       | (17,191 | ) |
| Increase (decrease) in accounts payable                                      |       | 9,441,591                                                                         |        | 2,065,281                                            |       | (328,097 | ) |
| Increase in accrued liabilities                                              |       | 3,222,050                                                                         |        | 372,674                                              |       | 82,936 |   |
| Increase in other liabilities                                                |       | 127,629                                                                           |        | 8,309                                                |       | 2,194 |   |
| Net cash used by operating activities                                        |       | (14,156,957                                                                       | )           | (1,032,261                                           | )          | (3,089,181 | ) |
|                                                                         |       |                                                                              |        |                                                 |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                                              |        |                                                 |       |   |   |
| Property,  equipment and construction in progress additions                  |       | (50,436,751                                                                       | )           | (11,466,381                                          | )          | (4,411,076 | ) |
| Restricted cash                                                              |       | (1,150,000                                                                        | )           | —                                               |       | — |   |
| Investment in  Ecuador property                                              |       | (1,440,000                                                                        | )           | —                                               |       | — |   |
| Net cash used by investing activities                                        |       | (53,026,751                                                                       | )           | (11,466,381                                          | )          | (4,411,076 | ) |
|                                                                         |       |                                                                              |        |                                                 |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                                              |        |                                                 |       |   |   |
| Borrowings                                                                   |       | 2,226,826                                                                         |        | —                                               |       | — |   |
| Repayments of borrowings                                                     |       | (469,999                                                                          | )           | (4,517                                               | )          | (1,978 | ) |
| Proceeds from  exercise of warrants, net                                     |       | 3,868,260                                                                         |        | —                                               |       | — |   |
| Proceeds from  exercise of options, net                                      |       | 202,460                                                                           |        | 202,460                                              |       | — |   |
| Proceeds from  sale of common stock, net                                     |       | 74,379,695                                                                        |        | —                                               |       | 5,010,000 |   |
| Net cash provided by financing activities                                    |       | 80,207,242                                                                        |        | 197,943                                              |       | 5,008,022 |   |
|                                                                         |       |                                                                              |        |                                                 |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 13,023,534                                                                        |        | (12,300,699                                          | )          | (2,492,235 | ) |
| Cash and cash  equivalents at beginning of period                            |       |                                                                              |        | 25,324,233                                           |       | 29,455,130 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                                                 | 13,023,534  |                                                 | $          | 13,023,534 |   | $ | 26,962,895 |   |
|                                                                         |       |                                                                              |        |                                                 |       |   |   |
| Supplemental  cash flow information:                                         |       |                                                                              |        |                                                 |       |   |   |
| **Cash  paid for:**                                                          | ** ** | ** **                                                                        | ** **  | ** **                                           | ** ** | ** ** | ** ** |
| Interest                                                                     |       | $                                                                                 | 91,859      |                                                 | $          | 1,178 |   | $ | 1,452 |   |
| Foreign income  tax                                                          |       | 6,374                                                                             |        | 6,374                                                |       |   |   |
| **Non —  cash items:**                                                  | ** ** | ** **                                                                        | ** **  | ** **                                           | ** ** | ** ** | ** ** |
| Common stock  issued for property interest                                   |       | $                                                                                 | 1,112,500   |                                                 | $          | — |   | $ | — |   |
| Warrants issued  to private placement agent                                  |       | 325,000                                                                           |        | —                                               |       | — |   |
| Imputed  financing costs                                                     |       | 428,000                                                                           |        | —                                               |       | — |   |
| Issuance of  common stock for subscription receivable                        |       | 230,825                                                                           |        | —                                               |       | — |   |
| Conversion of  long-term debt to common stock                                |       | 685,000                                                                           |        | —                                               |       | — |   |
| Conversion of  notes payable to common stock                                 |       | 1,020,529                                                                         |        | —                                               |       | — |   |
| Depreciation on support  equipment capitalized to property and equipment     |       | 310,914                                                                           |        | 115,159                                              |       | — |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

5

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**BPZ Energy, Inc. and Subsidiaries(An Exploratory Stage Company)Notes To Consolidated Financial Statements****March 31, 2007 and 2006(Unaudited)**

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

**Organization**

BPZ Energy, Inc., (the “Company” or  “BPZ”) a Colorado corporation, formerly namedNavidec, Inc., was incorporated in 1993 and is based in Houston, Texaswith offices in Lima, Peru and Quito, Ecuador. We are an exploratory stagecompany focused on the exploration and production of oil and natural gas and weintend to utilize part of our future natural gas production for thecomplementary development of gas-fired power generation.

Currently, we have exclusive rights and licenseagreements for oil and gas exploration and production covering a total ofapproximately 2.4 million acres in northwest Peru. Our license contractscover 100% ownership of both Block Z-1 (739,205 acres) and Block XIX (472,860acres). The Block Z-1 contract was signed in November 2001, and the BlockXIX contract was signed in December 2003. Our license contracts provide for an initial exploration period of sevento thirteen years and seven to ten years, respectively, and require that weconduct specified activities on the properties 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 forgas exploration and production. We have presented all necessary documentationrequested by Perupetro in order to become the qualified operator under alicense contract for Block XXII (948,000 acres, referred to as Area VI inprevious filings) which we previously held under a Technical EvaluationAgreement. Subsequently, in March 2006, we were notified by Perupetro that wequalified as an operator for Block XXII. In July 2006 Perupetro officiallyinformed us that our proposal for the 248,000 acre Block XXIII, located onshorein northwest Peru between our Blocks Z-1 and XIX, was the winning bid in theirrecent license tender process. We have presented all necessary documentation tobecome the qualified operator of this new block under an exploration andproduction license contract.

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

We are in the exploratory stage of our oil and natural gasbusiness and to date our activities in Peru have been primarily limited toanalysis and evaluation of technical data on the properties and preparation ofthe development plans for the properties, including detailed engineering anddesign of the power plant and gas processing facilities, refurbishment of oneof our offshore platforms, procuring machinery and equipment for an extendeddrilling campaign, obtaining all necessary environmental and operating permitsand securing the required capital and financing to complete the current plan ofoperation.  We commenced drilling of ourinitial well, the CX11-21XD, in the Corvina Gas Field at the CX-11 platform inSeptember 2006, and a total depth of 10,457 feet (9,234 feet true verticaldepth) was reached in November 2006.  InMarch 2007, after a total of six Drill Stem Tests were conducted on separatepotential pay zones from the Lower and Upper Zorritos formations, the welltested positive for both gas and oil in quantities that we believe to becommercially producible.  We arecurrently in the process of working over the shut-in CX11-16X well, and willthen begin the drilling of our second new well in the Corvina field, to testfor additional gas reserves and further appraise the oil discovery. However, wecaution readers that test data is not necessarily indicative of actualresults.  We have not drilled any otherwells or recognized any revenues from operations, and we do not anticipategenerating significant revenues from our properties prior to early 2008.

6

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**Navidec MergerTransaction**

On September 10, 2004, BPZ Energy, Inc., a Texascorporation, consummated a reverse merger with Navidec, whereby BPZ-Texasbecame a wholly owned subsidiary of Navidec (the “Merger”). See“Business—Navidec Merger Transaction” and Note 2 to the Company’s ConsolidatedFinancial Statements on Form 10K for the year ended December 31, 2006, asamended for detailed discussion regarding the Merger. As a result of theMerger, the shareholders of BPZ-Texas received the majority of the votinginterest and control of the Board of Directors and management of the combinedentity and on February 4, 2005, Navidec changed its name to BPZ Energy, Inc.Accordingly, for accounting purposes, BPZ-Texas was treated as the acquiringentity. All financial statements herein represent the historical financialstatements of the accounting acquirer, BPZ—Texas. Although the Company’s namehas been changed, the pre-merger company may be referred to as Navidec in thisfiling, as the context may require, to avoid confusion.

The Merger Agreement provided for the immediateissuance by Navidec of 9,000,000 shares of its common stock to the shareholdersof BPZ-Texas and the future issuance of an additional 18,000,000 shares on anearn-out basis if the Company achieves certain reserve and production goals.The first 9,000,000 earn-out shares were contingent on achieving certainreserve targets, which were achieved in December 2004. The remaining9,000,000 earn-out shares are issuable once the Company is entitled to receiveas its proportionate share from gross production from any oil and gas wellsowned or operated by the Company not less than 2,000 barrels of oil per day orits equivalent (approximately 12 million cubic feet of gas per day) prior toDecember 28, 2007.

**Basisof Presentation**

The Company’s unaudited consolidated financial statementsincluded herein have been prepared pursuant to the rules and regulations of theSecurities and Exchange 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 theinterim periods on a basis consistent with the annual audited financialstatements.  All such adjustments are ofa normal recurring nature. The Company believes that the disclosures containedherein are adequate to make the information presented not misleading.  The consolidated balance sheet at December31, 2006 is derived from the December 31, 2006 audited consolidated financialstatements.  These interim financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form10-K, as amended, for the year ended December 31, 2006.  The results of operations for interim periodsare not necessarily indicative of the results to be expected for the full year.

***Reclassifications***

Certain reclassificationsof prior year balances have been made to conform such amounts to corresponding2007 classifications.  Thesereclassifications have no impact on net income.

***Principlesof Consolidation***

Our consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries and branch offices. Allintercompany balances and transactions have been eliminated.

**Recent Accounting Pronouncements**

In April2005, the FASB issued FASB Staff Position FSP FAS 19-1 provides circumstancesthat would permit the continued capitalization of exploratory well costs beyondone year, other than when additional exploration wells are necessary to justifymajor capital expenditures and those wells are under way or firmly planned forthe near future. Generally, the statement allows exploratory well costs tocontinue to be capitalized when the well has found a sufficient quantity ofreserves to justify its completion as a producing well and the enterprise ismaking sufficient progress assessing the reserves and the economic andoperating viability of the project.

In June2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes - an interpretation of SFAS No. 109”**(“FIN48”). This interpretation provides guidance for recognizing and measuringuncertain tax positions, as defined in SFAS No. 109, “Accounting for IncomeTaxes.” FIN 48 prescribes a threshold condition that a tax position must meetfor any of the benefit of the uncertain tax position to be recognized in thefinancial statements. Guidance is also provided regarding derecognition,classification and disclosure of these uncertain tax positions. FIN 48 iseffective for fiscal years beginning after December 15, 2006. The adoption ofthis Interpretation is not expected to have a material impact on ourconsolidated financial position, results of operations, or cash flows.

7

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InSeptember 2006, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”), which establishes an approach requiring thequantification of financial statement errors based on the effect of the erroron each of the company’s financial statements and the related financialstatement disclosures.  This model iscommonly referred to as a “dual approach” because it requires quantification oferrors under both the “iron curtain” and “roll-over” methods.  The roll-over method focuses primarily on theimpact of a misstatement on the income statement, including the reversingeffect of prior year misstatements; however, its use can lead to theaccumulation of misstatements in the balance sheet. The iron curtain methodfocuses primarily on the effect of correcting the period end balance sheet withless emphasis on the reversing effects of prior year errors on the incomestatement. The Company currently uses the iron curtain method for quantifyingfinancial statement misstatements. The Company will initially apply the provisionsof SAB 108 in connection with the preparation of the Company’s annual financialstatements for the year ending December 31, 2006. The use of the dual approachis not expected to have a material impact on our consolidated financialposition, results of operations, or cash flows.

In December2006, the FASB issued FASB Staff Position FSP EITF 00-19-2, *Accounting for Registration Payment Arrangements*. This FASBStaff Position, or FSP, specifies that the contingent obligation to make futurepayments or otherwise transfer consideration under a registration paymentarrangement, whether issued as a separate agreement or included as a provisionof a financial instrument or other agreement, should be separately recognizedand measured in accordance with FASB Statement No. 5, *Accountingfor Contingencies*. This FSP also requires certain disclosuresregarding registration payment arrangements and liabilities recorded for suchpurposes. This FSP is immediately effective for registration paymentarrangements entered into or modified after December 21, 2006. The guidance ofthis FSP is effective for fiscal years beginning after December 15, 2006, andinterim periods within those fiscal years for registration payment arrangementsentered into prior to December 21, 2006. This FSP requires adoption byreporting a change in accounting principle through a cumulative-effectadjustment to the opening balance of our stockholders’ equity accounts as ofthe first interim period of the year in which this FSP is initially applied. Wedo not expect our adoption of this FSP to materially affect our financialposition, results of operations or cash flows.

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.157 – *Fair Value Measurement* (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples, and expands disclosures about fair value measurements. SFAS No. 157applies under other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, SFAS No. 157 does not require any new fair value measurements.However, for some entities, the application of this SFAS No. 157 will changecurrent practice.  The definition of fairvalue focuses on the price that would be received to sell the asset or paid totransfer the liability (an exit price), not the price that would be paid toacquire the asset or received to assume the liability (an entry price).  SFAS No. 157 emphasizes that fair value is amarket-based measurement, not an entity-specific measurement.  The provisions of this Statement will beeffective for financial statement issued for fiscal years beginning afterNovember 15, 2007 and interim periods within those fiscal years.

In February 2007, FASB issued Statement of FinancialAccounting Standards No. 159, The Fair Value Option for Financial Assetsand Financial Liabilities–Including an Amendment of FASB Statement No. 115(“SFAS No. 159”). This standard permits an entity to choose to measure manyfinancial instruments and certain other items at fair value. Most of theprovisions in SFAS No. 159 are elective; however, the amendment to FASBStatement No. 115, Accounting for Certain Investments in Debt and EquitySecurities, applies to all entities with available-for-sale and tradingsecurities. SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently evaluating the impactthis adoption will have on the consolidated financial statements.

**Note 2 —Value Added Tax Receivable**

Value-added tax (referred to as “IGV” in Peru) is generallyimposed on goods and services at a rate of 19%. Peru currently has an IGV earlyrecovery program 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. The Company has applied forearly recovery of certain IGV paid since it does not anticipate first sales ofoil or power to the Peruvian power market until early 2008.

The Company’s value addedtax receivable balance as of March 31, 2007 was $4,735,558.  Of this balance, the 

8

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Company filed claims with the Peruvian tax authorityto recover approximately $3.6 million under the IGV early recovery program, ofwhich $1.7 million has been collected as of May 4, 2007.

**Note 3 — Inventories**

Inventories consist primarily of tubular goods, accessoriesand spare parts for production equipment, stated at the lower of average costor market.  The balance in inventory atMarch 31, 2007 was $1,870,411.

**Note 4 — Prepaid and Other CurrentAssets**

Below is a summary of prepaid and other current assetsas of March 31, 2007 and December 31, 2006:
| ** **                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                              |       |               |       |                  |       |
| Prepaid expenses  and other       |       | $                  | 799,624    |                  | $          | 763,480 |   |
| Deposits                          |       | 69,029             |       | 68,367                |       |
| Prepaid  insurance                |       | 334,394            |       | 517,974               |       |
| Insurance  receivable             |       | 612,033            |       | 612,033               |       |
| Interest  receivable              |       | —             |       | 10,646                |       |
| Prepaid and  other current assets |       | $                  | 1,815,080  |                  | $          | 1,972,500 |   |

 

Prepaid expensesand other are primarily related to prepayments for drilling services, equipmentrental and material procurement.  Deposits are primarily tosecure delivery of the drilling rig and rent deposits in connection with theCompany’s offices in Houston and Peru. Prepaid insurance consists of premiums related to the Company’soperations as well as general liability and directors and officers insurancepolicies.

Insurance receivable is related to the barge incident whichoccurred in early August 2006.  TheCompany incurred an operational delay of approximately three weeks resultingfrom a navigation incident which caused the BPZ-01 barge to be grounded on asand bank in Talara Bay in northwest Peru during the second mobilization tripto the Corvina platform. As of March 31, 2007, a claim of approximately$712,000 for repairs is expected to be filed with the insurance carrier.   A deductible of $100,000 will be applied tothis insurance claim when reimbursed. See Note 11 “Commitments and Contingencies”, included herein, forfurther discussion.

**Note 5 — Property, Equipment andConstruction in Progress**

Below is a summary of property, equipment and construction in progress as of March 31, 2007 and December 31, 2006:
| ** **                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                                    |       |               |       |                  |       |
| Construction in  progress:                              |       |               |       |                  |       |
| Power plant and related equipment                       |       | $                  | 3,655,283  |                  | $          | 3,581,069 |   |
| Platforms and wells                                     |       | 37,169,143         |       | 25,759,009            |       |
| Pipelines and processing facilities                     |       | 2,535,593          |       | 2,535,593             |       |
| Barge and  related equipment                            |       | 6,468,134          |       | 6,461,877             |       |
| Office equipment,  leasehold improvements, and vehicles |       | 905,694            |       | 828,727               |       |
| Accumulated  depreciation and amortization              |       | (604,038           | )          | (439,365              | )          |
| Net property,  equipment and construction in progress   |       | $                  | 50,129,809 |                  | $          | 38,726,910 |   |

 

As of March 31, 2007, the Companyincurred costs associated with its development initiatives for the explorationand production of natural gas reserves and the complementary development ofproprietary gas-fired power generation for sale in Peru. In March 2007, after a total of six Drill StemTests were conducted on separate potential pay zones from the Lower and UpperZorritos formations, the Company’s initial well, CX11-21XD, tested positive forboth gas and oil in quantities that we believe to be commerciallyproducible.  We are currently in theprocess of working over the shut-in CX11-16X well, and will 

9

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then begin the drilling of our second new well in the Corvina field, totest for additional gas reserves and further appraise the oil discovery.However, we caution readers that test data is not necessarily indicative ofactual results.  We have not drilled anyother wells or recognized any revenues from operations, and we do notanticipate generating significant revenues from our properties prior to early2008.  During the three months endedMarch 31, 2007, costsassociated with the final stages of completion and testing of the first wellwere approximately $11.5 million.  Intandem with the gas-to-power project, the recent discovery of oil reserves inthe Corvian field has prompted the Company to simultaneously direct itsattention towards accelerating the development of the Corvina oil.  The accelerated oil production program willinvolve the procurement of production facilities, as well as storage andtransportation equipment in an effort to produce and then ship the oil to anearby refinery.  The Company is in theinitial stages of this project.  Inaddition, the Company incurred costs for office equipment and leasehold improvementsfor its offices in Houston, Peru and Ecuador. In accordance with “successful efforts” method of accounting, theCompany capitalized $115,159 of depreciation expense related to supportequipment to construction in progress during the three months ended March 31,2007.

**Note 6 — Investment in EcuadorProperty**

The Company has an investment in an oil and gas property inEcuador (the “Santa Elena Property”) totaling $1,710,708 and $1,757,604 as ofMarch 31, 2007 and December 31, 2006, respectively.  The Company accounts for this investmentunder the cost method and records its share of cash received or paid as otherincome or expense.  Since the Company’sinvestment represents ownership of an oil and gas property, which is adepleting asset, the Company is amortizing the cost of the investment on astraight-line basis over the remaining term of the license agreement whichexpires in May 2016.  Accordingly,the Company recorded amortization expense of $46,896 for the three months endedMarch 31, 2007, and the three months ended March 31, 2006.

**Note 7 — Restricted Cash and Performance Bonds**

In connection with its properties in Peru, the Company hasobtained two performance bonds totaling $1,350,000 to guarantee certainobligations and commitments.  As of March31, 2007, the Company had restricted cash deposits of $1,150,000, which collateralizesthe performance bonds.  In addition tothe cash collateral posted by the Company, an individual shareholder of theCompany provided a guarantee in the amount of $200,000 to the financialinstitution that issued one of the bonds to secure the Company’sperformance.  The performance bonds wereissued by Peruvian banks and their terms are governed by the correspondinglicense contract or agreement.  All ofthe performance bonds were issued by Peruvian banks and their terms aregoverned by the corresponding license contract or technical evaluationagreement.

**Note 8 — Long-Term Debt**

On March 31, 2007, the Company had long-term debt of$51,298 compared to $55,815 in long-term debt as of December 31, 2006.  Long-term debt for both 2007 and 2006 consistedof two secured loans for the purchase of office furniture. Both loans have aterm of 60 months, bearing interest at 5.94% and 9.44%, with principal andinterest payments due on a monthly basis.

**Note9 — Stockholders’ Equity**

The Companyhas 25,000,000 shares of preferred stock, no par value and 250,000,000 sharesof common stock, no par value, authorized for issuance.

**Potentially Dilutive Securities**

In addition to its shares issued and outstanding, the Company has the following potentially dilutive securities as of March 31, 2007 and December 31, 2006.  None of these potentially dilutive shares have been included in the calculation of earnings per share as the effect would be anti-dilutive.

10

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| ** **                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Stock options  outstanding                                                    |       | 3,957,000          |       | 4,306,152             |       |
| Warrants  outstanding                                                         |       | 250,000            |       | 250,000               |       |
| Shares issuable  to consultant for services                                   |       | —             |       | —                |       |
| Contingent  incentive earn-out shares                                         |       | 450,000            |       | 450,000               |       |
| Contingent  Merger earn-out shares                                            |       | 9,000,000          |       | 9,000,000             |       |
|                                                                          |       |               |       |                  |       |
| Total potentially dilutive securities                                         |       | 13,657,000         |       | 14,006,152            |       |
|                                                                          |       |               |       |                  |       |
| Shares available for  grant pursuant to Long-Term Incentive Compensation Plan |       | 1,151,000          |       | 1,156,000             |       |

 

On January 1, 2006, the Company adopted SFAS No. 123 — Revised2004,*Share—Based Payment* (“SFAS No. 123(R)”),which establishes accounting for stock-based payment transactions for employeeservices and goods and services received from non-employees. SFAS No. 123(R) isa revision of SFAS No. 123, *Accounting for Stock-BasedCompensation*, and supersedes APB No. 25, *Accountingfor Stock Issued to Employees*. Under the provisions of SFAS No.123(R), stock-based compensation cost is measured at the date of grant, basedon the calculated fair value of the award, and is recognized as expense overthe employee’s or non-employee’s service period, which is generally the vestingperiod of the equity grant.

Prior to January 1, 2006, the Company accounted for stock-basedcompensation in accordance with SFAS No. 123.  Asallowed under SFAS No.123, the Company accounted for its stock-based compensation to employeesusing the intrinsic value method of accounting which bases compensation expenseon the difference between the quoted market price of the award at themeasurement date less the amount, if any, the employee is required to pay forthe stock.  As of January 1, 2006,stock-based awards to employees consisted of only restricted shares valuedusing the market price of the Company’s traded common stock on the date ofgrant. The fair value method used to value restricted shares would have yieldedthe same fair value and compensation expense as the intrinsic value methodused; thus, no pro forma results of operations are required to be presented.

In addition, stock-based awards to non-employees as ofJanuary 1, 2006 consisted of options and restricted shares issued in exchangefor various legal and investment banking services.  Equity instruments issued to non-employeesfor services were accounted for at fair value at the date of grant.  The fair value for awards issued tonon-employees was measured using a Black-Scholes valuation model.  Expenses determined for employees andnon-employees were recognized in the Company’s financial statements over theapplicable service period.

The Company adopted SFAS No. 123(R) using the modifiedprospective application method and, accordingly, no prior periods have beenrestated as a result 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 granted prior to, but notyet vested as of January 1, 2006, based on the grant-date fair value estimatedin accordance with the original provisions of SFAS No. 123; and (b) compensationcost for all stock-based payments granted on or after January 1, 2006, based onthe grant-date fair value estimated in accordance with SFAS No. 123(R). SFASNo. 123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods to reflect actualforfeitures.   The Company’s forfeitureestimates were not changed as a result of adopting SFAS No. 123(R).

The following tablesummarizes stock-based compensation costs recognized under SFAS 123(R) for thethree months ended March 31, 2007 and the three months ended March 31, 2006:
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                          |       |                             |       |   |   |
| Employee  stock—based compensation costs |       | $                                | 942,459    |   | $ | 467,915 |   |
| Non-employee  stock-based compensation        |       | 17,100                           |       | 75,000 |   |
|                                          |       | $                                | 959,559    |   | $ | 542,915 |   |

 

11

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See below for a detaileddiscussion regarding the Company’s employee long-term incentive compensationplan and stock-based payments to non-employees.

**RestrictedStock Awards and Performance Shares**

The Company determines the fair value of restricted stockawards and performance shares based on the market price of the Company’s commonstock on the date of grant. Compensation cost for such awards is recognized ona straight-line basis 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 summary of the Company’s restricted stock award activityand related information is presented below: 
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Non-vested  balance at December 31, 2006 |       | 746,500            |       | $                   | 4.01       |   |
| Granted                                       |       | 5,000              |       | 3.80                |       |
| Vested                                        |       | —             |       | —              |       |
| Forfeited                                     |       | —             |       | —              |       |
| Non-vested balance at  March 31, 2007         |       | 751,500            |       | $                   | 4.01       |   |

 

As of March 31, 2007, there was approximately $1.1 millionof total unrecognized compensation cost related to nonvested restricted stockawards, which is expected to be recognized over a weighted-average period ofapproximately 1.1 years.

No performance shares were outstanding as of March 31,2007.

**Stock Options**

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

The fair value of each stock option granted isestimated on the date of grant using a Black-Scholes option pricing model. Thefollowing table presents the weighted-average assumptions used in the optionpricing model for options granted during the three months ended March 31, 2007.During the three months ended March 31, 2007 and March 31, 2006, no optionswere granted by the Company. The expected life of the options represents theperiod of time the options are expected to be outstanding. For the three monthsended March 31, 2007, the expected term of options granted was derived based ona weighting between (a) the Company’s historical exercise and forfeitureactivity and (b) the average midpoint between vesting and the contractual term.For the three months ended March 31, 2006, the expected term of options grantedwas based on the contractual term.  Inthe future, as information regarding post-vesting termination becomes moreaccessible, the Company may change the method of deriving the expected term.This change could impact the fair value of options granted in the future. TheCompany expects to refine the method of deriving the expected term no laterthan January 1, 2008.  For the threemonths ended March 31, 2007 and March 31, 2006, our expected volatility isbased on the historical volatility of our stock for a period approximating theexpected life.  The risk-free interestrate is based on the observed U.S. Treasury yield curve in effect at the timethe options were granted. The dividend yield is based on our history ofdividend payouts.

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|                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 6        |       | 10       |       |
| Risk-free  interest rate                             |       | 4.7      | %          | 2.5      | %          |
| Volatility                                           |       | 86.00    | %          | 76.12    | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average fair  value per share at grant date |       | $        | —     |     | $          | — |   |
|                                                      |            |          |            |          |            |  |  |

 

A summary of our stock option activity and relatedinformation is presented below:

During the three months ended March 31, 2007 a total of141,500 options were exercised.  As ofMarch 31, 2007, there was approximately $2.4 million of total unrecognizedcompensation cost related to nonvested stock options which is expected to berecognized over a weighted-average period of approximately 1.4 years.

Thefollowing tables summarizes information about stock options outstanding as ofMarch 31, 2007: 
| ** **                                  | ** ** | **Outstanding**    | ** ** | **Exercisable**     | ** ** |
|---------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                  | ** ** | ** **         | ** ** | **Weighted-**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Average**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Remaining**       | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Contractual**     | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Life**            | ** ** | **Exercise Price** | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| **Range of Exercise Prices** | ** ** | **Options**        | ** ** | **(In years)** | ** ** | **Per Option** | ** ** | **Options** | ** ** | **Per Option** | ** ** |
| 1.30                                        |       | 892,000            |       | 6.69                |       | $ | 1.30 |   | 892,000 |   | $ | 1.30 |   |
| 2.00                                        |       | 1,191,500          |       | 6.69                |       | 2.00 |   | 1,191,500 |   | 2.00 |   |
| 3.20                                        |       | 580,000            |       | 8.29                |       | 3.20 |   | 100,000 |   | 3.20 |   |
| 3.35                                        |       | 750,000            |       | 8.46                |       | 3.35 |   | — |   | — |   |
| 4.00                                        |       | 372,500            |       | 8.78                |       | 4.22 |   | — |   | — |   |
| Total(1)                                    |       | 3,786,000          |       | 7.49                |       | $ | 2.50 |   | 2,183,500 |   | $ | 1.77 |   |

 

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(1)          171,000outstanding options have been excluded from this total as they relate tooptions assumed in the Company’s Merger with Navidec. 
|                                               | ** ** | ** **         | ** ** | **Weighted—**      | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                                    | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                                    | ** ** | **Options**        | ** ** | **Per Option**     | ** ** |
| Non-vested  balance at December 31, 2006 |       | 2,102,500          |       | $                       | 3.07       |   |
| Granted                                       |       | —             |       | —                  |       |
| Vested                                        |       | (500,000           | )          | 1.30                    |       |
| Non-vested balance at  March 31, 2007         |       | 1,602,500          |       | $                       | 3.51       |   |

 

Pursuant to a Settlement Agreement and Mutual Releaseentered into on May 19, 2006 between the Company, Mr. McKowen and NavidecFinancial Services (“NFS”), the vesting period related to the 500,000 nonvestedoptions outstanding as of December 31, 2006, was extended from September 10,2006 to one year following the effective date of the registration with the SECof the shares NFS received in the Merger with Navidec. The registration ofthese shares underlying these options became effective on December 15, 2006and, as a result, the expiration date for the remaining options was extended toDecember 16, 2007.  The extension of thevesting period did not result in a revaluation of these options, as the numberof options that the Company expects to vest did not change as a result of themodification.  In March 2007, suchfunding received by the Company exceeded the $6,000,000 target and as a result,the remaining 500,000 options vested.

The aggregate intrinsic value of stock options outstandingat March 31, 2007 was approximately $13.2 million, of which approximately $9.2million relates to awards 

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vested and exercisable and approximately $4.0 millionrelates to awards expected to vest. The intrinsic value for stock optionsoutstanding is calculated as the amount by which the quoted price of our commonstock as of March 31, 2007 exceeds the exercise price of the option.

**Warrants**

As of March 31, 2007, the Company had 250,000 warrantsoutstanding.  For their role as placementagent, in connection with the private placement of 11,466,000 shares of commonstock in July 2005, Morgan Keegan & Company, Inc. received fully vested warrantsto purchase 100,000 shares of the Company’s common stock at an exercise priceof $3.00 per share. Such warrants expire on July 19, 2010. These warrants werevalued at $325,000 using the Black-Scholes model, which amount was treated asadditional non-cash stock offering costs.

Additionally, for their financial advisory services, inconnection with the private placement of 4,482,000 shares of common stock inJune 2006, Morgan Keegan & Company, Inc., received fully vested warrants topurchase 150,000 shares of the Company’s common stock at an exercise price of$3.00 per share. Such warrants expire on June 30, 2011. These warrants werevalued at $248,645 using the Black-Scholes model, which amount was treated asadditional non-cash stock offering costs.

All warrants issued were valued using the Black-Scholesmodel, which amount was treated as additional non-cash stock offeringcosts.  The following table presents theweighted-average assumptions used in the option pricing model for optionsgranted during the three months ended March 31, 2007 and the same period ended2006.  No warrants were granted duringthe three months ended March 31, 2007 or March 31, 2006.  The same methodologies applied to determinethe assumptions used to value the options noted above were also used in valuingthe warrants issued to Morgan Keegan & Company.
|                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 1.6      |       | 1.6      |       |
| Risk-free  interest rate                             |       | 4.7      | %          | 4.9      | %          |
| Volatility                                           |       | 86.0     | %          | 64.7     | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average  fair value per share at grant date |       | $        | —     |     | $          | — |   |
|                                                      |            |          |            |          |            |  |  |

 

Nowarrants were exercised during the three months ended March 31, 2007.

**Contingent Incentive Earn-Out Shares**

During2005, the Company’s Board of Directors awarded a total of 485,000 shares ofincentive stock awards to three of the Company’s officers. The incentive stockawards vest and the earn-out shares are issuable once the Company is entitledto receive as its proportionate share from gross production from any oil andgas wells owned or operated by the Company not less than 2,000 barrels of oil perday or its equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007, the same target applicable to the Merger earn-outshares (see below).  However, one of theCompany’s officers resigned from the Company and its subsidiaries effectiveJune 15, 2006, and as a result 225,000 of the unvested contingent incentivestock awards, representing $990,000 of future possible compensation expense,were forfeited.  Subsequently, 190,000shares of those 225,000 shares awarded to the former officer were reassigned tohis replacement who was originally awarded 35,000 shares.  As of March 31, 2007, the total ofoutstanding awards related to the incentive stock awards was 450,000 shareswith a possible combined future expense of $1,980,000.  Of this amount, approximately $204,828corresponds to the three months ended March 31, 2007 and the same period endedMarch 31, 2006, respectively.  Since theCompany has not yet obtained a firm financing sufficient to achieve theearn-out target applicable to the Merger earn-out shares, the Company does not,as of March 31, 2007, consider the achievement of this target to be probablefor accounting purposes and is not currently accruing the associatedstock-based compensation expense.

**MergerEarn-Out Shares**

Under theterms of the Merger Agreement, the Company committed to issue 18,000,000 sharesto the former shareholders of BPZ-Texas on a contingent earn-out basis if theCompany achieves certain reserve and production goals. The first earn-outtarget relating to reserves was achieved in December 2004 and 9,000,000 of theearn-out shares were issued. The remaining 9,000,000 earn-out shares areissuable once the Company is entitled to receive as its proportionate sharefrom 

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gross production from anyoil and gas wells owned or operated by the Company not less than 2,000 barrelsof oil per day or its equivalent (approximately 12 million cubic feet of gasper day) prior to December 28, 2007.

Foraccounting purposes, the earn-out arrangement is treated as a stock dividendbecause the earn-out is payable to the shareholders of the accounting acquirer,BPZ-Texas. Accordingly, except for a retroactive increase in the number ofcommon shares outstanding for all periods presented, no accounting entry isrequired upon the issuance of the earn-out shares.

**Long-Term Incentive CompensationPlan**

The BPZEnergy, Inc. 2005 Long-Term Incentive Compensation Plan (the “LTIP”) permitsthe Board of Directors to award eligible employees, directors and consultantswith incentive-based and non-incentive-based compensation. The maximum numberof shares of stock of the Company that may be subject to incentives under theLTIP, including without limitation incentive options, is 4,000,000 shares, andsuch shares shall be reserved at all times until issued under the LTIP. Of suchamount, no more than 1,600,000 shares in the aggregate shall be eligible forthe issuance of performance shares, stock grants, restricted stock grants andother stock-based incentives. The LTIP will be administered and managed withinthe discretion of Compensation Committee of the Company or, in the absence ofsuch committee, by the Board of Directors. Incentives under the LTIP may begranted to eligible employees, directors or consultants in any one or acombination of incentive options, non-statutory stock options, stockappreciation rights, restricted stock grants, stock grants and performanceshares.

**Note 10 — Affiliate and Related Party Transactions**

As of March 31, 2007 and March 31, 2006, the Company had nooutstanding balances with affiliates or related parties.

**Note 11 — Commitments andContingencies**

*BargeIncident*

In early August 2006, the Company incurred an operationaldelay of approximately three weeks resulting from a navigation incident whichcaused the BPZ-01 barge to be grounded on a sand bank in Talara Bay innorthwest Peru during the second mobilization trip to the Corvina platform. Noinjuries were sustained by any of the Company’s staff, nor to any of the tugboat operator’s crew members. The BPZ-01 is a U.S. flagged vessel and as suchwas inspected after the incident by the U.S. Coast Guard, to its satisfaction.The barge resumed normal operations immediately thereafter. Based uponinformation currently available, the Company estimates that total expendituresrelated to this incident will be approximately $1.1 million. As of March 31,2007, approximately $382,000 has been incurred for barge recovery and temporaryrepairs to the vessel.  In addition, theCompany expects to incur approximately $330,000 in permanent repairs to thebarge and approximately $432,000 of consequential damages, primarily stand-bycharges.  As of April 30, 2007, theCompany has not presented a final claim to its insurance carrier for the bargerepairs and is negotiating a settlement agreement with a third party forrecovery of any damages not covered through its insurance.  The Company believes the majority of thecosts associated with this incident will be reimbursed through insurance or througha third party. No assurances can be given, however, that any such recoverieswill be sufficient to cover all costs associated with this incident or to thetiming of any such recoveries. This incident is not expected to have a materialimpact on the Company’s operations or business plan.

*Transferof NFS*

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

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

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transfer, because the Company is a successor by mergerto Navidec, Inc., if regulatory authorities determine that the Company did notcomply with applicable registration requirements in connection with thetransfers, fines or other sanctions could be imposed on the Company withrespect to the transaction.

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

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

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

*Peru Properties*

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

In connection with our onshore Block XIX license contract,we plan to shoot 200 kilometers of 2-D seismic surveys during the secondquarter of 2007.  Depending on theresults of this work, we may elect to drill an exploratory well.  We havesecured the environmental permits and other authorizations to perform seismictesting in this block.

The Company acquired four offshore platforms in connectionwith its Block Z-1 property. The Company recently completed the refurbishmentof one of the offshore platforms and intends to maintain all of such platformsfor use throughout the life of the Block Z-1 contract. These platforms revertback to the Government of Peru at the end of the contract, provided they are ingood working condition, with no further obligation to the company to dismantleor remove them. The Company and its legal advisors have reviewed Peruvian lawand existing regulations from the Peruvian Ministry of Energy and Mines inconjunction with the requirements of SFAS No. 143 “Accounting for AssetRetirement Obligations” (“ARO”) as it applies to tangible long lived assets andtheir future retirement and dismantlement. The Company has concluded there isno legal obligation to dismantle the platforms, as defined in SFAS No. 143, andtherefore recognition of an ARO is not required. Accordingly, no such provisionis reflected in the accompanying consolidated financial statements. If,however, current laws or regulations were changed or the platforms were nolonger in good working order, the Company could be obligated to dismantle andremove them. The current estimated cost to dismantle an offshore platform isestimated to be approximately $2 million, depending upon the condition of theplatform and the depth of the water.

In December 2005, the Company signed a drilling contractwith Petrex S.A., a subsidiary of Saipem SpA of Italy. Under the contract,Petrex S.A. will provide a platform rig capable of drilling to 16,000 feet andupgrade the rig to meet the Company’s specifications. The Company intends toutilize the rig for the initial development of the Corvina gas field and mayalso utilize it for the expected development of the Albacora oil field, andpotential appraisal wells in the Piedra Redonda gas field. The Company hasagreed to pay a $5.5 million fee to mobilize and upgrade the rig. In exchange,the Company will receive a competitive fixed day rate and exclusive rights touse the rig, at its option, during the two-year period which commenced inSeptember 2006.

In December 2005,the Company notified Perupetro that it had decided to exercise its exclusiveoption to convert its technical evaluation agreement on Area VI, into a licensecontract.  The new area renamed as BlockXXII, consists of 

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approximately 948,000acres and will encompass a significant portion of the Lancones basin.  After the license contract has been signed for this block, theCompany will be required to post a performance bond to guarantee certainobligations and commitments. However, negotiations on the terms of the licensecontract are still underway and the Company has not been officially awarded thelicense contract.  Accordingly, theCompany does not have sufficient information to determine the timing, norestimate the value of the performance bond to be posted in connection with thisproperty.

In July2006, Perupetro informed the Company that its proposal for Block XXIII, whichconsists of approximately 248,000 acres and is located onshore in northwestPeru between the Company’s Blocks Z-1 and XIX, was the winning bid in thetender process.  The Company haspresented all necessary documentation to become the qualified operator of thisnew block under an exploration and production license contract. The Company’sproposal covers only the exploration period and commits the Company to drill acertain number of wells, acquire certain amount of either 2-D or 3-D seismicdata and prepare an integrated geological, geochemical and reservoirengineering evaluation of the hydrocarbon prospects in the block.  After the license contract has been signed forthis block, the Company will be required to post a performance bond toguarantee certain obligations and commitments. However, negotiation on theterms of the license contract is still underway, and the Company has not beenofficially awarded the license contract. The Company therefore does not have sufficient information to determinethe timing, nor estimate the value of the performance bond to be posted inconnection with this property.

*FinancingActivities*

On December 20, 2006, the International Finance Corporation’s(“IFC”) Board of Executive Directors approved a $120 million financialpackage.  IFC is the private sector armof the World Bank Group based in Washington, D.C.  As part of the financing, we completed aprivate placement of 6,500,000 shares of common stock, no par value, to the IFCpursuant to a Subscription Agreement dated December 18, 2006.  The common stock was priced at $3.00 pershare resulting in proceeds to us of approximately $19.5 million.  The offering was placed directly by us andthere were no placement fees.  The remaining$100.5 million portion of IFC financing consists of $30.5 million of debtfacilities for IFC’s own account and $70 million of debt facilities for theaccount of third-party financial institutions. Syndication of the third-party debt component is expected to take placeduring the second or third quarter of 2007. The remaining debt portion of the financing is subject to identificationof the lending syndicate members and subsequent negotiation and approval of thenecessary loan documentation.   As ofApril 30, 2007, the third-party debt syndication has not been completed.

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

**Note 12 — Legal Proceedings**

*SECInquiry of Navidec*

Navidec was advised in February 2004 that the SEC wasconducting an informal inquiry to determine whether Navidec had violatedfederal securities laws. Based on the information made available to theCompany, it believes the SEC’s investigation related, at least in part, to therestatement of Navidec’s reported earnings for the first and second quarters of2003. This restatement was reported in Navidec’s Form 10-Q for the thirdquarter of 2003 filed on December 11, 2003.

In December 2004, the Company received notice that the SEChad issued an Order Directing a Private Investigation and Designating Officersto Take Testimony and would be conducting a formal investigation. Pursuant tothe Merger Agreement, the Company has been indemnified by NFS for the costs ofthe SEC investigation, and NFS has borne the costs incurred to date. TheCompany is not aware of any activity concerning this matter during the lastyear or of any actions the SEC may intend to take with respect to this matter.No assurance can be given, however, that the investigation has been and will beresolved without negative consequences to the Company.

**Note 13 —Subsequent Events**

As discussed above in Note 11, On December 20, 2006, theIFC’s Board of Executive Directors approved a $120 million financialpackage.  As part of the financing, theCompany completed a private placement of 6,500,000 shares of common stock, nopar value, to the IFC pursuant to a Subscription Agreement dated December 18,2006.  On April 18, 2007, the FormS-1 Registration Statement filed February 8, 2007 and subsequently amended onMarch 27, 2007, covering the 6,500,000 shares was declared effective and the related prospectuswas filed accordingly.

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In April, 2007, the Company awarded a seismic contract toPGS Geophysical, to shoot 200 kilometers of 2-D seismic testing in BlockXIX.  The contract amount is forapproximately $4 million and is scheduled to commence during the secondquarter, 2007.

On April 20, 2007,the Company agreed in principal to a private placement of its common stock forgross proceeds of approximately $35 million. On May 4, 2007, pursuant to a Stock Purchase Agreement, the Companycommitted to sell approximately 6.7 million shares to sixteen institutional andaccredited investors at a price of $5.25 per share.  The Company expects to use the proceeds fromthis offering primarily in an effort to accelerate the Corvina oil developmentand otherwise will be used consistent with the Company’s operating plan asdescribed in the Company’s public filings. The private placement shares will be issued under Regulation D of theSecurities Act of 1933, as amended.  Theshares issued will be restricted shares and will not be eligible for tradinguntil registered with the SEC.  TheCompany committed to file a registration statement covering the shares no laterthan 30 days after the closing, and will use its reasonable best efforts toobtain its effectiveness no later than 60 days after filing the registrationstatement, or in the event of SEC review, 90 days after filing.  The Company is subject to a maximum aggregatepenalty of 18% of the purchase price or $6.3 million if the registrationstatement related to the offering is not filed or declared effective within thetimelines outlined above.  At the option of each investor, penalties arepayable in cash or common stock of the Company.   Management believes that the possibility ofthe Company being subject to such penalty in future periods is remote, asdetermined under SFAS 5, “Accounting for Contingencies”.

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**Overview**

Youshould read the following discussion and analysis together with ourconsolidated financial statements and notes thereto and the discussion Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andItem 1A.  “Risk Factors” included in our Annual Report onForm 10-K, as amended, for the year ended December 31, 2006. The followinginformation contains forward-looking statements, which are subject to risks anduncertainties. Should one or more of these risks or uncertainties materialize,our actual results may differ from those expressed or implied by theforward-looking statements.

BPZ Energy, Inc., (the “Company” or “BPZ”) aColorado corporation, formerly named Navidec, Inc., was incorporated in1993 and is based in Houston, Texas with offices in Lima, Peru and Quito,Ecuador. We are an exploratory stage company focused on the exploration andproduction of oil and natural gas and we intend to utilize part of our futurenatural gas production for the complementary development of gas-fired powergeneration.

On September 10, 2004, BPZ Energy, Inc., a Texas,(BPZ-Texas”) corporation consummated a reverse merger with Navidec, Inc.,a Colorado corporation (“Navidec”), whereby BPZ-Texas became a wholly ownedsubsidiary of Navidec (the “Merger”). See “Business—Navidec Merger Transaction”and Note 2 to the Company’s Consolidated Financial Statements, bothincluded our December 31, 2006 Form 10-K, for detailed discussion regarding theMerger.

Currently, we have exclusive rights and licenseagreements for oil and gas exploration and production covering a total ofapproximately 2.4 million acres in northwest Peru. Our license contractscover 100% ownership of both Block Z-1 (739,205 acres) and Block XIX (472,860acres). The Block Z-1 contract was signed in November 2001, and the BlockXIX contract was signed in December 2003. Our license contracts providefor an initial exploration period of seven to thirteen years and seven to tenyears, respectively, and require that we conduct specified activities on theproperties during this period. If the exploration activities are successful,the total contract term can extend up to 30 years for oil exploration andproduction and up to 40 years for gas exploration and production. We havepresented all necessary documentation requested by Perupetro in order to becomethe qualified operator under a license contract for Block XXII (948,000 acres,referred to as Area VI in previous filings) which we previously held under aTechnical Evaluation Agreement. Subsequently, in March 2006, we were notifiedby Perupetro that we qualified as an operator for Block XXII. In July 2006Perupetro officially informed us that our proposal for the 248,000 acre BlockXXIII, located onshore in northwest Peru between our Blocks Z-1 and XIX, wasthe winning bid in their recent license tender process. We have presented allnecessary documentation to become the qualified operator of this new blockunder an exploration and production license contract.

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

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We are in the exploratory stage of our oil and naturalgas business and to date our activities in Peru have been primarily limited toanalysis and evaluation of technical data on the properties and preparation ofthe development plans for the properties, including detailed engineering anddesign of the power plant and gas processing facilities, refurbishment of oneof our offshore platforms, procuring machinery and equipment for an extendeddrilling campaign, obtaining all necessary environmental and operating permitsand securing the required capital and financing to complete the current plan ofoperation.  We commenced drilling of ourinitial well, the CX11-21XD, in the Corvina Gas Field at the CX-11 platform inSeptember 2006, and a total depth of 10,457 feet (9,234 feet true verticaldepth) was reached in November 2006.  InMarch 2007, after a total of six Drill Stem Tests were conducted on separatepotential pay zones from the Lower and Upper Zorritos formations, the welltested positive for both gas and oil in quantities that we believe to becommercially producible.  We arecurrently in the process of working-over the shut-in CX11-16X well, and willthen begin drilling our second new well in the Corvina field, to test foradditional gas reserves and further appraise the oil discovery. However, wecaution readers that test data is not necessarily indicative of actualresults.  We have not drilled any otherwells or recognized any revenues from operations, and we do not anticipategenerating significant revenues from our properties prior to early 2008.

**Plan of Operation**

*Corvina OilDevelopment and Gas-to-Power*

Our plan ofoperation is initially focused on the development and exploitation of the oiland natural gas resource opportunities in the offshore Block Z-1 innorthwest Peru, in which we own a 100% working interest.  In order to achieve our objectives, we mustobtain significant financing from external sources.  To date we have raised approximately $115million through several private placements of our common stock.  On December 20, 2006, the InternationalFinance Corporation’s (“IFC”) Board of Executive Directors approved a $100million debt financing package related to this project.  In addition, on April 20, 2007, the Companyagreed in principal to a private placement of its common stock for grossproceeds of approximately $35 million. On May 4, 2007 pursuant to a Stock Purchase Agreement, the Companycommitted to sell approximately 6.7 million shares to sixteen institutional andaccredited investors at a price of $5.25 per share.  The proceeds from this offering will be usedprimarily in an effort to fast-track the Corvina oil development and otherwisewill be used consistent with the Company’s operating plan as described in theCompany’s public filings.  The privateplacement shares will be issued under Regulation D of the Securities Act of1933, as amended.  The shares issued willbe restricted shares and will not be eligible for trading until registered withthe SEC.  The Company committed to file aregistration statement covering the shares no later than 30 days after theclosing, and will use its reasonable best efforts to obtain its effectivenessno later than 60 days after filing the registration statement, or in the eventof SEC review, 90 days after filing.  TheCompany is subject to a maximum aggregate penalty of 18% of the purchase priceor $6.3 million if the registration statement related to the offering is notfiled or declared effective within the timelines outlined above.  At theoption of each investor, penalties are payable in cash or common stock of theCompany.  Management believes that thepossibility of the Company being subject to such penalty in future periods isremote, as determined under SFAS 5, “Accounting for Contingencies”.  See “Liquidity, Capital Resources and CapitalExpenditures” below for further discussion.

OurCorvina Oil Development project, has an estimated initial capital budget of $17million.  In order to accelerate our oilproduction program in the Corvina field we will need to secure productionequipment, as well as storage and transportation barges, to enable us toproduce and then transport the oil to a nearby refinery.  We are in the initial stages of this project.We are planning to complete this project forfirst sales of oil in late 2007, though this schedule is subject to manyfactors outside our control, including obtaining all necessary equipment and noassurance can be given that we can meet this schedule.

Our CorvinaGas-to-Power project, with an estimated capital budget of $132.3 million,entails the refurbishment of the Corvina CX-11 platform, rehabilitation of anexisting well and the drilling of two new wells, installation of a 10-mile gaspipeline from the platform to shore, construction of gas processing facilitiesand a 160 megawatt (“MW”) simple-cycle electric generating plant, and theconstruction of a 40-mile gas pipeline to supply gas to third party generatorsin Arenillas, Ecuador

Our first priority in the Corvina Gas-to-Power project isdrilling the initial gas wells in the Corvina Gas Field to develop reserves andestablish deliverability at expected levels. In December 2005, we signed adrilling contract with Petrex S.A., a subsidiary of Saipem SpA of Italy. Underthis contract, Petrex S.A. provided us with a platform rig capable of drillingto 16,000 feet and upgraded the rig to meet our specifications. We paid$5.5 million to upgrade and mobilize the rig. In exchange, we received acompetitive fixed day rate and exclusive rights to use the rig, at our option,during the two-year period commencing with delivery of the rig inSeptember 2006. In addition, after the guaranteed two-year period, we havethe option to 

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extend the contract for an additional year at market rates.

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

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

We have completed drilling our first well and we plan to drill anadditional new well from the Corvina CX-11 platform which also has a shut-ingas well which we intend to recomplete and utilize for gas production. We havesecured all tubular goods required to meet our expected needs for the secondwell and the recompletion well. We have obtained the required environmental anddrilling permits in order to commence drilling operations.  We commenced drilling of our initial well,the CX11-21XD, in the Corvina Gas Field at the CX-11 platform in September 2006and a total depth of 10,457 feet (9,234 feet true vertical depth) was reachedin November 2006. In March 2007, after a total of six Drill Stem Tests (DST)were conducted on separate potential pay zones from the Lower and UpperZorritos formations, the well tested positive for both gas and oil inquantities that we believe to be commercially producible. However, we cautionthe reader that test results are not necessarily indicative of actualproduction.  The gas is essentially puremethane with no impurities, making it ideal for the Company’s proposed 160 MWpower plant project, discussed further below, which will require 40 MMcfpd offeedstock.  The drilling of this firstwell at Corvina fulfills our contractual exploration commitment under the currentsecond exploration period of the Block Z-1 License Contract. We arecurrently working-over the shut-in CX11-16X well, and will then begin drillingour second new well in the Corvina field, to test for additional gas reservesand further appraise the oil discovery.

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

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

In addition to the local power market targeted in ourinitial project in Peru, we intend to simultaneously develop a gas salesstrategy for nearby Ecuador to capitalize on what we believe to be significantupside gas potential of the Corvina and Piedra Redonda Gas Fields located inBlock Z-1, as well as the potentially significant natural gas resources inthe adjacent onshore Block XIX. These properties are within 30 miles of theEcuadorian border and we plan to develop them for export sales of either rawgas or power generation via connection to the transmission system of Ecuador.Our plan for eventual Ecuadorian gas sales includes the construction of a40-mile pipeline from Caleta Cruz, the terminal point of our offshore pipelinefrom the Corvina Gas Field, to Arenillas, Ecuador. We intend to sell gas forthe generation of electricity by third party power producers in the localmarket in Ecuador. We are planning to complete this pipeline for first sales ofgas to Ecuador in late 2008, though this schedule is subject to many factorsoutside our control, including all necessary financing and no assurance can begiven that we can meet this schedule.

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In addition to the initial Corvina Gas-to-Power andCorvina Oil development projects described above, we have exploration anddevelopment rights to other fields within Block Z-1 and Blocks XIX, XXIIand XXIII.  We plan to seek additionalfinancing for these projects from industry or capital market sources, and weare not currently planning to make significant capital expenditures for seismicacquisition, excluding Block XIX as described below, or other exploration anddevelopment activities beyond our initial Corvina Gas-to-Power project asdescribed above, until we have secured such additional financing. Below is abrief summary of some of our possible future exploration and developmentprojects.

*Block Z-1*

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

*Block XIX*

In connection with our onshore Block XIX licensecontract, we plan to shoot 200 kilometers of 2-D seismic surveys during thesecond quarter of 2007.  Depending on theresults of this work, we may elect to drill an exploratory well.  We havesecured the environmental permits and other authorizations to perform seismictesting in this block.

*Blocks XXII and XXIII*

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

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

**Results of Operations**
|                                          | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **Increase/  (Decrease)** | ** ** |
| General and  administrative              |       | $                                                                      | 2,136,236  |   | $ | 1,575,440 |   | $ | 560,796 |   |
| Stock-based  compensation                |       | 959,559                                                                |       | 542,915 |   | 416,644 |   |
| Geological, geophysical  and engineering |       | 101,588                                                                |       | 466,403 |   | (364,815 | ) |
| Depreciation  expense                    |       | 54,497                                                                 |       | 37,168 |   | 17,329 |   |
| Total operating  expenses                |       | $                                                                      | 3,251,880  |   | $ | 2,621,926 |   | $ | 629,954 |   |

 

Our operating and administrative expenses to date haveconsisted principally of general and administrative costs as well asgeological, geophysical and engineering costs. General and administrative costs have increased significantly from$1,575,440 during the three months ended March 31, 2006 to $2,136,236 duringthe three months ended March 31, 2007 as a result of our increased activitylevels, additional personnel and costs associated with being a publiccompany.  We incurred $101,588 ofgeological, geophysical and engineering costs in the first quarter of 2007primarily related to the continued development of our Corvina Gas-to-Powerproject, compared to $466,403 during the comparable periods of 2006 primarilyrelated to the commencement of our Corvina Gas-to-Power project.

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Stock-basedcompensation expense for the three months ended March 31, 2007 wasapproximately $959,559, compared to $542,915 during the same period in2006.  Stock based compensation expenseis primarily related to our 2005 and 2006 restricted stock grants and accruedstock-based compensation under our 2005 Long-Term Incentive Plan.

We received net cash distributions from our Ecuadorproperty of $162,288 for the three months ended March 31, 2007 compared to netcash distributions of $236,551 during the three months ended March 31,2006.  However, due to capacity problems atthe local refinery in Ecuador, anticipated oil sales from the Decemberproduction were not realized  duringJanuary 2007 in the amount of approximately $137,047.  Since our investment consists of an interestin a producing oil and gas property, we are amortizing the investment on astraight-line basis over the remaining term of the license agreement coveringthe property.  Accordingly, we recorded$46,896 of amortization expense during the three months ended March 31, 2007,and the three months ended March 31, 2006.

We incurred interest expense of $1,178 during the threemonths ended March 31, 2007, compared with $1,452 for the three months endedMarch 31, 2006.  Interest expense isprimarily related to other debt.

We did not incur any registration delay expense for the three months ended March 31, 2007.  During the three month period ended March 31, 2006 we recorded registration delay expense totaling $1,031,946, of which approximately $488,026 was paid in cash and $543,920 was settled by issuance of 196,624 shares of common stock.  In connection with the private placement of 11,466,000 common shares in July 2005, we were obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use our best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days from closing. The Registration Statement had not been declared effective by the required date and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $343,000, for each thirty day period until the Registration Statement is declared effective by the SEC. In addition, in connection with the private placement of 4,482,000 common shares in March 2006, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 within ninety days, and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days, from March 8, 2006.  The Registration Statement was not filed or declared effective by the required dates and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,010, for each thirty day period until the Registration Statement is declared effective by the SEC.  On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements.

As a result of the increased cash balance from the variousprivate placements of our common stock during 2005 and 2006, we receivedinterest income of $240,307 during the three months ended March 31, 2007 ascompared to $222,003 for the three month period ended March 31, 2006.

We realized foreign tax expense of$6,374 for the three months ended March 31, 2007.  The tax is related to the revenues from our 10% non-operated working interest in the SantaElena Property in southwestern Ecuador. No tax expense was incurred for the three months ended March 31, 2006.

We realized a net loss of $3,205,392 or $0.06 per share,during the three months ended March 31, 2007, compared to a net loss of$3,238,666, or $0.08 per share, for the same period in 2006.

**Project Capital Budget (Corvina Oil andGas-to-Power)**
|                                      | ** ** | **($ in millions)** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| Power plant and  related equipment   |       | $                             | 50.4       |   |
| Pipelines and  processing facilities |       | 55.6                          |       |
| Platform and  wells                  |       | 38.3                          |       |
| Contingencies                        |       | 5.0                           |       |
| Total estimated capital  budget      |       | $                             | 149.3      |   |

 

**Liquidity, Capital Resources and Capital Expenditures**

We currently have no source of revenue or positive cashflow from operations, and our primary source of cash flow has been cashproceeds from private placements of our common stock.  As of March 31, 2007, our cash balance wasapproximately 

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$13.0 million.

On December 20,2006, the IFC Board of Executive Directors approved a $120 million financialpackage.  IFC is the private sector armof the World Bank Group based in Washington, D.C.  As part of the financing, we completed aprivate placement of 6,500,000 shares of common stock, no par value, to the IFCpursuant to a Subscription Agreement dated December 18, 2006.  The commonstock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million.  The offering was placed directly by us andthere were no placement fees.  Subsequently, the registration statement onForm S-1 covering the shares was declared effective on April 18, 2007, and the related prospectuswas filed accordingly.  Theremaining $100.5 million portion of IFC financing consists of $30.5 million ofdebt facilities for IFC’s own account and $70 million of debt facilities forthe account of third-party financial institutions.  Syndication of the third-party debt componentby IFC is expected to take place late in the second quarter or early thirdquarter of 2007 with disbursements expected shortly thereafter.  The remaining debt portion of the financingis subject to identification of the lending syndicate members and subsequentnegotiation and approval of the necessary loan documentation.

During the three months ended March 31, 2007, we incurredcapital expenditures of approximately $11.5 million primarily related tocompletion and testing of our first well and the commencement of therecompletion program on our second well in the Corvina field.  In comparison, during the three monthsended March 31, 2006, we incurred capital expenditures of approximately $4.4million primarily from continued work on the refurbishment of the Corvinaplatform and power plant and gas processing facilities designs.

In early August 2006, we incurred an operationaldelay of approximately three weeks resulting from a navigation incident whichcaused the BPZ-01 barge to be grounded on a sand bank in Talara Bay innorthwest Peru during the second mobilization trip to the Corvina CX-11platform. No injuries were sustained by any of our staff, nor to any of the tugboat operator’s crew members. The BPZ-01 is a U.S. flagged vessel and as suchwas inspected after the incident by the U.S. Coast Guard, to its satisfaction. Thebarge resumed normal operations immediately thereafter. Based upon informationcurrently available, the Company estimates that total expenditures related tothis incident will be approximately $1.1 million. As of December 31, 2006,approximately $382,000 has been incurred for barge recovery and temporaryrepairs to the vessel.  In addition, theCompany expects to incur approximately $330,000 in permanent repairs to thebarge and approximately $432,000 of consequential damages, primarily stand-bycharges. As of the April 30, 2007, we havenot presented a final claim to our insurance carrier for the barge repairs andwe are negotiating a settlement agreement with a third party for recovery ofany damages not covered through our insurance. We believe the majority of thecosts associated with this incident will be reimbursed through insurance orthrough a third party. No assurances can be given, however, that any suchrecoveries will be sufficient to cover all costs associated with this incidentor to the timing of any such recoveries. This incident did not have a materialimpact on our operations or business plan.

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

In connection with our Block XIX license contract, weplan to shoot 200 kilometers of 2-D seismic during the second quarter,2007.  Depending on the results of thiswork, we may elect to drill an exploratory well.  We estimate the cost to acquire this seismicdata to be approximately $4 million.

On April 20, 2007,the Company agreed in principal to a private placement of its common stock forgross proceeds of approximately $35 million. On May 4, 2007, pursuant to a Stock Purchase Agreement, the Companycommitted to sell approximately 6.7 million shares to sixteen institutional andaccredited investors at a price of $5.25 per share.  The proceeds from this offering will be usedprimarily in an effort to fast-track the Corvina oil development and otherwisewill be used consistent with the Company’s operating plan as described in theCompany’s public filings.  The privateplacement shares will be issued under Regulation D of the Securities Act of1933, as amended.  The shares issued willbe restricted shares and will not be eligible for trading until registered withthe SEC.  The Company committed to file aregistration statement covering the shares no later than 30 days after theclosing, and will use its reasonable best efforts to obtain its effectivenessno later than 60 days after filing the registration statement, or in the eventof SEC review, 90 days after filing.  TheCompany 

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is subject to a maximumaggregate penalty of 18% of the purchase price or $6.3 million if theregistration statement related to the offering is not filed or declaredeffective within the timelines outlined above.  At the option of eachinvestor, penalties are payable in cash or common stock of the Company.  Management believes that the possibility ofthe Company being subject to such penalty in future periods is remote, asdetermined under SFAS 5, “Accounting for Contingencies”.

The Companybelieves that, based upon the test results from the initial well CX 11-21XD,this additional equity financing will enable the Company to achieve theproduction goal in the Merger Agreement. The Merger Agreement provides for the issuance of an additional9,000,000 shares of common stock to the former shareholders of BPZ-Texas oncethe Company is entitled to receive as its proportionate share from grossproduction from any oil and gas wells owned or operated by the Company of notless than 2,000 barrels of oil per day or its equivalent (approximately 12million cubic feet of gas per day) prior to December 28, 2007.

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

**Off-Balance Sheet Arrangements**

As of March 31, 2007, we had no transactions, agreements orother contractual arrangements with unconsolidated entities or financialpartnerships, often referred to as special purpose entities, which generallyare established for the purpose of facilitating off-balance sheet arrangements.
| ** **                      | ** ** | **Payments Due by Period at March 31, 2007** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | ** **                                                                      | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| ** **                      | ** ** | **Total**                                                                       | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| **Contractual  Obligations:**   | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt  obligations(1)  |       | $                                                                               | 77,605     |   | $ | 21,657 |   | $ | 55,948 |   | $ | — |   | $ | — |   |
| Operating lease  obligations(2) |       | 703,180                                                                         |       | 197,224 |   | 505,956 |   | — |   | — |   |
| Purchase  obligations(3)        |       | 7,158,184                                                                       |       | 7,158,184 |   | — |   | — |   | — |   |
| Total                           |       | $                                                                               | 7,938,970  |   | $ | 7,377,066 |   | $ | 561,904 |   | $ | — |   | $ | — |   |

 

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(1)                                 Capital lease for officefurniture in our executive office in Houston, Texas.

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

(3)                                 Primarily consists ofpurchase obligations for various equipment and services related to the Company’sdrilling operations as well as powerplant and pipeline projects in Peru.

**Critical Accounting Policies and RecentAccounting Pronouncements**

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

***Successful Efforts Method of Accounting***

We follow the successful efforts method of accounting forour investments in oil and gas properties. Under this method, oil and gas leaseacquisition costs and intangible drilling costs associated with explorationefforts that result in the 

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discovery of proved reserves and costs associated withdevelopment drilling, whether or not successful, are capitalized when incurred.Certain costs of exploratory wells are capitalized pending determinations thatproved reserves have been found. If the determination is dependent upon theresults of planned additional wells and required capital expenditures toproduce the reserves found, the drilling costs will be capitalized as long assufficient reserves have been found to justify completion of the exploratorywell and additional wells are underway or firmly planned to complete theevaluation of the well. All costs related to unsuccessful exploratory wells areexpensed when such wells are determined to be non-productive or at the one yearanniversary of completion of the well if proved reserves have not beenattributed and capital expenditures as described in the preceding sentence arenot required. We assess our capitalized exploratory wells pending evaluationeach quarter to determine whether costs should remain capitalized or should becharged to earnings. Other exploration costs, including geological andgeophysical costs, are expensed as incurred. We will recognize gains or losseson the sale of properties, should they occur, on a field-by-field basis.

The application of the successful efforts method ofaccounting requires management’s judgment to determine the proper designationof wells as either developmental or exploratory, which will ultimatelydetermine the proper accounting treatment of the costs incurred. The resultsfrom a drilling operation can take considerable time to analyze, and the determinationthat commercial reserves have been discovered requires both judgment andapplication of industry experience. Wells may be completed that are assumed tobe productive and actually deliver oil and gas in quantities insufficient to beeconomic, which may result in the abandonment of the wells at a later date. Theevaluations of oil and gas leasehold acquisition costs requires management’sjudgment to estimate the fair value of exploratory costs related to drillingactivity in a given area.

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

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

We periodically evaluate the recoverability of the carryingvalue of our long-lived assets and identifiable intangibles by monitoring andevaluating changes in circumstances that may indicate that the carrying amountof the asset may not be recoverable. Examples of events or changes incircumstances that indicate the recoverability of the carrying amount of anasset should be assessed include, but are not limited to, (a) a significantdecrease in the market value of an asset, (b) a significant change in theextent or matter in which an asset is used or a significant physical change inan asset, (c) a significant adverse change in legal factors or in the businessclimate that could affect the value of an asset or an adverse action orassessment by a regulator, (d) an accumulation of costs significantly in excessof the amount originally expected to acquire or construct an asset, and/or (e)a current period operating or cash flow loss combined with a history ofoperating or cash flow losses or a projection or forecast that demonstrates continuinglosses associated with an asset used for the purpose of producing revenue.

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

***Future Dismantlement, Restoration, andAbandonment Costs***

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

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Our plan of operations includes thedrilling of wells and the construction of an electric power generation plant.We may be required to plug and abandon those wells and restore the well siteand power generation site upon completion of their production. However, due tothe fact that we have not yet begun operations, we do not have sufficientinformation to determine the timing, nor calculate the present value, of theobligation. Therefore, no such provision is reflected in the accompanyingconsolidated financial statements.

***AccountingChanges and Error Corrections***

In June 2005, the Financial Accounting Standards Boardissued SFAS No. 154, Accounting Changes and Error Corrections, which replacedAccounting Principles Board Opinion No. 20, Accounting Changes (“APB 20”), andSFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS154 requires retrospective application to prior period financial statements ofa voluntary change in accounting principle unless it is impracticable. Incontrast, APB 20 previously required that most voluntary changes in accountingprinciple be recognized by including the cumulative effect of changing to thenew accounting principle in net income in the period of change. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. Earlier application is permitted foraccounting changes and correction of errors made in fiscal years beginningafter June 1, 2005. SFAS 154 does not change the transition provisions of anyexisting accounting pronouncements, including those that are in a transitionphase as of its effective date. We have elected to adopt the provisions of SFAS154 on January 1, 2006. We do not expect adoption to have a material effect onour results of operations or financial position.

**Disclosure RegardingForward-Looking Statements**

Wecaution that this document contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995, Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  All statements, other thanstatements of historical facts, included in or incorporated by reference intothis Form 10-Q 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 thenegative thereof, are also intended to identify forward-lookingstatements.  In particular, statements,expressed or implied, concerning future operating results, the ability toreplace or increase reserves, or to increase production, or the ability to generateincome or cash flows are by nature, forward-looking statements.  These statements are based on certainassumptions and analyses made by the management of BPZ in light of itsexperience and its perception of historical trends, current conditions and expectedfuture developments as well as other factors it believes are appropriate in thecircumstances. However, forward-looking statements are not guarantees ofperformance and no assurance can be given that these expectations will beachieved.

Importantfactors that could cause actual results to differ materially from theexpectations reflected in the forward-looking statements include, but are notlimited to any of the following in the jurisdictions in which BPZ or itssubsidiaries are doing business:  thetiming and extent of changes in commodity prices for crude oil, natural gas andrelated products, currency exchange rates, interest rates, inflation, theavailability of goods and services, drilling and other operational risks,availability of capital resources, timing of syndication of and disbursementsunder the anticipated IFC debt facility, legislative or 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, as amended, for the year endedDecember 31, 2006.

Inlight of these risks, uncertainties and assumptions, we caution the reader thatthese forward-looking statements are subject to risks and uncertainties, manyof which are beyond our control, which could cause actual events or results todiffer materially from those expressed or implied by the statements.  All subsequent written and oral forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by the cautionary statements.  We undertake no obligations to update orrevise its forward-looking statements, whether as a result of new information,future events or otherwise.

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

The primary objective of the following information is toprovide forward-looking quantitative and qualitative information aboutour potential exposure to market risks. The term “market risk” refers to therisk of loss arising from adverse changes in interest rates, oil and naturalgas prices and foreign currency exchange rates. The disclosures are not meantto be precise indicators of expected future losses, but rather indicators ofreasonable possible losses. This 

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forward-looking information provides indicators ofhow we view and manage our ongoing market risk exposures. All of our marketrisk sensitive instruments were entered into for purposes other thanspeculative trading.

*Interest Rate Risk.*

As of March 31, 2007, the Company had long-term debt of$51,298, consisting of two secured loans for the purchase of office furniture.Both 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.Significant changes in market interest rates may significantly affect the levelof financing that the IFC will structure with respect to our project in Peru.

*Commodity Price Risk.*

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

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

With respect to our planned electricity generation business,the price we can obtain for the sale of power may not rise at the same rate, ormay not rise at all, to match a rise in the Company’s cost to produce andtransport gas reserves to our initial 160MW power plant in Caleta Cruz. Pricesfor both electricity and natural gas have been very volatile in the past yearand have increase significantly over the past two years. The profitability ofthis business depends in large part on the difference between the price ofpower and the price of fuel used to generate power, or “spark spread.”

*Foreign Currency Exchange Rate Risk.*

The U.S. Dollar is the functionalcurrency for our operations in both Peru and Ecuador. Ecuador has adopted theU.S. Dollar as its official currency. Peru, however, still uses its localcurrency, Nuevo Soles, in addition to the U.S. Dollar, and therefore, ourfinancial results are subject to favorable or unfavorable fluctuations in theexchange rate and inflation of that country. Transaction differences have beennominal to-date but are expected to increase as our activities in Peru continueto escalate.

**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 Vice President - Finance and Chief Accounting Officer, of the effectivenessof our disclosure controls and procedures as defined in Rule 13a-15(e) of theExchange Act.  Based upon that evaluationour Chief Executive Officer and Vice President - Finance and Chief AccountingOfficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this report to ensure that information requiredto be disclosed by the Company in the reports that the Company files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms.

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

During the quarter ended March 31, 2007, there was nochange in internal control over financial reporting that materially affected oris reasonably likely to materially affect, our internal control over financialreporting.

**PART II**

**Item 1.  Legal Proceedings**

See Note 12 of the Notesto Consolidated Financial Statements included in Part I, Item I, which isincorporated herein by reference.

**Item 1A.  Risk Factors**

Item 1A, “Risk Factors”of our Annual Report on Form 10-K, as amended, for the year ended December 31,2006, includes a detailed discussion of our risk factors.  There are no material changes in our riskfactors as previously described in our Annual Report on Form 10-K, as amended,for the year ended December 31, 2006.

**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**
| 31.1   | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                              |
| 31.2   | Certification of the Vice President – Finance and Chief Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                |
|   |                                                                                                                                                                                                              |
| 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 Vice President – Finance and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith) |

 

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**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: May 9, 2007 |                                              |
|-------------------|---------------------------------------------------|
|              |                                              |
|              |                                              |
|              | BPZ ENERGY, INC.                                  |
|              |                                              |
| * *          | */s/ Manuel Pablo Zúñiga-Pflücker* |
|              | Manuel Pablo Zúñiga-Pflücker       |
|              | President and Chief Executive Officer             |

 

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