**UNITEDSTATESSECURITIES 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:  June 30, 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**

**BPZENERGY, INC.**

(Exact name ofregistrant 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**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer o  Accelerated Filer x   Non-Accelerated Filer o

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

Yes o No x

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

As of July 31, 2007, there were 62,524,069 shares of commonstock, no par value, outstanding.

 

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

 

2

----

**PART I**

**Item 1.  Financial Statements**

**BPZ Energy, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                         | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2007**          | ** **  | **2006**              | ** ** |
| ** **                                                                                                                                                         | ** ** | **(Unaudited)**   | ** **  | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                         | ** ** | ** **        | ** **  | ** **            | ** ** |
|                                                                                                                                                               |       |              |        |                  |       |
| Current assets:                                                                                                                                                    |       |              |        |                  |       |
| Cash and cash equivalents                                                                                                                                          |       | $                 | 30,174,969  |                  | $          | 25,324,233 |   |
| Private  placement receivable                                                                                                                                      |       | 942,300           |        | —                |       |
| Value added tax  receivable                                                                                                                                        |       | 5,347,999         |        | 3,159,698             |       |
| Inventory                                                                                                                                                          |       | 1,955,640         |        | 1,945,781             |       |
| Prepaid and  other current assets                                                                                                                                  |       | 2,377,090         |        | 1,972,500             |       |
| Total current  assets                                                                                                                                              |       | 40,797,998        |        | 32,402,212            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Property, equipment and  construction in progress, net                                                                                                             |       | 69,261,471        |        | 38,726,910            |       |
| Restricted cash                                                                                                                                                    |       | 1,995,000         |        | 1,150,000             |       |
| Investment in Ecuador  property, net                                                                                                                               |       | 1,663,812         |        | 1,757,604             |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total assets                                                                                                                                                       |       | $                 | 113,718,281 |                  | $          | 74,036,726 |   |
|                                                                                                                                                               |       |              |        |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                     | ** ** | ** **        | ** **  | ** **            | ** ** |
|                                                                                                                                                               |       |              |        |                  |       |
| Current liabilities:                                                                                                                                               |       |              |        |                  |       |
| Accounts payable                                                                                                                                                   |       | $                 | 6,440,321   |                  | $          | 7,376,310 |   |
| Accrued  liabilities                                                                                                                                               |       | 5,944,629         |        | 2,849,376             |       |
| Other  liabilities                                                                                                                                                 |       | 155,121           |        | 101,975               |       |
| Current maturity  of long-term debt                                                                                                                                |       | 695,865           |        | 17,345                |       |
| Current taxes  payable                                                                                                                                             |       | 35,325            |        | —                |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total current  liabilities                                                                                                                                         |       | 13,271,261        |        | 10,345,006            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Long-term debt                                                                                                                                                     |       | 5,548,310         |        | 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; 62,354,069 and 54,143,717 shares issued  and outstanding at June 30, 2007 and December 31, 2006, respectively |       | 136,370,018       |        | 96,574,326            |       |
| Additional paid  in capital                                                                                                                                        |       | 5,247,777         |        | 5,092,341             |       |
| Stock  subscription receivable                                                                                                                                     |       | (230,825          | )           | (230,825              | )          |
| Deficit  accumulated during the exploratory stage                                                                                                                  |       | (46,488,260       | )           | (37,799,937           | )          |
|                                                                                                                                                               |       |              |        |                  |       |
| Total  stockholders’ equity                                                                                                                                   |       | 94,898,710        |        | 63,635,905            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total liabilities and  stockholders’ equity                                                                                                                   |       | $                 | 113,718,281 |                  | $          | 74,036,726 |   |

 

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

3

----

**BPZ Energy, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

**Consolidated Statements of Operations**

**(Unaudited)**
| ** **                                                       | ** ** | **Cumulative**                | ** **  | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------|-------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                       | ** ** | **Amounts from**         | ** **  | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **August 20, 2001** | ** **  | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **(Inception) to**       | ** **  | ** **                                          | ** ** | ** **                                        | ** ** |
| ** **                                                       | ** ** | **June 30,**             | ** **  | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                                                       | ** ** | **2007**                      | ** **  | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007**   | ** ** | **2006**   | ** ** |
| Revenue                                                          |       | $                             | —      |                                                | $          | —                                            |       | $          | —     |       | $          | — |   | $ | — |   |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Operating and  administrative expenses:                          |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| General and administrative                                       |       | 20,445,142                    |        | 2,824,773                                           |       | 1,864,396                                         |       | 4,961,009  |       | 3,439,836  |       |
| Stock-based compensation                                         |       | 13,568,590                    |        | 941,963                                             |       | 807,178                                           |       | 1,901,522  |       | 1,350,093  |       |
| Geological, geophysical and engineering                          |       | 5,378,089                     |        | 1,868,663                                           |       | 397,304                                           |       | 1,970,251  |       | 863,707    |       |
| Depreciation expense                                             |       | 350,396                       |        | 52,289                                              |       | 58,069                                            |       | 106,786    |       | 95,237     |       |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Total operating expenses                                         |       | 39,742,217                    |        | 5,687,688                                           |       | 3,126,947                                         |       | 8,939,568  |       | 5,748,873  |       |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Operating loss                                                   |       | (39,742,217                   | )           | (5,687,688                                          | )          | (3,126,947                                        | )          | (8,939,568 | )          | (5,748,873 | )          |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Other income  (expense):                                         |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Income from investment in Ecuador property, net of  amortization |       | 1,789,046                     |        | (46,896                                             | )          | 398,203                                           |       | (230,839   | )          | 587,858    |       |
| Interest expense                                                 |       | (95,088                       | )           | —                                              |       | (1,386                                            | )          | (1,165     | )          | (2,838     | )          |
| Amortization of deferred financing costs                         |       | (428,000                      | )           | —                                              |       | —                                            |       | —     |       | —     |       |
| Registration delay expense                                       |       | (4,068,480                    | )           | —                                              |       | (1,101,184                                        | )          | —     |       | (2,133,130 | )          |
| Interest income                                                  |       | 1,795,010                     |        | 257,453                                             |       | 206,030                                           |       | 497,747    |       | 428,033    |       |
| Merger costs                                                     |       | (5,470,455                    | )           | —                                              |       | —                                            |       | —     |       | —     |       |
| Net loss on sale of asset                                        |       | (8,835                        | )           | —                                              |       | —                                            |       | (8,985     | )          | —     |       |
| Miscellaneous income                                             |       | (208,939                      | )           | 38,128                                              |       | (14,529                                           | )          | 44,789     |       | (9,529     | )          |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Total other income (expense)                                     |       | (6,695,741                    | )           | 248,685                                             |       | (512,866                                          | )          | 301,547    |       | (1,129,606 | )          |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Loss before income taxes                                         |       | (46,437,958                   | )           | (5,439,003                                          | )          | (3,639,813                                        | )          | (8,638,021 | )          | (6,878,479 | )          |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Income taxes                                                     |       | 50,302                        |        | 43,928                                              |       | —                                            |       | 50,302     |       | —     |       |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Net loss                                                         |       | $                             | (46,488,260 | )                                                   | $          | (5,482,931                                        | )          | $          | (3,639,813 | )          | $          | (8,688,323 | ) | $ | (6,878,479 | ) |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Basic and  diluted net loss per share                            |       |                          |        | $                                                   | (0.09      | )                                                 | $          | (0.09      | )          | $          | (0.15      | ) | $ | (0.17 | ) |
|                                                             |       |                          |        |                                                |       |                                              |       |       |       |       |       |
| Weighted average common  shares outstanding                      |       |                          |        | 58,685,317                                          |       | 42,470,985                                        |       | 56,509,394 |       | 41,662,618 |       |

 

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

4

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**BPZEnergy, Inc. and Subsidiaries**

**(AnExploratory Stage Company)**

**Consolidated Statements of Cash Flows**

**(Unaudited)**
| ** **                                                                           | ** ** | **Cumulative**                                     | ** **  | ** **                     | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|--------------------------------|------------|-------------|------------|
| ** **                                                                           | ** ** | **Amounts from**                              | ** **  | ** **                     | ** ** | ** **  | ** ** |
| ** **                                                                           | ** ** | **August 20, 2001  (Inception) to** | ** **  | **Six months ended** | ** ** |
| ** **                                                                           | ** ** | **June 30,**                                  | ** **  | **June 30,**              | ** ** |
| ** **                                                                           | ** ** | **2007**                                           | ** **  | **2007**                       | ** ** | **2006**    | ** ** |
| Net loss                                                                             |       | $                                                  | (46,488,260 | )                              | $          | (8,688,323  | )          | $ | (6,878,479 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities:         |       |                                               |        |                           |       |        |       |
| Stock-based  compensation                                                            |       | 13,568,590                                         |        | 1,901,522                      |       | 1,350,093   |       |
| Stock issued in  merger                                                              |       | 979,981                                            |        | —                         |       | —      |       |
| Options assumed  in merger                                                           |       | 4,490,474                                          |        | —                         |       | —      |       |
| Stock issued for  registration delay expense                                         |       | 2,602,739                                          |        | —                         |       | 1,106,136   |       |
| Depreciation  expense                                                                |       | 350,396                                            |        | 106,786                        |       | 95,237      |       |
| Net loss on retirement  of assets                                                    |       | 8,835                                              |        | 8,985                          |       | —      |       |
| Amortization of  investment in Ecuador property                                      |       | 460,688                                            |        | 93,792                         |       | 93,792      |       |
| Amortization of  deferred financing fees                                             |       | 428,000                                            |        | —                         |       | —      |       |
| Expenses paid by  affiliate                                                          |       | 629,596                                            |        | —                         |       | —      |       |
| Changes in  operating assets and liabilities:                                        |       |                                               |        |                           |       |        |       |
| Increase value added tax receivable                                                  |       | (4,985,444                                         | )           | (2,188,301                     | )          | (1,653,639  | )          |
| Increase in inventory                                                                |       | (1,955,640                                         | )           | (9,859                         | )          | (1,909,004  | )          |
| Increase in prepaid and other current assets                                         |       | (2,739,645                                         | )           | (404,590                       | )          | (1,308,156  | )          |
| Increase (decrease) in accounts payable                                              |       | 6,440,321                                          |        | (935,989                       | )          | 578,694     |       |
| Increase (decrease) in accrued liabilities                                           |       | 5,944,629                                          |        | 3,095,253                      |       | (97,169     | )          |
| Increase in other liabilities                                                        |       | 172,466                                            |        | 53,146                         |       | 30,489      |       |
| Current income taxes payable                                                         |       | 35,325                                             |        | 35,325                         |       | —      |       |
| Net cash used by operating activities                                                |       | (20,056,949                                        | )           | (6,932,253                     | )          | (8,592,006  | )          |
|                                                                                 |       |                                               |        |                           |       |        |       |
| Cash flows from  investing activities:                                               |       |                                               |        |                           |       |        |       |
| Property,  equipment and construction in progress additions                          |       | (63,440,023                                        | )           | (24,469,653                    | )          | (14,096,888 | )          |
| Restricted cash                                                                      |       | (1,995,000                                         | )           | (845,000                       | )          | —      |       |
| Investment in  Ecuador property                                                      |       | (1,440,000                                         | )           | —                         |       | —      |       |
| Net cash used by investing activities                                                |       | (66,875,023                                        | )           | (25,314,653                    | )          | (14,096,888 | )          |
|                                                                                 |       |                                               |        |                           |       |        |       |
| Cash flows from  financing activities:                                               |       |                                               |        |                           |       |        |       |
| Borrowings                                                                           |       | 2,226,826                                          |        | —                         |       | —      |       |
| Repayments of  borrowings                                                            |       | (475,146                                           | )           | (9,664                         | )          | (6,278      | )          |
| Proceeds from  exercise of warrants, net                                             |       | 3,868,260                                          |        | —                         |       | —      |       |
| Proceeds from  exercise of options, net                                              |       | 1,121,460                                          |        | 1,121,460                      |       | —      |       |
| Proceeds from  sale of common stock, net                                             |       | 110,365,541                                        |        | 35,985,846                     |       | 5,010,000   |       |
| Net cash provided by financing activities                                            |       | 117,106,941                                        |        | 37,097,642                     |       | 5,003,722   |       |
|                                                                                 |       |                                               |        |                           |       |        |       |
| Net increase  (decrease) in cash and cash equivalents                                |       | 30,174,969                                         |        | 4,850,736                      |       | (17,685,172 | )          |
| Cash and cash  equivalents at beginning of period                                    |       | —                                             |        | 25,324,233                     |       | 29,455,130  |       |
| Cash and cash  equivalents at end of period                                          |       | $                                                  | 30,174,969  |                           | $          | 30,174,969  |       | $ | 11,769,958 |   |
|                                                                                 |       |                                               |        |                           |       |        |       |
| Supplemental  cash flow information:                                                 |       |                                               |        |                           |       |        |       |
| **Cash  paid for:**                                                                  | ** ** | ** **                                         | ** **  | ** **                     | ** ** | ** **  | ** ** |
| Interest                                                                             |       | $                                                  | 91,846      |                           | $          | 1,165       |       | $ | 2,838 |   |
| Foreign income  tax                                                                  |       | 6,374                                              |        | 14,977                         |       | —      |       |
| **Non —  cash items:**                                                          | ** ** | ** **                                         | ** **  | ** **                     | ** ** | ** **  | ** ** |
| Common stock  issued for property interest                                           |       | $                                                  | 1,112,500   |                           | $          | —      |       | $ | — |   |
| Warrants issued  to private placement agent                                          |       | 325,000                                            |        | —                         |       | 248,645     |       |
| Purchase and  additions to equipment with the issuance of a capital lease obligation |       | 6,180,679                                          |        | 6,180,679                      |       |        |       |
| Imputed  financing costs                                                             |       | 428,000                                            |        | —                         |       | —      |       |
| Issuance of  common stock for subscription receivable                                |       | 1,173,125                                          |        | 942,300                        |       | 12,325,500  |       |
| 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             |       | 434,223                                            |        | 238,468                        |       | —      |       |

 

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**

**(Unaudited)**

**Note 1 - Basis of Presentation and SignificantAccounting 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.

On September 10, 2004, BPZ Energy, Inc., aTexas, (BPZ-Texas”) corporation consummated a reverse merger withNavidec, Inc., a Colorado corporation (“Navidec”), whereby BPZ-Texasbecame a wholly owned subsidiary of Navidec (the “Merger”). See “Business—NavidecMerger Transaction” and Note 2 to the Company’s Consolidated FinancialStatements on Form 10K for the year ended December 31, 2006, as amended fordetailed discussion regarding the Merger. On February 4, 2005, Navidec changed its name to BPZ Energy, Inc.  Although the Company’s name has been changed,the pre-merger company may be referred to as Navidec in this filing, as thecontext may require, to avoid confusion.

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 in previousfilings) which we previously held under a Technical Evaluation Agreement.Subsequently, in March 2006, we were notified by Perupetro that we qualified asan operator for Block XXII. In July 2006 Perupetro officially informed usthat our proposal for the 248,000 acre Block XXIII, located onshore innorthwest Peru between our Blocks Z-1 and XIX, was the winning bid in theirlicense tender process. We have presented all necessary documentation to becomethe qualified operator of this new block under an exploration and productionlicense 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 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.  On May 17, 2007we began working over the shut-in CX11-16X well.  We conducted a thorough examination of thewell bore and concluded that the existing production casing is in goodcondition and that cement logs indicate that no additional remediation work isrequired.  We completed a total of fourdrill stem tests on separate potential pay zones from the Lower and UpperZorritos formations.  The well testedpositive for gas in quantities that we believe to be commercially producible.  However, we caution readers that test data isnot necessarily indicative of actual results. On June 21, 2007 we spudded a third well, the CX11-14D Corvina Well,which is in a new slot on the CX 11 platform, next to the CX 11-16X wellmentioned above.  The CX11-14D well hasbeen engineered to allow us to appraise the oil and gas producing zonesdiscovered in the CX 11-21XD well, as well as to investigate the potential ofthe Cardalitos formation which is located right above the Upper Zorritosformation.  We have not drilled any 

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other wells or recognized any revenues from operations, and we do notanticipate generating significant revenues from our properties prior to early2008.

**Navidec Merger Transaction**

On September 10,2004, BPZ Energy, Inc., a Texas corporation, consummated a reverse mergerwith Navidec, whereby BPZ-Texas became a wholly owned subsidiary of Navidec(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.  Accordingly, for accountingpurposes, BPZ-Texas was treated as the acquiring entity.  All financial statements herein represent thehistorical financial statements of the accounting acquirer, BPZ — Texas.

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

**Basisof Presentation**

The Company’sunaudited consolidated financial statements included herein have been preparedpursuant to the rules and regulations of the Securities and Exchange Commissionas they pertain to Form 10-Q. Accordingly, certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations. The unaudited financial statements reflect all adjustments which are, inthe opinion of management, necessary for a fair presentation of the financialposition and results of operations for the interim periods on a basisconsistent with the annual audited financial statements.  All such adjustments are of a normalrecurring nature. The Company believes that the disclosures contained hereinare 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 reclassifications of prior year balances havebeen made to conform such amounts to corresponding 2007 classifications.  These reclassifications have no impact on netincome.

***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 April 2005, the Financial Accounting StandardsBoard (“FASB”) issuedFASB Staff Position FSP FAS 19-1 provides circumstances that would permit thecontinued capitalization of exploratory well costs beyond one year, other thanwhen additional exploration wells are necessary to justify major capitalexpenditures and those wells are under way or firmly planned for the nearfuture. Generally, the statement allows exploratory well costs to continue tobe capitalized when the well has found a sufficient quantity of reserves tojustify its completion as a producing well and the enterprise is makingsufficient progress assessing the reserves and the economic and operatingviability of the project.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes - an interpretation of Statement ofFinancial Accounting Standards (“SFAS”) No. 109”**(“FIN 48”).This interpretation provides guidance for recognizing and measuring uncertaintax positions, as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN48 prescribes a threshold condition that a tax position must meet for any ofthe benefit of the uncertain tax 

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position to be recognized in the financial statements.Guidance is also provided regarding derecognition, classification anddisclosure of these uncertain tax positions. FIN 48 is effective for fiscalyears beginning after December 15, 2006. The adoption of this Interpretation isnot expected to have a material impact on our consolidated financial position,results of operations, or cash flows.

In September 2006, the Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin No. 108, “Considering the Effects of PriorYear Misstatements 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 applied the provisions ofSAB 108 in connection with the preparation of the Company’s annual financialstatements for the year ending December 31, 2006. The use of the dual approachdid not have a material impact on our consolidated financial position, resultsof 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 FASB issued 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 SFAS No. 159, TheFair Value Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115 (“SFAS No. 159”). This standardpermits an entity to choose to measure many financial instruments and certainother items at fair value. Most of the provisions in SFAS No. 159 are elective;however, the amendment to FASB Statement No. 115, Accounting for CertainInvestments in Debt and Equity Securities, applies to all entities withavailable-for-sale and trading securities. SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007. The Company is currentlyevaluating the impact, if any, this adoption will have on our consolidatedfinancial statements.

**Note 2 — Value Added Tax Receivable**

Value-addedtax (referred to as “IGV” in Peru) is generally imposed on goods and servicesat a rate of 19%. Peru currently has an IGV early recovery program forcompanies during the exploration phase. Under this program, IGV paid on 

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the acquisition of certain goodsand services used directly in hydrocarbon exploration activities can berecovered prior to a commercial discovery taking place or production andrevenue billings begin. The Company has applied for early recovery of certainIGV paid since it does not anticipate first sales of oil or power to thePeruvian power market until early 2008.

The Company’s value added tax receivable balance as ofJune 30, 2007 was $5.3 million.  Of thisbalance, the Company has filed claims with the Peruvian tax authority torecover approximately $3.3 million under the IGV early recovery program.  Approximately $2.4 million has been collectedduring the six months ended June 30, 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 atJune 30, 2007 was $1,995,640.

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

Below is a summary of prepaid and other current assetsas of June 30, 2007 and December 31, 2006:
| ** **                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Prepaid expenses  and other       |       | $                 | 447,446    |                  | $          | 763,480 |   |
| Deposits                          |       | 56,160            |       | 68,367                |       |
| Prepaid  insurance                |       | 1,261,451         |       | 517,974               |       |
| Insurance  receivable             |       | 612,033           |       | 612,033               |       |
| Interest  receivable              |       | —            |       | 10,646                |       |
| Prepaid and  other current assets |       | $                 | 2,377,090  |                  | $          | 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.  Additional coverage wasprocured in response to increased business activity for the six months endedJune 30, 2007.

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 June 30, 2007, a claim of approximately $712,000for 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 and Construction inProgress**

Below is a summary of property, equipment and construction in progress as of June 30, 2007 and December 31, 2006:
| ** **                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2007**          | ** ** | **2006**              | ** ** |
|                                                    |       |              |       |                  |       |
| Construction in  progress:                              |       |              |       |                  |       |
| Power plant and related equipment                       |       | $                 | 3,712,624  |                  | $          | 3,581,069 |   |
| Platforms and wells                                     |       | 50,116,670        |       | 25,759,009            |       |
| Pipelines and processing facilities                     |       | 3,473,547         |       | 2,535,593             |       |
| Barge and  related equipment                            |       | 11,868,885        |       | 6,461,877             |       |
| Office  equipment, leasehold improvements, and vehicles |       | 869,381           |       | 828,727               |       |
| Accumulated  depreciation and amortization              |       | (779,636          | )          | (439,365              | )          |
| Net property,  equipment and construction in progress   |       | $                 | 69,261,471 |                  | $          | 38,726,910 |   |

 

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As of June 30, 2007, the Companyincurred costs of $30.7 million associated with its development initiatives forthe exploration and production of natural gas reserves and the complementarydevelopment of proprietary gas-fired power generation for sale in Peru.

The Company spudded its first well,the CX11-21XD, in September of 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 the Company believes tobe commercially producible.

On May 17, 2007 the Company began working over theshut-in CX11-16X well.  Upon thecompletion of a thorough examination of the well bore which concluded that theexisting production casing was in good condition  and that cement logs indicated that noadditional remediation work was required, a total of four drill stem tests werecompleted on separate potential pay zones from the Lower and Upper Zorritosformations.  The well tested positive forgas in quantities that the Company believe to be commercially producible.  However, the Company cautions readers thattest data from the two wells mentioned above, is not necessarily indicative ofactual results.

On June 21, 2007 the Company spudded a third well, theCX11-14D Corvina Well, which is in a new slot on the CX 11 platform, next tothe CX 11-16X well mentioned above.  TheCX11-14D well has been engineered to allow the Company to appraise the oil andgas producing zones discovered in the CX 11-21XD well, as well as toinvestigate the potential of the Cardalitos formation which is located rightabove the Upper Zorritos formation.  Notests have yet been performed on this well.

The Company has not drilled any other wells or recognizedany revenues from operations, and it does not anticipate generating significantrevenues from our properties prior to early 2008.

Inconjunction with the gas-to-power project, the recent discovery of oil reservesin the Corvina field has prompted the Company to simultaneously direct itsattention towards accelerating the development of the Corvina oil.  On June 13, 2007 the Company entered into acapital lease agreement, with an option to purchase, for two barges toassist in the development of the Corvina oil. The two barges will be towed toPeru where they will be fitted with the required equipment for their intendeduse. One of these barges, will be moored next to the CX11 platform, and willact as a floating production and storage facility (“FPSO”) for oil producedfrom the Corvina field. The Company has also identified several sources for thenecessary oil production facilities to be installed on the FPSO barge. Thesecond barge will be used to offload the produced oil from the FPSO andtransport it to a refinery located approximately 80 miles to the south in the portof Talara. Thecapital lease for the two barges begins in August 2007 and expires in November2009.  Lease payments are variable basedon the working status of the barges with a purchase option of $5,000,000 afterthe first year of the lease and $4,000,000 after the maturity date of thelease.  The assets will be depreciatedover the term of the capital lease obligation. The capital lease assetswere recorded at $6,180,679, which represents the present value of the minimumlease payments, or the aggregate fair market value of the assets.  SeeNote 8 “Long-Term Debt”, included herein, for further discussion.

In addition, the Company incurredcosts for office equipment and leasehold improvements for its offices inHouston, Peru and Ecuador.  In accordancewith “successful efforts” method of accounting, the Company capitalized$238,468 of depreciation expense related to support equipment to constructionin progress during the six months ended June 30, 2007.

**Note 6 — Investment in Ecuador Property**

The Companyhas an investment in an oil and gas property in Ecuador (the “Santa ElenaProperty”) totaling $1,663,812 and $1,757,604 as of June 30, 2007 and December31, 2006, respectively.  The Companyaccounts for this investment under the cost method and records its share ofcash received or paid as other income or expense.  Since the Company’s investment representsownership of an oil and gas property, which is a depleting asset, the Companyis amortizing the cost of the investment on a straight-line basis over theremaining term of the license agreement which expires in May 2016.  Accordingly, the Company recordedamortization expense of $46,896 and $93,792 for the three and six months endedJune 30, 2007, respectively, as well as for the three and six months ended June30, 2006, respectively.

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

In connection with its properties in Peru, the Company hasobtained three performance bonds totaling $2,350,000 to guarantee certainobligations and commitments.  As of June30, 2007, the Company had restricted cash deposits of $1,995,000, whichpartially collateralizes the performance bonds. In addition to the cash collateral posted by the Company, an individualshareholder of the Company had provided a guarantee in the amount of $200,000to the financial institution that 

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issued one of the bonds to secure the Company’sperformance.  During 2004, theCompany issued 236,528 shares to an individual investor for $119,175 of cashproceeds and a subscription receivable of $230,825 for the guarantee. During the three monthsended June 30, 2007, the guarantee was replaced by a deposit of  an additional $95,000 by the Company to thesame financial institution.  Theperformance bonds were issued by Peruvian banks and their terms are governed bythe corresponding license contract or agreement.  All of the performance bonds were issued byPeruvian banks and their terms are governed by the corresponding licensecontract or technical evaluation agreement.

**Note 8 — Long-Term Debt**

In conjunction with thegas-to-power project, the recent discovery of oil reserves in the Corvina fieldhas prompted the Company to simultaneously direct its attention towardsaccelerating the development of the Corvina oil.  On June 13, 2007 the Company entered into a capitallease agreement, with an option to purchase, for two barges to assist in thedevelopment of the Corvina oil. The capital lease for the two barges begins inAugust 2007 and expires in November 2009. Lease payments are variable, based on the working status of the barges,with a purchase option of $5,000,000 after the first year of the lease and$4,000,000 after the maturity date of the lease.  The capital lease obligation was recorded atthe present value of the minimum lease payments at an imputed discount rate of18%, which reflects the Company’s incremental borrowing rate for thistransaction.  The capital leaseobligation was recorded at $6,180,679, which represents the present value ofthe minimum lease payments, or the fair market value of the debt obligation.

On June 30, 2007, theCompany had long-term debt of $5,548,310 compared to $55,815 in long-term debtas of December 31, 2006.  The majority ofthe long-term debt in 2007 is from the capital lease discussed above.  However, long-term debt for both 2007 and2006 also includes  two secured loans forthe purchase of office furniture. Both loans have a term of 60 months, bearinginterest at 5.94% and 9.44%, with principal and interest payments due on a monthlybasis.

Maturities of long-termdebt are as follows:
| Less than one year    |   | $      | 6,205,571 |   |
|-----------------------|--------|--------|-----------|--------|
| One to three  years   |   | 38,604 |      |
| Three to five  years  |   | — |      |
| More than five  years |   | — |      |
| Total                 |   | $      | 6,244,175 |   |

 

**Note9 — Stockholders’ Equity**

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

**Potentially Dilutive Securities**

In addition to its shares issued and outstanding, the Company has the following potentially dilutive securities as of June 30, 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.
| ** **                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Stock options  outstanding                                                    |       | 3,388,300         |       | 4,306,152             |       |
| Warrants  outstanding                                                         |       | 250,000           |       | 250,000               |       |
| Contingent  incentive earn-out shares                                         |       | 450,000           |       | 450,000               |       |
| Contingent  Merger earn-out shares                                            |       | 9,000,000         |       | 9,000,000             |       |
|                                                                          |       |              |       |                  |       |
| Total potentially dilutive securities                                         |       | 13,088,300        |       | 14,006,152            |       |
|                                                                          |       |              |       |                  |       |
| Shares available for  grant pursuant to Long-Term Incentive Compensation Plan |       | 1,033,500         |       | 1,156,000             |       |

 

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On January 1, 2006, the Company adopted SFAS No. 123 —Revised 2004,*Share—Based Payment* (“SFAS No.123(R)”), which establishes accounting for stock-based payment transactions foremployee services and goods and services received from non-employees. SFAS No.123(R) is a 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)compensation cost for all stock-based payments granted on or after January 1, 2006,based on the grant-date fair value estimated in accordance with SFAS No.123(R). SFAS No. 123(R) requires forfeitures to be estimated at the time ofgrant and revised, 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 and six months ended June 30, 2007 and June 30, 2006, respectively:
|                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                            |       |                                          |       |   |   |   |   |
| Employee  stock—based compensation costs |       | $                                               | 964,954    |                                          | $          | 691,593 |   | $ | 1,907,413 |   | $ | 1,159,508 |   |
| Non-employee  stock-based compensation        |       | (22,991                                         | )          | 115,585                                       |       | (5,891 | ) | 190,585 |   |
|                                          |       | $                                               | 941,963    |                                          | $          | 807,178 |   | $ | 1,901,522 |   | $ | 1,350,093 |   |

 

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.

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A summary of the Company’srestricted stock award activity and related information is presented below:
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Non-vested  balance at December 31, 2006 |       | 746,500            |       | $                   | 4.01       |   |
| Granted                                       |       | 70,000             |       | 6.31                |       |
| Vested                                        |       | (340,000           | )          | 4.39                |       |
| Forfeited                                     |       | —             |       | —              |       |
| Non-vested balance at  June 30, 2007          |       | 476,500            |       | $                   | 4.48       |   |

 

As of June 30, 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 1.4 years.

No performance shares were outstanding as of June 30, 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.

Thefair value of each stock option granted is estimated on the date of grant usinga Black-Scholes option pricing model. The following table presents theweighted-average assumptions used in the option pricing model for optionsgranted during the six months ended June 30, 2007. During the six months endedJune 30, 2007, 77,500 options were granted by the Company under the 2005Long-term Incentive Plan. The expected life of the options represents theperiod of time the options are expected to be outstanding. For the six monthsended June 30, 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 six months ended June 30, 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 six monthsended June 30, 2007 and June 30, 2006, our expected volatility is based on thehistorical volatility of our stock for a period approximating the expectedlife.  The risk-free interest rate isbased on the observed U.S. Treasury yield curve in effect at the time theoptions were granted. The dividend yield is based on our history of dividendpayouts.
|                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 6        |       | 10       |       |
| Risk-free  interest rate                             |       | 4.6      | %          | 2.5      | %          |
| Volatility                                           |       | 85.33    | %          | 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 six months ended June 30, 2007 a total of677,700 options were exercised.  As ofJune 30, 2007, there was approximately $2.1 million of total unrecognizedcompensation cost related to non-vested stock options which is expected to berecognized over a weighted-average period of approximately 1.2 years.

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The following tables summarizeinformation about stock options outstanding as of June 30, 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                                        |       | 665,800            |       | 6.69                |       | $ | 1.30 |   | 665,800 |   | $ | 1.30 |   |
| 2.00                                        |       | 881,500            |       | 6.69                |       | 2.00 |   | 881,500 |   | 2.00 |   |
| 3.20                                        |       | 575,000            |       | 8.29                |       | 3.20 |   | 100,000 |   | 3.20 |   |
| 3.35                                        |       | 750,000            |       | 8.46                |       | 3.35 |   | — |   | — |   |
| 4.55                                        |       | 430,000            |       | 8.77                |       | 4.22 |   | — |   | — |   |
| Total(1)                                    |       | 3,302,300          |       | 7.66                |       | $ | 2.72 |   | 1,647,300 |   | $ | 1.79 |   |

 

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(1)          86,000outstanding 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                                       |       | 77,500             |       | 6.50                    |       |
| Vested                                        |       | (500,000           | )          | 1.30                    |       |
| Forfeited                                     |       | (25,000            | )          | 3.92                    |       |
| Non-vested  balance at June 30, 2007          |       | 1,655,000          |       | $                       | 3.64       |   |

 

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 500,000non-vested options outstanding as of December 31, 2006, was extended fromSeptember 10, 2006 to one year following the effective date of the registrationwith the SEC of the shares NFS received in the Merger with Navidec. Theregistration of these shares underlying these options became effective onDecember 15, 2006 and, as a result, the expiration date for the remaining optionswas extended to December 16, 2007.  Theextension of the vesting period did not result in a revaluation of theseoptions, as the number of options that the Company expects to vest did notchange as a result of the modification. In March 2007, such funding 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 June 30, 2007 was approximately $10.9 million, of which approximately $6.9million relates to awards 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 June 30, 2007 exceeds the exercise price of the option.

**Warrants**

As of June 30, 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 vestedwarrants to purchase 100,000 shares of the Company’s common stock at anexercise price of $3.00 per share. Such warrants expire on July 19, 2010. Thesewarrants were valued at $325,000 using the Black-Scholes model, which amountwas treated as additional 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 

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the Company’s common stock at an exercise price of $3.00per share. Such warrants expire on June 30, 2011. These warrants were valued at$248,645 using the Black-Scholes model, which amount was treated as additionalnon-cash stock offering costs.

Allwarrants issued were valued using the Black-Scholes model, which amount wastreated as additional non-cash stock offering costs.  The following table presents theweighted-average assumptions used in the option pricing model for optionsgranted during the six months ended June 30, 2007 and the same period ended2006.  No warrants were granted duringthe six months ended June 30, 2007 or June 30, 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                             |       | 4.6      | %          | 4.9      | %          |
| Volatility                                           |       | 85.3     | %          | 64.7     | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average fair  value per share at grant date |       | $        | —     |     | $          | — |   |
|                                                      |            |          |            |          |            |  |  |

 

Nowarrants were exercised during the six months ended June 30, 2007.

**Contingent Incentive Earn-Out Shares**

During2005, the Company’s Board of Directors awarded a total of 485,000 shares of incentivestock awards to three of the Company’s officers. The incentive stock awardsvest and the earn-out shares are issuable once the Company is entitled toreceive as its proportionate share from gross production from any oil and gaswells owned or operated by the Company not less than 2,000 barrels of oil perday or its equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007, 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 June 30, 2007, the total of outstandingawards related to the incentive stock awards was 450,000 shares with a possiblecombined future expense of $1,980,000. Of this amount, approximately $204,828 and $409,656 corresponds to thethree and six months ended June 30, 2007 and the same three and six monthperiods ended June 30, 2006, respectively. Since the Company has not yet obtained a reserve report from anindependent certified reservoir engineer confirming the production potential ofthe CX 11-21XD, well nor has it located or procured all of the necessaryequipment in support of that production, for accounting purposes, it is notconsidered probable that the Company will have production by December 28,2007.  Therefore, for accountingpurposes, the Company is not accruing the associated stock-based compensationexpense related to the Contingent Incentive Shares.     However, operationally, the Company hasset a goal of having oil production on line by the end of 2007 and willcontinue to work towards that endeavor.

**Merger Earn-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 gross production from any oil and gas wells owned or operated by theCompany not less than 2,000 barrels of oil per day or its equivalent(approximately 12 million cubic feet of gas per day) prior to December 28,2007.

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

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**Long-TermIncentive Compensation Plan**

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 June30, 2007 and June 30, 2006, the Company had no outstanding balances withaffiliates or related parties.

**Note 11 — Commitments and Contingencies**

*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 June 30,2007, 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 August 9, 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 for recoveryof any damages not covered through its insurance.  The Company believes 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 is not expected to havea material impact 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 transfer, because the Company isa successor by merger to Navidec, Inc., if regulatory authorities determinethat the Company did not comply with applicable registration requirements inconnection with the transfers, fines or other sanctions could be imposed on theCompany with respect to the transaction.

While federal and stateregulators might conclude that the Company was subject to responsibility forregistration of the shares, the Company regards the possibility of liabilityarising from the distribution of the NFS shares as remote for the followingreasons:  The Company took no action withrespect to the transfer of NFS shares which, pursuant to the terms of theMerger Agreement, was agreed to be handled by NFS, including any necessaryqualifications or registrations under 

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applicable securities laws. Further, the Companybelieved, based on information provided by NFS and its advisors, that NFS hadundertaken to comply with all applicable registration requirements.Additionally, the transfer, which was tantamount to a stock dividend to thepre-merger shareholders of Navidec, Inc., did not involve cash consideration,making a finding of any damage to shareholders unlikely. Finally, it is theCompany’s understanding that NFS is taking action to register the NFS sharesand is communicating with the SEC to address this issue to the SEC’ssatisfaction.

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 June 30, 2007, in connection with our Peruproperties, we have deposited approximately $1.9 million as restricted cash tocollateralize two performance bonds which guarantee our various obligations andcommitments under one of our license contracts and another agreement. The performancebonds were issued by Peruvian banks and their terms are governed by thecorresponding license contract or agreement. We were required to deposit approximately $750,000 as restricted cash tocollateralize a new performance bond in connection with the beginning of thethird exploration period under our Block Z-1 license contract, which began inJune 2007.  In addition, although we arestill negotiating the terms of our commitments under our license contracts forBlocks XXII and XXIII, we anticipate having to deposit funds as restricted cashto collateralize performance bonds to guarantee our obligations totalingapproximately $3.7 million, of which we expect $0.4 million to be deposited forBlock XXII in late 2007 and $3.5 million to be deposited for Block XXIII inearly 2008.

In connection with our Block XIX license contract, wehave commenced shooting 200 kilometers of 2-D seismic.  We anticipate that it will takeapproximately two months to complete the data acquisition phase of this projectand an additional two to three months to process and interpret the data. Depending on the results of this work, we mayelect to drill an exploratory well. We have secured the environmentalpermits and other authorizations to perform seismic testing 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 paid a$5.5 million fee to mobilize and upgrade the rig. In exchange, the Companyreceived a discounted fixed day rate and exclusive rights to use the rig, atits option, during the two-year period which commenced in September 2006.

In 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 approximately 948,000 acres and will encompass a significantportion of the Lancones basin.  After the license contracthas been signed for this block, the Company will be required to post aperformance bond to guarantee certain obligations and commitments. However,negotiations on the terms of the license contract are still underway and theCompany has not been officially awarded the license contract.  Accordingly, the Company does not havesufficient information to determine the timing, nor estimate the value of theperformance bond to be posted in connection with this property.

In July 2006, Perupetro informedthe Company that its proposal for Block XXIII, which consists of approximately248,000 acres and is located onshore in northwest Peru between the Company’sBlocks Z-1 and XIX, was the winning bid in 

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the tender process. The Company has presented all necessary documentation to become thequalified operator of this new block under an exploration and productionlicense contract. The Company’s proposal covers only the exploration period andcommits the Company to drill a certain number of wells, acquire certain amountof either 2-D or 3-D seismic data and prepare an integrated geological,geochemical and reservoir engineering evaluation of the hydrocarbon prospectsin the block.  After the license contracthas been signed for this block, the Company will be required to post aperformance bond to guarantee certain obligations and commitments. However,negotiation on the terms of the license contract is still underway, and theCompany has not been officially awarded the license contract.  The Company therefore does not havesufficient information to determine the timing, nor estimate the value of theperformance bond to be posted in connection with this property.

*Financing Activities*

On December 20, 2006, 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 a privateplacement 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 fourth quarter of 2007.  Theremaining debt portion of the financing is subject to identification of thelending syndicate members and subsequent negotiation and approval of thenecessary loan documentation.   As ofAugust 9, 2007, the third-party debt syndication has not been completed.

On May 4, 2007, with anover-allotment purchase that closed on June 15, 2007, the Company completed aprivate placement of 7,170,000 shares of common stock, no par value, toaccredited investors pursuant to a Subscription Agreement.  The common stock was priced at $5.25 pershare and the over-allotment was priced at $5.40 per share resulting inproceeds to us of approximately $37.7 million. No warrants or dilutive securities were issued in connection with theoffering.  The offering was placeddirectly by the Company.  A placement feeof 2% of the gross proceeds of this transaction was paid to Morgan Keegan forinvestment services and consulting related to the offering.  The registration statement was declaredeffective by the Securities and Exchange Commission on June 14, 2007, and theregistration statement was filed on June 21, 2007.

In conjunction with thegas-to-power project, the recent discovery of oil reserves in the Corvina fieldhas prompted the Company to simultaneously direct its attention towardsaccelerating the development of the Corvina oil.  On June 13, 2007 the Company entered into acapital lease agreement, with an option to purchase, for two barges to assistin the development of the Corvina oil. The capital lease for the two bargesbegins in August 2007 and expires in November 2009.  Lease payments are variable, based on theworking status of the barges with a purchase option of $5,000,000 after thefirst year of the lease and $4,000,000 after the maturity date of thelease.  The capital lease obligation wasrecorded at the present value of the minimum lease payments at an imputeddiscount rate of 18%, which reflects the Company’s incremental borrowing ratefor this transaction.  The assets will bedepreciated over the term of the capital lease obligation.  The capital lease assets were recorded at$6,180,679, which represents the present value of the minimum lease payments,or the aggregate fair market value of the assets.

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 

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Agreement, the Company has been indemnified by NFS for thecosts of the 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.

**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof 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., aTexas, (BPZ-Texas”) corporation consummated a reverse merger withNavidec, Inc., a Colorado corporation (“Navidec”), whereby BPZ-Texasbecame a wholly owned subsidiary of Navidec (the “Merger”). See “Business—NavidecMerger Transaction” and Note 2 to the Company’s Consolidated FinancialStatements, both included our December 31, 2006 Form 10-K, for detaileddiscussion regarding the Merger.

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.

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.  On May 17, 2007we began working over the shut-in CX11-16X well.  We conducted a thorough examination of thewell bore and concluded that the existing production casing is in goodcondition  and that cement logs indicatethat no additional remediation work is required.  We completed a total of four drill stem testson separate potential pay zones from the Lower and Upper Zorritosformations.  The 

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well tested positive for gas in quantities that we believe to be commerciallyproducible.  However, we caution readersthat test data is not necessarily indicative of actual results.  On June 21, 2007 we spudded a third well, theCX11-14D Corvina Well, which is in a new slot on the CX 11 platform, next tothe CX 11-16X well mentioned above.  TheCX11-14D well has been engineered to allow us to appraise the oil and gasproducing zones discovered in the CX 11-21XD well, as well as to investigatethe potential of the Cardalitos formation which is located right above theUpper Zorritos formation.  We have notdrilled any other wells or recognized any revenues from operations, and we donot anticipate generating significant revenues from our properties prior toearly 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 $117million 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, we agreed inprincipal to a private placement of our common stock for gross proceeds ofapproximately $35 million.  On May 8,2007, we closed on an initial private placement of common stock, with anover-allotment that closed on June 15, 2007, resulting in gross proceeds of$37.7 million to us.  The proceeds fromthis offering will be used primarily in an effort to accelerate the Corvina oildevelopment and otherwise will be used consistent with the operating plan asdescribed in our public filings.  Theprivate placement shares will be issued under Regulation D of the SecuritiesAct of 1933, as amended.  The sharesissued will be restricted shares and will not be eligible for trading untilregistered with the SEC.  Theregistration statement was declared effective by the Securities and ExchangeCommission on June 14, 2007, and the related prospectus was filed on June 21,2007.

Our Corvina OilDevelopment project, has an estimated initial capital budget of $11.7million.  In order to accelerate our oilproduction program in the Corvina field we have secured storage andtransportation barges and have identified several sources for procuringproduction equipment to enable us to produce and then transport the oil to anearby refinery.  We are in the initialstages of this project. We are planning tocomplete this project for first sales of oil in late 2007, though this scheduleis subject to many factors outside our control, including obtaining allnecessary equipment and no assurance can be given that we can meet thisschedule.

Our CorvinaGas-to-Power project, with an estimated capital budget of $161.1 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, andsubsequently, the construction of a 40-mile gas pipeline to supply gas to thirdparty generators in 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 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.

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We have completed drilling our first well the CX11-21XD, recompleted theCX 11-16X well and have begun drilling a third well, CX 11-14D.  We commenced drilling of our initial well,the CX11-21XD, in the Corvina Gas Field at the CX-11 platform in September2006, and a total depth of 10,457 feet (9,234 feet true vertical depth) wasreached in November 2006.  In March 2007,after a total of six Drill Stem Tests were conducted on separate potential payzones from the Lower and Upper Zorritos formations, the well tested positivefor both gas and oil in quantities that we believe to be commerciallyproducible.  On May 17, 2007 we beganworking over the shut-in CX11-16X well. We conducted a thorough examination of the well bore and concluded thatthe existing production casing is in good condition  and that cement logs indicate that noadditional remediation work is required. We completed a total of four drill stem tests on separate potential payzones from the Lower and Upper Zorritos formations.  The well tested positive for gas inquantities that we believe to be commercially producible.  However, we caution readers that test data isnot necessarily indicative of actual results. On June 21, 2007 we spudded a third well, the CX11-14D Corvina Well,which is in a new slot on the CX 11 platform, next to the CX 11-16X wellmentioned above.  The CX11-14D well hasbeen engineered to allow us to appraise the oil and gas producing zonesdiscovered in the CX 11-21XD well, as well as to investigate the potential ofthe Cardalitos formation which is located right above the Upper Zorritosformation.  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.

Our initial plan of operation envisions the installation of a Company-owned160 MW simple-cycle, gas-fired, electric generation plant at Nueva Esperanza,near the town of Caleta Cruz, in northwest Peru. In August 2005, weawarded the turnkey contract for the engineering, procurement and constructionof the power plant project to BTEC Turbines LP of Houston (“BTEC”). Thecontract was awarded following a comprehensive six-month bidding process thatincluded field visits by all of the bidders. The engineering portion of thecontract is ongoing and nearing completion. Final terms of the procurement and construction portions of contract arecurrently being negotiated. BTEC is expected to supply two General ElectricFrame 7EA simple-cycle gas-fired turbines. BTEC will also act as themain contractor for the design, transportation, construction, startup andcommissioning of the power plant. Our plan is to own 100% of the power plant.Accordingly, our revenues from the natural gas delivered to the power plantwill be derived from the sale of electricity.

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 mid to late 2009, though this schedule is subject to manyfactors outside our control, including all necessary financing and no assurancecan be given that we can meet this schedule.

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 

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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 are currently shooting 200 kilometers of 2-D seismic surveysduring the second quarter of 2007. Depending on the results of this work, we may elect to drill anexploratory well.  We have secured the environmental permits andother authorizations to perform seismic testing 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 ofOperations**
|                                          | ** ** | **For the three months** | ** ** | **For the six months** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **ended June 30,**            | ** ** | **ended June 30,**          | ** ** |
| ** **                               | ** ** | **2007**                                | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| General and  administrative              |       | $                                       | 2,824,773  |                                  | $          | 1,864,396 |   | $ | 4,961,009 |   | $ | 3,439,836 |   |
| Stock-based  compensation                |       | 941,963                                 |       | 807,178                               |       | 1,901,522 |   | 1,350,093 |   |
| Geological,  geophysical and engineering |       | 1,868,663                               |       | 397,304                               |       | 1,970,251 |   | 863,707 |   |
| Depreciation  expense                    |       | 52,289                                  |       | 58,069                                |       | 106,786 |   | 95,237 |   |
| Total operating  expenses                |       | $                                       | 5,687,688  |                                  | $          | 3,126,947 |   | $ | 8,939,568 |   | $ | 5,748,873 |   |

 

Ouroperating and administrative expenses to date have consisted principally ofgeneral and administrative costs as well as geological, geophysical and engineeringcosts.  General and administrative costshave increased significantly from $1,864,396 and $3,439,836 during the threeand six months ended June 30, 2006 to $2,824,773 and $4,961,009 during thethree and six months ended June 30, 2007 as a result of our increased activitylevels, additional personnel and costs associated with being a publiccompany.  We incurred $1,868,663 and$1,970,251 of geological, geophysical and engineering costs in the three andsix months ended June 30, 2007 primarily related to the continued developmentof our Corvina Gas-to-Power project and seismic expense on block XIX, comparedto $397,304 and $863,707 during the comparable periods of 2006 primarilyrelated to the commencement of our Corvina Gas-to-Power project.

Stock-basedcompensation expense for the three and six months ended June 30, 2007 wasapproximately $941,963 and $1,901,522 compared to $807,178 and $1,350,083during the same period in 2006.  Stockbased compensation expense is primarily related to our 2005 and 2006 restrictedstock grants and accrued stock-based compensation under our 2005 Long-TermIncentive Plan.

We receivednet cash distributions from our Ecuador property of $162,288 for the three andsix months ended June 30, 2007 compared to net cash distributions of $236,551during the three and six months ended June 30, 2006.  However, due to capacity problems at thelocal refinery in Ecuador, anticipated oil sales from the December productionwere not realized  during January 2007 inthe amount of approximately $137,047. Since our investment consists of an interest in a producing oil and gasproperty, we are amortizing the investment on a straight-line basis over theremaining term of the license agreement covering the property.  Accordingly, we recorded $46,896 and $93,792of amortization expense during the three 

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and six months ended June 30, 2007,and the three and six months ended June 30, 2006.

We incurredno interest expense during the three months ended June 30, 2007.  We incurred interest expense of $1,165 duringthe six months ended June 30, 2007, compared with $1,386 and 2,838 for thethree and six months ended June 30, 2006. The difference is primarily due to an accrual correction related tointerest expense for other debt from December 31, 2006.

We did not incur any registration delay expense for the three and six months ended June 30, 2007.  During the three and six month periods ended June 30, 2006 we recorded registration delay expense totaling $1,101,184 and 2,133,130, of which approximately $538,968 and $1,026,994 was paid in cash and $562,216 and $1,106,136 was paid by the issuance of 252,966 and 449,590 shares of common stock, respectively.  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 resultof the increased cash balance from the various private placements of our commonstock during 2005 and 2006, we received interest income of $257,440 and$497,747 during the three and six months ended June 30, 2007 as compared to$206,030 and $428,033 for the three and six month period ended June 30, 2006.

We realized foreign tax expense of$6,375 and $12,749 for the three and six months ended June 30, 2007,respectively as well as federal income tax of $37,553 for the three monthsended June 30, 2007.  The tax is relatedto the revenues from our 10%non-operated working interest in the Santa Elena Property in southwesternEcuador.  No tax expense was incurred forthe three and six months ended June 30, 2006.

We realizeda net loss of $5,482,931 or $0.09 per share and $8,688,323 or $0.15 per share,during the three and six months ended June 30, 2007, compared to a net loss of$3,639,813, or $0.09 per share and $6,878,479 or $0.17, for the same periods in2006.

**Project Capital Budget (Corvina Oil andGas-to-Power)**
|                                      | ** ** | **($ in millions)** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| Power plant and  related equipment   |       | $                             | 59.4       |   |
| Pipelines and  processing facilities |       | 35.7                          |       |
| Platform and  wells                  |       | 61.0                          |       |
| Oil development                      |       | 11.7                          |       |
| Contingencies                        |       | 5.0                           |       |
| Total estimated capital  budget      |       | $                             | 172.8      |   |

 

**Liquidity, CapitalResources and Capital Expenditures**

We currently have no source of revenue or cash flow fromoperations, and our primary source of cash flow has been cash proceeds fromprivate placements of our common stock. As of July 31, 2007, our cash balance was approximately$24.5 million.

On May 4, 2007, with anover-allotment purchase that closed on June 15, 2007, we completed a privateplacement of 7,170,000 shares of common stock, no par value, to accreditedinvestors pursuant to a Subscription Agreement. The 

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common stock was priced at $5.25 per share and theover-allotment was priced at $5.40 per share resulting in proceeds to us ofapproximately $37.7 million.  No warrantsor dilutive securities were issued in connection with the offering.  The offering was placed directly by us.  A placement fee of 2% of the gross proceedsof this transaction was paid to Morgan Keegan for investment services andconsulting related to the offering. The registration statement was declaredeffective by the Securities and Exchange Commission on June 14, 2007, and therelated prospectus was filed on June 21, 2007.

On December 20, 2006, theIFC 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 in the fourth quarter of 2007 withdisbursements expected shortly thereafter. The remaining debt portion of the financing is subject to identificationof the lending syndicate members and subsequent negotiation and approval of thenecessary loan documentation.

During the six months ended June 30, 2007, we incurredcapital expenditures of approximately $30.7 million primarily related todrilling, completion and testing activity on the three Corvina wells as well as$6.2 million related to the capital lease of two barges to be used forproduction, storage and delivery of oil produced from Corvina oil.  In comparison, during the six monthsended June 30, 2006, we incurred capital expenditures of approximately $14.1primarily on the purchase of a deck barge and related equipment forapproximately $6 million, modernization and refurbishment costs of the platformtender assist drilling rig of approximately $5.5 million and continued work onthe refurbishment of the Corvina platform and power plant and gas processingfacilities 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-by charges. As of the July 31, 2007, we have notpresented a final claim to our insurance carrier for the barge repairs and weare negotiating a settlement agreement with a third party for recovery of anydamages not covered through our insurance. We believe the majority of the costsassociated with this incident will be reimbursed through insurance or through athird party. No assurances can be given, however, that any such recoveries willbe sufficient to cover all costs associated with this incident or to the timingof any such recoveries. This incident did not have a material impact on ouroperations or business plan.

As of June 30, 2007, in connection with our Peruproperties, we have deposited approximately $1.9 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 were required to deposit approximately$750,000 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 began in June 2007. In addition, although we are still negotiating the terms of ourcommitments under our license contracts for Blocks XXII and XXIII, weanticipate having to deposit funds as restricted cash to collateralizeperformance bonds to guarantee our obligations totaling approximately $3.7million, of which we expect $0.4 million to be deposited for Block XXII in late2007 and $3.5 million to be deposited for Block XXIII in early 2008.

In connection with our Block XIX license contract, wehave commenced shooting 200 kilometers of 2-D seismic.  We anticipate that it will takeapproximately two months to complete the data acquisition phase of thisproject.  Once completed, data processing and analysis will takeplace.  Dependingon the results of this work, we may elect to drill an exploratory well.  We estimate the cost to acquire this seismicdata to be approximately $3 million.

TheCompany believes that, based upon the test results from the initial well CX11-21XD and this additional equity 

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financing, theCompany can potentially achieve the production goal as stated in the MergerAgreement.  The Merger Agreement providesfor the issuance of an additional 9,000,000 shares of common stock to theformer shareholders of BPZ-Texas once the Company is entitled to receive as itsproportionate share from gross production from any oil and gas wells owned oroperated by the Company of not less than 2,000 barrels of oil per day or itsequivalent (approximately 12 million cubic feet of gas per day) prior toDecember 28, 2007.  However,  since the Company has not yet obtained a reserve reportfrom an independent certified reservoir engineer confirming the productionpotential of the CX 11-21XD well, nor has it located or procured all of thenecessary equipment in support of that production, for accounting purposes, itis not considered probable that the Company will have production by December28, 2007.  However, operationally, theCompany has set a goal of having oil production on line by the end of 2007 andwill continue to work towards that endeavor.

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 SheetArrangements**

As of June30, 2007, we had no transactions, agreements or other contractual arrangementswith unconsolidated entities or financial partnerships, often referred to asspecial purpose entities, which generally are established for the purpose offacilitating off-balance sheet arrangements.

**ContractualObligations**
|                                 | ** ** | **Payments Due by Period at June 30, 2007** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | ** **                                                                     | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| ** **                      | ** ** | **Total**                                                                      | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| **Contractual  Obligations:**   | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating lease  obligations(1) |       | $                                                                              | 597,486    |   | $ | 183,301 |   | $ | 414,185 |   | — |   | — |   |
| Purchase  obligations(2)        |       | 5,136,850                                                                      |       | 5,136,850 |   | — |   | — |   | — |   |
| Long-term debt  obligations(3)  |       | 8,288,409                                                                      |       | 2,324,447 |   | 5,963,962 |   | — |   | — |   |
| Total                           |       | $                                                                              | 14,022,745 |   | $ | 7,644,598 |   | $ | 6,378,147 |   | $ | — |   | $ | — |   |
|                                 |            |                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

(3)                                 Capital lease for twoproduction and storage barges.  Beginsin August 2007 and expires in November 2009. Lease payments are variable, based on the working status of the barges,with a purchase option of $5,000,000 after the first year of the lease and$4,000,000 after the maturity date of the lease.  Also include the capital lease for office furniture in our executive officein Houston, Texas expiring in 2010.

**Critical Accounting Policies and Recent Accounting 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.

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***Successful Efforts Method of Accounting***

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

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

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

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

We periodically evaluate the recoverability of 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 demonstratescontinuing losses associated with an asset used for the purpose of producingrevenue.

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, reservoircharacteristics, depth of the reservoir, market demand for equipment, currently

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available procedures and consultations with constructionand engineering consultants. Because these costs typically extend many yearsinto the future, estimating these costs is difficult and requires management tomake estimates and judgments that are subject to future revisions based onnumerous factors, including changing technology, the political and regulatoryenvironment and estimates as to the proper discount rate to use and timing ofabandonment.

Our plan of operations includes the drilling of wells andthe construction of an electric power generation plant. We may be required toplug and abandon those wells and restore the well site and power generationsite upon completion of their production. However, due to the fact that we havenot yet begun operations, we do not have sufficient information to determinethe timing, nor calculate the present value, of the obligation. Therefore, no suchprovision is reflected in the accompanying consolidated financial statements.

***AccountingChanges and Error Corrections***

In June2005, the Financial Accounting Standards Board issued SFAS No. 154, AccountingChanges and Error Corrections, which replaced Accounting Principles BoardOpinion No. 20, Accounting Changes (“APB 20”), and SFAS No. 3, ReportingAccounting Changes in Interim Financial Statements. SFAS 154 requiresretrospective application to prior period financial statements of a voluntarychange in accounting principle unless it is impracticable. In contrast, APB 20previously required that most voluntary changes in accounting principle berecognized by including the cumulative effect of changing to the new accountingprinciple in net income in the period of change. SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. Earlier application is permitted for accountingchanges and correction of errors made in fiscal years beginning after June 1,2005. SFAS 154 does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as ofits effective date. We have elected to adopt the provisions of SFAS 154 onJanuary 1, 2006. We do not expect adoption to have a material effect on ourresults of operations or financial position.

**Disclosure Regarding Forward-Looking Statements**

We caution that thisdocument contains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934.  All statements, other than statements ofhistorical facts, included in or incorporated by reference into this Form 10-Qwhich address activities, events or developments which we expect, believe oranticipate will or may occur in the future are forward-looking statements. Thewords “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,”“predicts,” “plans” and similar expressions, or the negative thereof, are alsointended to identify forward-looking statements.  In particular, statements, expressed orimplied, concerning future operating results, the ability to replace orincrease reserves, or to increase production, or the ability to generate incomeor 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 andexpected future developments as well as other factors it believes areappropriate in the circumstances. However, forward-looking statements are notguarantees of performance and no assurance can be given that these expectationswill be achieved.

Important factors thatcould cause actual results to differ materially from the expectations reflectedin the forward-looking statements include, but are not limited to any of thefollowing in the jurisdictions in which BPZ or its subsidiaries are doingbusiness:  the timing and extent ofchanges in commodity prices for crude oil, natural gas and related products,currency exchange rates, interest rates, inflation, the availability of goodsand services, drilling and other operational risks, availability of capitalresources, timing of syndication of and disbursements under the anticipated IFCdebt facility, legislative or regulatory changes, political developments, actsof war and terrorism.  A more detaileddiscussion on risks relating to the oil and natural gas industry and to us isincluded in the Company’s Annual Report on Form 10-K, as amended, for theyear ended December 31, 2006.

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

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

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

*Interest Rate Risk.*

As of June 30, 2007, the Company had long-term debt of$5,548,310 and current maturities of long-term debt of $695,865, consisting ofa capital lease obligation for the two barges to be used in the Corvina oilproduction and two secured loans for the purchase of office furniture. Thecapital lease obligation has an imputed interest rate of 18.00% over a leaseterm of 27 months.  The other two loanshave 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. We do not expect asignificant change in the market interest rate to impact the interest on ourterm debt.  However, significant changesin market interest rates may significantly affect the level of financing thatthe 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 generationbusiness, the price we can obtain for the sale of power may not rise at thesame rate, or may not rise at all, to match a rise in the Company’s cost toproduce and transport gas reserves to our initial 160MW power plant in CaletaCruz. Prices for both electricity and natural gas have been very volatile inthe past year and have increase significantly over the past two years. Theprofitability of this business depends in large part on the difference betweenthe price of power and the price of fuel used to generate power, or “sparkspread.”

*Foreign Currency Exchange Rate Risk.*

The U.S. Dollar is the functional currency for ouroperations in both Peru and Ecuador. Ecuador has adopted the U.S. Dollar as itsofficial currency. Peru, however, still uses its local currency, Nuevo Soles,in addition to the U.S. Dollar, and therefore, our financial results aresubject to favorable or unfavorable fluctuations in the exchange rate andinflation of that country. Transaction differences have been nominal to-datebut are expected to increase as our activities in Peru continue toescalate.  During the six months endedJune 30, 2007, we incurred an exchange rate gain of approximately $28,847primarily related to the early recovery of IGV or Value Added Taxes in Peru.

**Item 4. Controls and Procedures**

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

As of the end of the period covered by this report,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures as definedin Rule 13a-15(e) of the Exchange Act. Based upon that evaluation our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as 

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of the end of the period covered by this report to ensure thatinformation required to be disclosed by the Company in the reports that theCompany files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

** (b) Changes in Internal Controlover Financial Reporting**

Duringthe quarter ended June 30, 2007, there was no change in internal control overfinancial reporting that materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II**

**Item 1.  Legal Proceedings**

See Note 12 of the Notes to Consolidated FinancialStatements included in Part I, Item I, which is incorporated herein byreference.

**Item 1A.  Risk Factors**

Item 1A, “Risk Factors” of our Annual Report on Form10-K, as amended, for the year ended December 31, 2006, includes a detaileddiscussion of our risk factors.  Thereare no material changes in our risk factors as previously described in ourAnnual 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**

On May 4, 2007, with anover-allotment purchase that closed on June 15, 2007, the Company completed aprivate placement of 7,170,000 shares of common stock, no par value, to accreditedinvestors pursuant to a Subscription Agreement. The common stock was priced at $5.25 per share and the over-allotmentwas priced at $5.40 per share resulting in proceeds to us of approximately$37.7 million.  No warrants or dilutivesecurities were issued in connection with the offering.  The offering was placed directly by theCompany.  A placement fee of 2% of thegross proceeds of this transaction was paid to Morgan Keegan for investmentservices and consulting related to the offering.   The registration statement was declaredeffective by the Securities and Exchange Commission on June 20, 2007, and therelated prospectus was filed on June 21, 2007.

**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 Chief Executive Officer pursuant to  Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                     |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                             |
| 31.2   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                     |
|   |                                                                                                                                                                             |
| 32.1   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes - Oxley Act of 2002. (Filed herewith) |
|   |                                                                                                                                                                             |
| 32.2   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes - Oxley Act of 2002. (Filed herewith) |

 

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

 

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