**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

 
| **(Mark One)**                                                 |
|----------------------------------------------------------------|
| ** **                                                     |
| **x**                                                          | **QUARTERLY  PURSUANT TO UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                           |
| ** **                                                     |
| **For the  quarterly period ended:  June 30,  2006** |
| ** **                                                     |
|                                                           |
| **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: 000-29098**

**BPZENERGY, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

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

Indicateby check mark whether the registrant (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (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 markwhether the registrant is a large accelerated filer, an accelerated file or anon-accelerated filer.  See definition of“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

LargeAccelerated Filer o  Accelerated Filer o   Non-Accelerated Filer x

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

Yeso No x

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

As of September 12, 2006, there were 47,264,809shares of common stock, no par value, outstanding.

 

 

----

**TABLE OF CONTENTS**

 
| **PART I**  |                                                                                        |
|------------------|---------------------------------------------------------------------------------------------|
|             |                                                                                        |   |
| Item 1.          | Financial  Statements                                                                       |   |
|             |                                                                                        |   |
|             | Consolidated  Balance Sheets                                                                |   |
|             |                                                                                        |   |
|             | Consolidated  Statements of Operations                                                      |   |
|             |                                                                                        |   |
|             | Consolidated  Statement of Stockholders’ Equity                                        |   |
|             |                                                                                        |   |
|             | 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,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **(Unaudited)**         | ** ** | **(Restated)**              | ** ** |
| **ASSETS**                                                                                                                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                                               |       |                    |       |                        |       |
| Current assets:                                                                                                                                                    |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                         |       | $                       | 11,769,958 |                        | $          | 29,455,130 |   |
| Private  placement receivable                                                                                                                                      |       | 12,325,500              |       | —                      |       |
| Value added tax  receivable                                                                                                                                        |       | 2,016,194               |       | 362,555                     |       |
| Inventory                                                                                                                                                          |       | 1,909,004               |       | —                      |       |
| Prepaid and  other current assets                                                                                                                                  |       | 1,815,270               |       | 507,114                     |       |
| Total current  assets                                                                                                                                              |       | 29,835,926              |       | 30,324,799                  |       |
|                                                                                                                                                               |       |                    |       |                        |       |
| Property,  equipment and construction in progress, net                                                                                                             |       | 18,366,691              |       | 4,365,040                   |       |
| Restricted cash                                                                                                                                                    |       | 1,455,953               |       | 1,455,953                   |       |
| Investment in  Ecuador property, net                                                                                                                               |       | 1,851,396               |       | 1,945,188                   |       |
|                                                                                                                                                               |       |                    |       |                        |       |
| Total assets                                                                                                                                                       |       | $                       | 51,509,966 |                        | $          | 38,090,980 |   |
|                                                                                                                                                               |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                     | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                                               |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                               |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                   |       | $                       | 1,326,041  |                        | $          | 747,347 |   |
| Accrued  liabilities                                                                                                                                               |       | 373,461                 |       | 470,632                     |       |
| Other  liabilities                                                                                                                                                 |       | 101,005                 |       | 70,516                      |       |
|                                                                                                                                                               |       |                    |       |                        |       |
| Total current  liabilities                                                                                                                                         |       | 1,800,507               |       | 1,288,495                   |       |
|                                                                                                                                                               |       |                    |       |                        |       |
| Long-term debt                                                                                                                                                     |       | 64,630                  |       | 70,908                      |       |
|                                                                                                                                                               |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                         |       |                    |       |                        |       |
| Preferred stock,  no par value, 25,000,000 authorized, none issued and outstanding                                                                                 |       | —                  |       | —                      |       |
| Common stock, no  par value, 250,000,000 authorized; 47,306,569 and 40,349,979 shares issued  and outstanding at June 30, 2006 and December 31, 2005, respectively |       | 74,654,382              |       | 56,873,641                  |       |
| Additional paid  in capital                                                                                                                                        |       | 6,132,086               |       | 6,393,411                   |       |
| Deferred  stock-based compensation                                                                                                                                 |       | (1,719,857              | )          | (3,992,172                  | )          |
| Stock  subscription receivable                                                                                                                                     |       | (230,825                | )          | (230,825                    | )          |
| Deficit  accumulated during the exploratory stage.                                                                                                                 |       | (29,190,957             | )          | (22,312,478                 | )          |
|                                                                                                                                                               |       |                    |       |                        |       |
| Total  stockholders’ equity                                                                                                                                   |       | 49,644,829              |       | 36,731,577                  |       |
|                                                                                                                                                               |       |                    |       |                        |       |
| Total liabilities and  stockholders’ equity                                                                                                                   |       | $                       | 51,509,966 |                        | $          | 38,090,980 |   |

 

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** | ** **  | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|-------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                       | ** ** | **June 30, 2006**                                                       | ** **  | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | ** **                                                                        | ** **  | ** **                                          | ** ** | **(Restated)**                                    | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Revenue                                                          |       | $                                                                                 | —      |                                                | $          | —                                            |       | $ | — |   | $ | — |   | $ | — |   |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Operating and  administrative expenses:                          |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| General and  administrative                                      |       | 10,617,613                                                                        |        | 1,864,396                                           |       | 924,197                                           |       | 3,439,836 |   | 1,884,986 |   |
| Stock-based  compensation                                        |       | 9,791,653                                                                         |        | 807,178                                             |       | 179,270                                           |       | 1,350,093 |   | 254,270 |   |
| Geological,  geophysical and engineering                         |       | 2,222,803                                                                         |        | 397,304                                             |       | 291,126                                           |       | 863,707 |   | 429,191 |   |
| Depreciation  expense                                            |       | 125,032                                                                           |        | 58,069                                              |       | 1,645                                             |       | 95,237 |   | 2,295 |   |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Total operating  expenses                                        |       | 22,757,101                                                                        |        | 3,126,947                                           |       | 1,396,238                                         |       | 5,748,873 |   | 2,570,742 |   |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Operating loss                                                   |       | (22,757,101                                                                       | )           | (3,126,947                                          | )          | (1,396,238                                        | )          | (5,748,873 | ) | (2,570,742 | ) |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Other income (expense):                                          |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Income from  investment in Ecuador property, net of amortization |       | 1,204,445                                                                         |        | 398,203                                             |       | 74,635                                            |       | 587,858 |   | 162,429 |   |
| Interest expense                                                 |       | (80,946                                                                           | )           | (1,386                                              | )          | (2,305                                            | )          | (2,838 | ) | (7,967 | ) |
| Amortization of  deferred financing costs                        |       | (428,000                                                                          | )           | —                                              |       | (28,955                                           | )          | — |   | (57,910 | ) |
| Registration  delay expense                                      |       | (2,649,097                                                                        | )           | (1,101,184                                          | )          | —                                            |       | (2,133,130 | ) | — |   |
| Interest income                                                  |       | 937,841                                                                           |        | 206,030                                             |       | —                                            |       | 428,033 |   | — |   |
| Merger costs                                                     |       | (5,470,455                                                                        | )           | —                                              |       | —                                            |       | — |   | — |   |
| Miscellaneous  income                                            |       | 52,356                                                                            |        | (14,529                                             | )          | 4,695                                             |       | (9,529 | ) | 13,173 |   |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Total other  income (expense)                                    |       | (6,433,856                                                                        | )           | (512,866                                            | )          | 48,070                                            |       | (1,129,606 | ) | 109,725 |   |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Loss before  income taxes                                        |       | (29,190,957                                                                       | )           | (3,639,813                                          | )          | (1,348,168                                        | )          | (6,878,479 | ) | (2,461,017 | ) |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Income taxes                                                     |       | —                                                                            |        | —                                              |       | —                                            |       | — |   | — |   |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Net loss                                                         |       | $                                                                                 | (29,190,957 | )                                                   | $          | (3,639,813                                        | )          | $ | (1,348,168 | ) | $ | (6,878,479 | ) | $ | (2,461,017 | ) |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Basic and diluted net  loss per share                            |       |                                                                              |        | $                                                   | (0.09      | )                                                 | $          | (0.05 | ) | $ | (0.17 | ) | $ | (0.10 | ) |
|                                                             |       |                                                                              |        |                                                |       |                                              |       |   |   |   |   |
| Weighted average common shares outstanding                       |       |                                                                              |        | 42,470,985                                          |       | 25,960,796                                        |       | 41,662,618 |   | 25,857,083 |   |

 

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

4

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**BPZ Energy, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

# **Consolidated Statements ofStockholders’ Equity**

**Six Months Ended June 30, 2006**

**(Unaudited)**

 
| ** **                                               | ** ** | **Common Stock Issued** | ** ** | **Additional  Paid-in** | ** ** | **Deferred  Stock-based** | ** ** | **Stock  Subscription** | ** ** | **Deficit  Accumulated  During the  Exploratory** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Shares**                        | ** ** | **Amount**              | ** ** | **Capital**               | ** ** | **Compensation**        | ** ** | **Receivable**                                         | ** ** | **Stage**  | ** ** | **Total** | ** ** |
|                                                     |       |                              |       |                    |       |                      |       |                    |       |                                                   |       |       |       |   |   |
| Balances at December 31, 2005 (audited)  (Restated) |       | 40,349,979                        |       | $                       | 56,873,641 |                      | $          | 6,393,411               |       | $                                                      | (3,992,172 | )          | $          | (230,825 | ) | $ | (22,312,478 | ) | $ | 36,731,577 |   |
|                                                     |       |                              |       |                    |       |                      |       |                    |       |                                                   |       |       |       |   |   |
| Stock-based compensation                                 |       | 10,000                            |       | 25,000                  |       | 150,000                   |       | —                  |       | —                                                 |       | —     |       | 175,000 |   |
| Exercise of stock options                                |       | 275,000                           |       | 882,750                 |       | (882,750                  | )          | —                  |       | —                                                 |       | —     |       | — |   |
| Long-term incentive compensation plan                    |       | 70,000                            |       | (1,320,000              | )          | 222,780                   |       | 2,272,315               |       | —                                                 |       | —     |       | 1,175,095 |   |
| Common stock sold for cash, net of offering costs        |       | 6,152,000                         |       | 17,335,500              |       | —                    |       | —                  |       | —                                                 |       | —     |       | 17,335,500 |   |
| Warrants issued in connection with sale of common  stock |       | —                            |       | (248,645                | )          | 248,645                   |       | —                  |       | —                                                 |       | —     |       | — |   |
| Common stock issued for registration delay               |       | 449,590                           |       | 1,106,136               |       | —                    |       | —                  |       | —                                                 |       |       |       | 1,106,136 |   |
| Net loss for the period                                  |       |                              |       |                    |       |                      |       |                    |       |                                                   |       | (6,878,479 | )          | (6,878,479 | ) |
|                                                     |       |                              |       |                    |       |                      |       |                    |       |                                                   |       |       |       |   |   |
| Balances at  June 30, 2006                          |       | 47,306,569                        |       | $                       | 74,654,382 |                      | $          | 6,132,086               |       | $                                                      | (1,719,857 | )          | $          | (230,825 | ) | $ | (29,190,957 | ) | $ | 49,644,829 |   |

 

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)**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Cumulative  Amounts from  August 20, 2001  (Inception) to** | ** **  | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|-------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **June 30, 2006**                                                       | ** **  | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | ** **                                                                        | ** **  | ** **                                        | ** ** | **(Restated)** | ** ** |
| Cash flows from operating activities:                                        |       |                                                                              |        |                                              |       |   |   |
| Net loss                                                                     |       | $                                                                                 | (29,190,957 | )                                                 | $          | (6,878,479 | ) | $ | (2,461,017 | ) |
| Adjustments to reconcile  net loss to net cash used by operating activities: |       |                                                                              |        |                                              |       |   |   |
| Stock-based compensation                                                     |       | 9,791,653                                                                         |        | 1,350,093                                         |       | 254,270 |   |
| Stock issued in merger                                                       |       | 979,981                                                                           |        | —                                            |       | — |   |
| Options assumed in  merger                                                   |       | 4,490,474                                                                         |        | —                                            |       | — |   |
| Stock issued for  registration delay expense                                 |       | 1,378,096                                                                         |        | 1,106,136                                         |       | — |   |
| Depreciation expense                                                         |       | 125,032                                                                           |        | 95,237                                            |       | 2,295 |   |
| Amortization of  investment in Ecuador property                              |       | 273,104                                                                           |        | 93,792                                            |       | 42,760 |   |
| Amortization of deferred  financing fees                                     |       | 428,000                                                                           |        | —                                            |       | 57,910 |   |
| Expenses paid by  affiliate                                                  |       | 629,596                                                                           |        | —                                            |       | — |   |
| Changes in operating  assets and liabilities:                                |       |                                                                              |        |                                              |       |   |   |
| Increase value added tax  receivable                                         |       | (2,016,194                                                                        | )           | (1,653,639                                        | )          | — |   |
| Increase in inventory                                                        |       | (1,909,004                                                                        | )           | (1,909,004                                        | )          | — |   |
| Increase in prepaid and  other current assets                                |       | (1,815,270                                                                        | )           | (1,308,156                                        | )          | (62,033 | ) |
| Increase (decrease) in  accounts payable                                     |       | 1,326,041                                                                         |        | 578,694                                           |       | (181,535 | ) |
| Increase in accrued  liabilities                                             |       | 373,461                                                                           |        | (97,169                                           | )          | 91,758 |   |
| Increase in other  liabilities                                               |       | 101,005                                                                           |        | 30,489                                            |       | — |   |
| Net cash used by  operating activities                                       |       | (15,034,982                                                                       | )           | (8,592,006                                        | )          | (2,255,592 | ) |
|                                                                         |       |                                                                              |        |                                              |       |   |   |
| Cash flows from investing activities:                                        |       |                                                                              |        |                                              |       |   |   |
| Property, equipment and  construction in progress additions                  |       | (18,491,723                                                                       | )           | (14,096,888                                       | )          | (22,222 | ) |
| Restricted cash                                                              |       | (1,455,953                                                                        | )           | —                                            |       | (1,200,000 | ) |
| Investment in Ecuador  property                                              |       | (1,440,000                                                                        | )           | —                                            |       | — |   |
| Net cash used by  investing activities                                       |       | (21,387,676                                                                       | )           | (14,096,888                                       | )          | (1,222,222 | ) |
|                                                                         |       |                                                                              |        |                                              |       |   |   |
| Cash flows from financing activities:                                        |       |                                                                              |        |                                              |       |   |   |
| Borrowings                                                                   |       | 2,226,826                                                                         |        | —                                            |       | — |   |
| Repayments of borrowings                                                     |       | (456,667                                                                          | )           | (6,278                                            | )          | (178,007 | ) |
| Proceeds from exercise  of warrants, net                                     |       | 3,868,260                                                                         |        | —                                            |       | — |   |
| Proceeds from sale of  common stock, net                                     |       | 42,554,197                                                                        |        | 5,010,000                                         |       | — |   |
| Net cash provided by  (used by) financing activities                         |       | 48,192,616                                                                        |        | 5,003,722                                         |       | (178,007 | ) |
|                                                                         |       |                                                                              |        |                                              |       |   |   |
| Net increase (decrease) in cash and cash equivalents                         |       | 11,769,958                                                                        |        | (17,685,172                                       | )          | (3,655,821 | ) |
| Cash and cash equivalents at beginning of period                             |       | —                                                                            |        | 29,455,130                                        |       | 4,014,191 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                                                 | 11,769,958  |                                              | $          | 11,769,958 |   | $ | 358,370 |   |
|                                                                         |       |                                                                              |        |                                              |       |   |   |
| Supplemental cash flow information:                                          |       |                                                                              |        |                                              |       |   |   |
| **Cash paid for:**                                                           | ** ** | ** **                                                                        | ** **  | ** **                                        | ** ** | ** ** | ** ** |
| Interest                                                                     |       | $                                                                                 | 80,542      |                                              | $          | 2,838 |   | $ | 10,192 |   |
| **Non — cash items:**                                                   | ** ** | ** **                                                                        | ** **  | ** **                                        | ** ** | ** ** | ** ** |
| Common stock issued for property interest                                    |       | $                                                                                 | 1,112,500   |                                              | $          | — |   | $ | 1,112,500 |   |
| Warrants issued to private placement agent                                   |       | 573,645                                                                           |        | 248,645                                           |       | — |   |
| Imputed financing costs                                                      |       | 428,000                                                                           |        | —                                            |       | — |   |
| Issuance of common stock for subscription receivable                         |       | 12,556,325                                                                        |        | 12,325,500                                        |       | — |   |
| Conversion of long-term debt to common stock                                 |       | 685,000                                                                           |        | —                                            |       | — |   |
| Conversion of  notes payable to common stock                                 |       | 1,020,529                                                                         |        | —                                            |       | — |   |

 

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

6

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**BPZ Energy, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

**Notes To Consolidated Financial Statements**

**June 30, 2006 and 2005**

**(Unaudited)**

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

**Organization**

BPZ Energy, Inc., aColorado corporation (“BPZ” or the “Company”) was incorporated in 1993 and isbased in Houston, Texas. BPZ is an exploratory stage company with properties innorthwest Peru and southwest Ecuador and is focused on the exploration andproduction of oil and natural gas and the complementary development ofgas-fired power generation.

On September 10,2004, BPZ Energy, Inc., a Texas corporation (“BPZ-Texas”), consummated areverse merger with Navidec, Inc. (“Navidec”) whereby BPZ-Texas became awholly owned subsidiary of Navidec (the “Merger”).  However, in the Merger, the stockholder groupof BPZ-Texas obtained majority ownership and management control of the combinedcompany. The Merger was treated, for accounting purposes, as a capitaltransaction rather than a business combination. It is equivalent to the issuance of common stock by BPZ-Texas for thenet assets of Navidec, accompanied by a recapitalization.  This accounting treatment is identical tothat resulting from a reverse merger under SFAS No. 141, Business Combination,except that no goodwill or other intangible asset has been recorded. Allfinancial statements presented herein represent the historical financialstatements of the accounting acquirer, BPZ-Texas.  Although the Company’s name has been changed,the pre-merger company may be referred to as Navidec in this filing to avoidconfusion.

The Merger required the transfer of all of thepre-merger business assets and liabilities of Navidec to its wholly ownedsubsidiary, Navidec Financial Services, Inc. (“NFS”), and the transfer ofownership of NFS to the shareholders of record of Navidec as of September 9,2004, the day prior to the consummation of the Merger. Accordingly, thepre-merger shareholders of BPZ-Texas were not entitled to receive shares ofNFS.  Upon consummation of the Merger,the Company became contractually and irrevocably bound to the spin-off of NFSto such pre-merger shareholders. All legal requirements for the transfer ofownership of NFS have been completed except for registration of the NFS shareswith the Securities and Exchange Commission (“SEC”). The Company has no controlover the registration process of NFS and cannot predict when, or if, themanagement of NFS will be able to complete the registration of NFS commonshares.  NFS’ results are excluded fromthe Company’s financial statements for all periods presented.

The Company maintains aregistered branch office in Peru. Currently, BPZ has exclusive rights and license agreements for oil andgas exploration and production covering a total of approximately 2.4 millionacres in northwest Peru.  The Company’slicense contracts cover 100% ownership of both Block Z-1 (739,205 acres), whichwas signed in November 2001 and Block XIX (472,860 acres), which wassigned in December 2003. The license contracts provide for an initialexploration period of seven to thirteen years and seven to ten years,respectively and require that we conduct specified activities on the propertiesduring this period.  If the explorationactivities are successful, the total contract term can extend up to 30 yearsfor oil exploration and production and 40 years for gas exploration andproduction.  BPZ is currently negotiatinga license contract for Block XXII (948,000 acres) which it previously heldunder a Technical Evaluation Agreement and was referred to as Area VI in itsprevious filings.  In July 2006 Perupetroofficially informed the Company that its proposal for the 248,000 acre BlockXXIII, located onshore in northwest Peru between the Company’s Blocks Z-1 andXIX, was the winning bid in their recent tender process.  The Company is in the process of presentingall necessary documentation to become the qualified operator of this new blockand will then begin negotiation of the exploration and production licensecontract.

BPZ through its whollyowned subsidiary, SMC Ecuador Inc. (a Delaware corporation), and its registeredbranch in Ecuador, also owns a 10% non-operated working interest in an oil andgas producing property, Block 2, located in the southwest region of Ecuador(the “Santa Elena Property”).  Thelicense agreement covering the property extends through May 2016.

BPZ is currently in theexploratory stage and to date its activities in Peru have been 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 its offshore platforms, procuring machinery and equipment for a drillingcampaign, obtaining all necessary environmental and operating permits, as wellas securing the required capital and financing to complete the current plan ofoperation. The Company has not drilled

7

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any wells or recognized any revenues from operationsand does not anticipate generating significant revenues from its propertiesprior to the second half of 2007.

**Basisof Presentation**

The Company’s unaudited consolidated financial statementsincluded herein have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission as they pertain to Form 10-Q.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations.  The unaudited financial statements reflectall adjustments which are, in the opinion of management, necessary for a fairpresentation of the financial position and results of operations for theinterim periods on a basis consistent with the annual audited financialstatements.  Except for the restatementdescribed in Note 2 to the Consolidated Financial Statements, all suchadjustments are of a normal recurring nature. The Company believes that thedisclosures contained herein are adequate to make the information presented notmisleading.  The consolidated balancesheet at December 31, 2005 is derived from the December 31, 2005 auditedconsolidated financial statements, as restated. These interim financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB/A for the year ended December 31, 2005.  The results of operations for interim periodsare not necessarily indicative of the results to be expected for the full year.

**New Accounting Pronouncements**

The following are recentaccounting pronouncements affecting the Company’s activities and operations:

In April 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)19-1, “Accounting for Suspended Well Costs.” FSP 19-1 provides guidance on the accounting for exploratory well coststo companies which use the successful efforts method of accounting.  The FSP states that exploratory well costsshould continue to be capitalized if:  1)a sufficient quantity of reserves are discovered in the well to justify itscompletion as a producing well and 2) sufficient progress is made in assessingthe reserves and the well’s economic and operating feasibility.  If the exploratory well costs do not meetboth of these criteria, these costs should be expensed, net of any salvagevalue.  Additional annual disclosures arerequired to provide information about management’s evaluation of capitalizedexploratory well costs.  In addition, theFSP requires the annual disclosure of 1) net changes from period to period ofcapitalized exploratory well costs for wells that are pending the determinationof proved reserves, 2) the amount of exploratory well costs that have beencapitalized for a period greater than one year after the completion of drillingand 3) an aging of exploratory well costs suspended for greater than one yearwith the number of wells it relates to. Further, the disclosures should describe the activities undertaken toevaluate the reserves and the projects, the information still required toclassify the associated reserves as proved and the estimated timing forcompleting the evaluation.  The guidancein FSP 19-1 is required to be applied to the first reporting period beginningafter April 4, 2005 on a prospective basis to existing and newly capitalizedexploratory well costs.  The guidanceprovided in FSP 19-1 may affect the treatment of costs capitalized infuture operations, but it would not have had a material effect on amountsrecorded in the consolidated financial position, results of operations or cashflow for the periods presented.

**Stock-BasedCompensation**

On January 1, 2006, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 123 — Revised 2004,*Share—Based Payment* (“SFAS 123(R)”),which establishes accounting for stock-based payment transactions for employeeservices and goods and services received from non-employees. SFAS 123(R) is arevision of SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”), and supersedes APBNo. 25, *Accounting for Stock Issued toEmployees*. Under the provisions of SFAS 123(R), stock-basedcompensation cost is measured at the date of grant, based on the calculatedfair value of the award, and is recognized as expense over the employee’s ornon-employee’s service period, which is generally the vesting period of theequity grant.

Prior to January 1, 2006, the Company accounted for stock-basedcompensation in accordance with SFAS 123. As allowed under SFAS 123, the Company accounted for its stock-basedcompensation to employees using the intrinsic value method of accounting whichbases compensation expense on the difference between the quoted market price ofthe award at the measurement date less the amount, if any, the employee isrequired to pay for the stock.  As ofJanuary 1, 2006, stock-based awards to employees consisted of only restrictedshares valued using the market price of the Company’s traded common stock onthe date of grant. The fair value method used to value restricted shares wouldhave yielded the same fair value and compensation expense as the intrinsic valuemethod used; thus, no pro forma results of operations are required to bepresented.

8

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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.

TheCompany adopted SFAS 123(R) using the modified prospective application methodand, accordingly, no prior periods have been restated as a result of theadoption of this pronouncement. Under this method, compensation cost recognizedduring the three and six months ended June 30, 2006 included:(a) compensation cost for all stock-based payments granted prior to, butnot yet vested as of January 1, 2006, based on the grant-date fair valueestimated in accordance with the original provisions of SFAS 123; and (b)compensation cost for all stock-based payments granted after January 1,2006, based on the grant-date fair value estimated in accordance with SFAS123(R). SFAS 123(R) requires forfeitures to be estimated at the time of grantand revised, if necessary, in subsequent periods to reflect actualforfeitures.   The Company’s forfeitureestimates were not changed as a result of adopting SFAS 123(R).

The following table summarizes stock-basedcompensation costs recognized under SFAS 123(R) for the three and six monthsended June 30, 2006 and under SFAS 123 for three and six months ended June 30,2005:

 
|                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Employee  stock—based compensation costs |       | $                                | 691,593    |                           | $          | — |   | $ | 1,159,508 |   | $ | — |   |
| Non-employee  stock-based compensation costs  |       | 115,585                          |       | 179,270                        |       | 190,585 |   | 254,270 |   |
|                                          |       | $                                | 807,178    |                           | $          | 179,270 |   | $ | 1,350,093 |   | $ | 254,270 |   |

 

See Note 10 to theConsolidated Financial Statements, included in this filing, for detaileddiscussion regarding the Company’s employee long-term incentive compensationplan and stock-based payments to non-employees.

*Restricted Stock Awards and Performance Shares*

TheCompany determines the fair value of restricted stock awards and performanceshares based on the market price of the Company’s common stock on the date ofgrant. Compensation cost for such awards is recognized on a straight-line basisover the vesting or service period, net of forfeitures; however, compensationcost related to performance shares will not be recorded or will be reversed ifthe Company does not believe it is probable that such performance criteria willbe met or if the service provider (employee or otherwise) fails to meet suchcriteria.

A summary of the Company’srestricted stock award and performance share activity and related informationis presented below:

 
| ** **                                   | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                   | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                   | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Nonvested balance at  December 31, 2005 |       | 1,130,000          |       | $                   | 4.40       |   |
| Granted                                      |       | 70,000             |       | 3.20                |       |
| Vested                                       |       | (160,000           | )          | 4.40                |       |
| Forfeited                                    |       | (300,000           | )          | 4.40                |       |
| Nonvested balance at June 30, 2006           |       | 740,000            |       | $                   | 4.29       |   |

 

Asof June 30, 2006, there was $2.0 million of total unrecognized compensationcost related to nonvested restricted stock awards, which is expected to berecognized over a weighted-average period of 1.6 years.   There were no performance shares outstandingas of June 30, 2006.

9

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*Stock Options*

Incentiveand non-qualified stock options issued to directors, officers and consultantsare issued at an exercise price equal to the fair market value of the stock atthe date of grant.  The majority of theCompany’s stock options vest two years from the grant date and generally expireten years from the date of grant. Compensation cost related to stock options is recognized on astraight-line basis over the vesting or service period and is net offorfeitures.

                The fair value of each stockoption granted is estimated on the date of grant using a Black-Scholes optionpricing model. The following table presents the weighted-average assumptionsused in the option pricing model for options granted during the six monthsended June 30, 2006. No options were granted by the Company during the sixmonths ended June 30, 2005. The expected life of the options represents theperiod of time the options are expected to be outstanding. For the six monthsended June 30, 2006, the expected term of options granted was derivedbased on a weighting between (a) the Company’s historical exercise andforfeiture activity and (b) the average midpoint between vesting and thecontractual term. In the future, as information regarding post-vestingtermination becomes more accessible, the Company may change the method ofderiving the expected term. This change could impact the fair value of optionsgranted in the future. The Company expects to refine the method of deriving theexpected term no later than January 1, 2008. For the six months ended June 30, 2005, our expected volatility isbased on the historical volatility of our stock for a period approximating theexpected life.  The risk-free interestrate is based on the observed U.S. Treasury yield curve in effect at the timethe options were granted. The dividend yield is based on our history ofdividend payouts.

 
| ** **                                          | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|------------|
| Expected life (years)                               |       | 6.0      |       |
| Risk-free interest rate                             |       | 4.9      | %          |
| Volatility                                          |       | 67.5     | %          |
| Dividend yield                                      |       | 0.0      | %          |
| Weighted-average fair value per share at grant date |       | $        | 2.13       |   |
|                                                     |            |          |            |  |

 

A summary of our stockoption activity and related information is presented below (in thousands,except per option prices):

 
| ** **                                   | ** ** | ** **         | ** ** | **Weighted—**      | ** ** |
|----------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                                   | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                                   | ** ** | **Options**        | ** ** | **Per Option**     | ** ** |
| Nonvested balance at  December 31, 2005 |       | 500,000            |       | $                       | 1.30       |   |
| Granted                                      |       | 1,330,000          |       | 3.28                    |       |
| Vested                                       |       | —             |       | —                  |       |
| Forfeited                                    |       | —             |       | —                  |       |
| Nonvested balance at June 30, 2006           |       | 1,830,000          |       | $                       | 2.74       |   |

 

Nooptions were exercised during the six months ended June 30, 2006. As ofJune 30, 2006, there was $2.7 million of total unrecognizedcompensation cost related to nonvested stock options which is expected to berecognized over a weighted-average period of 1.3 years.

Pursuantto a Settlement Agreement and Mutual Release entered into on May 19, 2006 betweenthe Company, Mr. McKowen and NFS, the vesting period related to the 500,000nonvested options outstanding as of December 31, 2005, which remained unvestedand outstanding as of June 30, 2006, was extended from September 10, 2006 toone year following the date the shares NFS received in the Merger with Navidecare registered with the SEC.  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.

10

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The following tablesummarizes information about stock options outstanding as of June 30,2006:

 
| ** **                                  | ** ** | **Outstanding**    | ** ** | **Exercisable**     | ** ** |
|---------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                  | ** ** | ** **         | ** ** | **Weighted-**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Average**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Remaining**       | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Contractual**     | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Life**            | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| **Range of Exercise Prices** | ** ** | **Options**        | ** ** | **(In years)** | ** ** | **Options** | ** ** | **Per Option** | ** ** |
| $                                           | 1.30       |               |       | 1,000,000           |       | 8.2 |   | 500,000 |   | $ | 1.30 |   |
|                                        | 2.00       |               |       | 1,225,000           |       | 8.2 |   | 1,225,000 |   | 2.00 |   |
|                                        | 3.20       |               |       | 580,000             |       | 9.8 |   | — |   | — |   |
|                                        | 3.35       |               |       | 750,000             |       | 9.9 |   | — |   | — |   |
| Total                                       |       | 3,555,000          |       | 8.8                 |       | 1,725,000 |   | $ | 1.80 |   |

 

Theaggregate intrinsic value of stock options outstanding at June 30, 2006was $6.1 million, of which $3.8 million relates to awards vested andexercisable and $2.3 million relates to awards expected to vest. The intrinsicvalue for stock options outstanding is calculated as the amount by which thequoted price of our common stock as of June 30, 2006 exceeds the exerciseprice of the option.

*Warrants*

As of June 30, 2006, the Company had 250,000 warrantsoutstanding, all of which were issued to Morgan Keegan & Company inconnection with previous private placements of the Company’s common stock andvested immediately.  In 2005, the Companyissued warrants to purchase 100,000 of the Company’s common stock at anexercise price of $3.00 per share, which expire on July 19, 2010 and werevalued at $325,000 at the date of grant.

In connection with the private placement of 4,482000shares of common stock in June 2006, Morgan Keegan &Company, Inc. also received vested warrants to purchase 150,000 shares ofthe Company’s common stock at an exercise price of $3.00 per share.  Such warrants expire on June 30, 2011 andwere valued at $248,645 on the date of grant.

All warrants issued were valued using theBlack-Scholes model, which amount was treated as additional non-cash stockoffering costs.  The following tablepresents the weighted-average assumptions used in the option pricing model foroptions granted during the six months ended June 30, 2006 and June 30,2005.  The same methodologies applied todetermine the assumptions used to value the options noted above were also usedin valuing the warrants issued to Morgan Keegan & Company.

 
|                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life  (years)                               |       | 1.6      |       | 1.9      |       |
| Risk-free  interest rate                             |       | 4.9      | %          | 2.5      | %          |
| Volatility                                           |       | 64.7     | %          | 76.12    | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average fair  value per share at grant date |       | $        | 1.66       |     | $          | 3.25 |   |
|                                                      |            |          |            |          |            |  |  |

 

Nowarrants were exercised during the six months ended June 30, 2006.

**Note 2 —September 2006 Restatement**

The previously issuedconsolidated financial statements of the Company as of December 31, 2005and for the three and six month periods ended June 30, 2005 have been restatedfor the issues described below:

·      as to the merger with Navidec, Inc.,the description of the accounting and the valuation of certain Navidec optionsassumed;

·      the accounting for the post-mergeroperations of Navidec Financial Services, Inc.; and

·      the accounting for expenses incurred onthe Company’s behalf by its former parent, BPZ & Associates, Inc. (“Associates”)prior to the merger with Navidec.

 

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*The Navidec Merger*

The Company’s description of the transaction wasamended to clarify that the merger is considered, from an accountingperspective to be in substance, a capital transaction rather than a businesscombination.  On July 8, 2004, Navidec and BPZ-Texas entered into a MergerAgreement (the “Merger Agreement”) providing for the acquisition of BPZ-Texasby Navidec in a transaction intended to qualify as a tax free share exchange(the “Merger”).  The Merger wasconsummated on September 10, 2004. The Company changed its namefrom Navidec, Inc. to BPZ Energy, Inc. on February 4, 2005.  Although the Company’s name has been changed,the pre-merger company may be referred to as Navidec in this filing to avoidconfusion.

The Merger was structured from a legal standpoint asthe acquisition of BPZ-Texas by Navidec; however, the stockholder group ofBPZ-Texas obtained majority ownership and management control of the combinedcompany.  It was equivalent to theissuance of common stock by BPZ-Texas for the net assets of Navidec,accompanied by a recapitalization.  Theaccounting treatment is identical to that resulting from a reverse merger ofBPZ-Texas with Navidec under SFAS 141, except that no goodwill or otherintangible asset was recorded.

The Company’s historical financial statements prior tothe acquisition become those of BPZ-Texas (accounting acquirer). Operationsprior to the Merger are those of BPZ-Texas and earnings per share for periodsprior to the Merger are restated to reflect the number of equivalent sharesreceived by BPZ-Texas, with the historical stockholders’ equity of BPZ-Texasprior to the Merger being retroactively restated (a recapitalization) toreflect the equivalent number of shares received in the Merger by BPZ-Texas andthe capital structure (the number and type of shares issued) of Navidec (thelegal acquirer). Accordingly, all financial statements included herein orincorporated by reference reflect the acquisition by BPZ-Texas of the netassets of Navidec and the recapitalization of BPZ-Texas’ common stock based onthe exchange ratio provided in the Merger Agreement.

*NavidecOptions*

The Company also restated its consolidated financialstatements to reflect a change in the valuation of the options assumed by theCompany in the Merger with Navidec to purchase 1,332,076 shares of Navideccommon stock.  All shares underlying suchoptions are issuable as common stock of the Company.  The proceeds from the exercise of the assumedoptions must be remitted to NFS pursuant to the Merger Agreement.  As such, the Company believes that $0.00should be the exercise price input in the Black-Scholes Model used to valuethese instruments.  In its priorrestatement on Form 8-K/A filed January 17, 2006, the Company used the statedexercise price (weighted average) per the respective option agreements.  The fair value of these options wasdetermined to be $3.21 (compared to $1.48 in the Company’s prior restatement)based on the exercise price noted and the market price of the underlying commonstock on the date of grant, among other Black-Scholes inputs.

*Operationsof NFS*

The Company also restated its consolidated financialstatements to exclude the operations of NFS for all periods presented.  The Merger Agreement provided that all of thepre-merger business operations, assets and liabilities of Navidec would betransferred to a wholly-owned subsidiary, NFS, followed by the transfer ofownership of NFS to the pre-merger shareholders of record as of September 9,2004, the day prior to the consummation of the Merger.  The Companypreviously concluded in its 2004 Form 10-KSB/A filed on January 17, 2006 thatit was the record owner of NFS shares, but that any ownership was at mosttemporary, and restated its consolidated financial statements to account forNFS on the equity method until such time as the final distribution of NFSshares to the pre-merger shareholders has been completed in all respects.  However, the Company subsequently learnedthrough discovery performed with respect to an action the Company filed againstNFS in District Court, Arapahoe County, Colorado (the “Court”) that new sharecertificates of NFS were issued in the names of the shareholders of thepre-merger Navidec effective September 9, 2004 and no NFS certificates wereever issued to the Company.  In addition,a Findings of Fact and Conclusions of Law (the “Order”) issued by the Courtstated that the Company was not a shareholder of NFS at any time afterSeptember 9, 2004.  Based on these findings,the Company has concluded that it should not account for the post-Mergeroperations of NFS in the Company’s consolidated financial statements.

*Allocation of Costs Incurred by Associates*

The Company also restatedits consolidated financial statements as a result of a change in themethodology used to allocate costs from Associates, its former parent.  The Company has identified costs that wereincurred by Associates in support of BPZ-Texas’ activities from BPZ-Texas’inception in August 2001 until the merger with Navidec

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on September 10, 2004. Specific costs incurred byAssociates on behalf of BPZ-Texas have been included in BPZ-Texas’ financialstatements. Additionally, all of Associates’ costs on BPZ-Texas’ projects inexcess of third party reimbursements have been included in BPZ-Texas’sfinancial statements in an effort to reflect all the costs of doingbusiness.  The Company believes itsallocation methodology is reasonable.

Theeffects of the restatement and any reclassification on the December 31,2005 consolidated balance sheet were as follows:
| ** **                                                                                                              | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                              | ** ** | **As Reported**            | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|                                                                                                                    |       |                            |       |   |   |   |   |
| **ASSETS**                                                                                                              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                         |       |                            |       |   |   |   |   |
| Cash and cash  equivalents                                                                                              |       | $                               | 29,455,130 |   | $ | — |   | $ | 29,455,130 |   |
| Value added tax  receivable                                                                                             |       | —                          |       | 362,555 |   | 362,555 |   |
| Prepaid and  other current assets                                                                                       |       | 869,669                         |       | (362,555 | ) | 507,114 |   |
| Total current  assets                                                                                                   |       | 30,324,799                      |       | — |   | 30,324,799 |   |
|                                                                                                                    |       |                            |       |   |   |   |   |
| Property, equipment and  construction in progress, net                                                                  |       | 4,365,040                       |       | — |   | 4,365,040 |   |
| Restricted cash                                                                                                         |       | 1,455,953                       |       | — |   | 1,455,953 |   |
| Investment in Ecuador  property, net                                                                                    |       | 1,945,188                       |       | — |   | 1,945,188 |   |
|                                                                                                                    |       |                            |       |   |   |   |   |
| Total assets                                                                                                            |       | $                               | 38,090,980 |   | $ | — |   | $ | 38,090,980 |   |
|                                                                                                                    |       |                            |       |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                          | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                    |       |                            |       |   |   |   |   |
| Accounts payable                                                                                                        |       | $                               | 747,347    |   | $ | — |   | $ | 747,347 |   |
| Accrued  liabilities                                                                                                    |       | 470,632                         |       | — |   | 470,632 |   |
| Other  liabilities                                                                                                      |       | 70,516                          |       | — |   | 70,516 |   |
| Total current  liabilities                                                                                              |       | 1,288,495                       |       | — |   | 1,288,495 |   |
|                                                                                                                    |       |                            |       |   |   |   |   |
| Long-term debt                                                                                                          |       | 70,908                          |       | — |   | 70,908 |   |
|                                                                                                                    |       |                            |       |   |   |   |   |
| Stockholders’ equity:                                                                                              |       |                            |       |   |   |   |   |
| Preferred stock,  no par value, 25,000,000 authorized, non issued and outstanding                                       |       | —                          |       | — |   | — |   |
| Common stock, no  par value, 250,000,000 authorized; and 40,349,979 shares issued and  outstanding at December 31, 2005 |       | 60,633,684                      |       | (3,760,043 | ) | 56,873,641 |   |
| Additional paid  in capital                                                                                             |       | 2,362,283                       |       | 4,031,128 |   | 6,393,411 |   |
| Deferred  stock-based compensation                                                                                      |       | (3,992,172                      | )          | — |   | (3,992,172 | ) |
| Common stock and  warrants held by affiliate                                                                            |       | (2,458,975                      | )          | 2,458,975 |   | — |   |
| Stock  subscription receivable                                                                                          |       | (230,825                        | )          | — |   | (230,825 | ) |
| Deficit  accumulated during the exploratory stage                                                                       |       | (19,582,418                     | )          | (2,730,060 | ) | (22,312,478 | ) |
|                                                                                                                    |       |                            |       |   |   |   |   |
| Total  stockholders’ equity                                                                                        |       | 36,731,577                      |       | — |   | 36,731,577 |   |
|                                                                                                                    |       |                            |       |   |   |   |   |
| Total  liabilities and stockholders’ equity                                                                        |       | $                               | 38,090,980 |   | $ | — |   | $ | 38,090,980 |   |

 

13

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The effects of therestatement and any reclassification on the unaudited consolidated statement ofoperations for the six and three months ended June 30, 2005 were asfollows:

 
| ** **                                                       | ** ** | **Six Months Ended June 30, 2005** | ** ** | **Three Months Ended June 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **As Reported**                                        | ** ** | **Adjustment**                                                | ** ** | **As Restated** | ** ** | **As Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                                                       | ** ** | ** **                                                  | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                          |       | $                                                           | —     |                                                          | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                             |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Operating and  administrative expenses:                          |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| General and  administrative                                      |       | 1,884,986                                                   |       | —                                                        |       | 1,884,986 |   | 924,197 |   | — |   | 924,197 |   |
| Stock-based compensation                                         |       | 254,270                                                     |       | —                                                        |       | 254,270 |   | 179,270 |   | — |   | 179,270 |   |
| Geological, geophysical  and engineering                         |       | 429,191                                                     |       | —                                                        |       | 429,191 |   | 291,126 |   | — |   | 291,126 |   |
| Depreciation expense                                             |       | 2,295                                                       |       | —                                                        |       | 2,295 |   | 1,645 |   | — |   | 1,645 |   |
| Total operating expenses                                         |       | 2,570,742                                                   |       | —                                                        |       | 2,570,742 |   | 1,396,238 |   | — |   | 1,396,238 |   |
| Operating loss                                                   |       | (2,570,742                                                  | )          | —                                                        |       | (2,570,742 | ) | (1,396,238 | ) | — |   | (1,396,238 | ) |
|                                                             |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Other income (expense):                                          |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Income from investment  in Ecuador property, net of amortization |       | 162,429                                                     |       | —                                                        |       | 162,429 |   | 74,635 |   | — |   | 74,635 |   |
| Equity in loss of NFS                                            |       | (970,894                                                    | )          | 970,894                                                       |       | — |   | (671,688 | ) | 671,688 |   | — |   |
| Loss on issuance of  equity securities by NFS                    |       | (49,414                                                     | )          | 49,414                                                        |       | — |   | 224,884 |   | (224,884 | ) | — |   |
| Interest expense                                                 |       | (7,967                                                      | )          | —                                                        |       | (7,967 | ) | (2,305 | ) | — |   | (2,305 | ) |
| Amortization of deferred  financing costs                        |       | (57,910                                                     | )          | —                                                        |       | (57,910 | ) | (28,955 | ) | — |   | (28,955 | ) |
| Miscellaneous income                                             |       | 13,173                                                      |       | —                                                        |       | 13,173 |   | 4,695 |   | — |   | 4,695 |   |
| Total other income  (expense)                                    |       | (910,583                                                    | )          | 1,020,308                                                     |       | 109,725 |   | (398,734 | ) | 446,804 |   | 48,070 |   |
|                                                             |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Loss before income taxes                                         |       | (3,481,325                                                  | )          | 1,020,308                                                     |       | (2,461,017 | ) | (1,794,972 | ) | 446,804 |   | (1,348,168 | ) |
|                                                             |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Income taxes                                                     |       | —                                                      |       | —                                                        |       | — |   | — |   | — |   | — |   |
| Net loss                                                         |       | $                                                           | (3,481,325 | )                                                             | $          | 1,020,308 |   | $ | (2,461,017 | ) | $ | (1,794,972 | ) | $ | 446,804 |   | $ | (1,348,168 | ) |
|                                                             |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Basic and diluted net  loss per share                            |       | $                                                           | (0.21      | )                                                             | $          | 0.11 |   | $ | (0.10 | ) | $ | (0.11 | ) | $ | 0.06 |   | $ | (0.05 | ) |
|                                                             |       |                                                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding                       |       | 16,417,713                                                  |       | 9,439,370                                                     |       | 25,857,083 |   | 16,530,708 |   | 9,430,088 |   | 25,960,796 |   |

 

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Theeffects of the restatement and any reclassification on the unauditedconsolidated statement of cash flows for the six months ended June 30,2005 were as follows:
| ** **                                                                   | ** ** | **For Six Months Ended June 30, 2005** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **As Reported**                                                 | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                                                                   | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                       |       |                                                                 |       |   |   |   |   |
| Net loss                                                                     |       | $                                                                    | (3,481,325 | ) | $ | 1,020,308 |   | $ | (2,461,017 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                                                 |       |   |   |   |   |
| Stock-based  compensation                                                    |       | 254,270                                                              |       | — |   | 254,270 |   |
| Depreciation expense                                                         |       | 2,295                                                                |       | — |   | 2,295 |   |
| Amortization of  investment in Ecuador property                              |       | 42,760                                                               |       | — |   | 42,760 |   |
| Amortization of  deferred financing fees                                     |       | 57,910                                                               |       | — |   | 57,910 |   |
| Equity in loss of  Navidec Financial Services                                |       | 970,894                                                              |       | (970,894 | ) | — |   |
| Loss on issuance of  equity securities by Navidec Financial Services         |       | 49,414                                                               |       | (49,414 | ) | — |   |
| Changes in operating  assets and liabilities:                                |       |                                                                 |       |   |   |   |   |
| Decrease in accounts  payable                                                |       | (62,033                                                              | )          | — |   | (62,033 | ) |
| Decrease in accrued  liabilities                                             |       | (181,535                                                             | )          | — |   | (181,535 | ) |
| Increase in other  liabilities                                               |       | 91,758                                                               |       | — |   | 91,758 |   |
| Net cash used by  operating activities                                       |       | (2,255,592                                                           | )          | — |   | (2,255,592 | ) |
|                                                                         |       |                                                                 |       |   |   |   |   |
| Cash flows from  investing activities:                                       |       |                                                                 |       |   |   |   |   |
| Property and equipment  additions                                            |       | (22,222                                                              | )          | — |   | (22,222 | ) |
| Restricted cash                                                              |       | (1,200,000                                                           | )          | — |   | (1,200,000 | ) |
| Net cash used by  investing activities                                       |       | (1,222,222                                                           | )          | — |   | (1,222,222 | ) |
|                                                                         |       |                                                                 |       |   |   |   |   |
| Cash flows from  financing activities:                                       |       |                                                                 |       |   |   |   |   |
| Repayments of  borrowings                                                    |       | (178,007                                                             | )          | — |   | (178,007 | ) |
| Net cash used by  financing activities                                       |       | (178,007                                                             | )          | — |   | (178,007 | ) |
|                                                                         |       |                                                                 |       |   |   |   |   |
| Net decrease in cash  and cash equivalents                                   |       | (3,655,821                                                           | )          | — |   | (3,655,821 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 4,014,191                                                            |       | — |   | 4,014,191 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                                    | 358,370    |   | $ | — |   | $ | 358,370 |   |

 

**Note 3 — Private Placement Receivable**

The Company recorded a receivable of $12,325,500 upon the signing of a Stock Purchase Agreement related to the private placement of 4,482,000 shares of common stock on June 30, 2006. Proceeds from the private placement were received in full in July 2006.

**Note 4 — Value Added Tax Receivable**

Value-added tax (referredto as “IGV” in Peru) is generally imposed on goods and services at a rate of19%. Peru currently has an early recovery system for exploration companies.Under this regime, IGV paid on the acquisition of goods and services useddirectly in hydrocarbon exploration activities can be recovered without havingto wait until a commercial discovery takes place or production begins. TheCompany has applied for early recovery of IGV paid as it does not anticipatefirst sales of power to the Peruvian power market until 2007.   TheCompany’s value added tax receivable balance as of June 30, 2006 was$2,016,194, of which approximately $1,500,000 was subsequently received duringthe third quarter of 2006.  

**Note 5 — Inventories**

Inventories consistprimarily of tubular goods and spare parts for production equipment, stated atthe lower of cost or market.

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**Note 6 — Prepaid and Other CurrentAssets**

Below is a summary of prepaid and other current assetsas of June 30, 2006 and December 31, 2005:
| ** **                        | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                              |       |                        |       |                            |       |
| Prepaid expenses  and other       |       | $                           | 1,441,002  |                            | $          | 270,903 |   |
| Deposits                          |       | 352,405                     |       | 181,347                         |       |
| Interest  receivable              |       | 21,863                      |       | 54,864                          |       |
| Prepaid and  other current assets |       | $                           | 1,815,270  |                            | $          | 507,114 |   |

 

Prepaidexpenses and other consist primarily of insurance premiums related to theCompany’s operations.

**Note 7 — Property, Equipment and Construction inProgress**

Below is a summary of property, equipment and construction in progress as of June 30, 2006 and December 31, 2005:
| ** **                                              | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                                                    |       |                        |       |                            |       |
| Construction in  progress:                              |       |                        |       |                            |       |
| Power plant and related equipment                       |       | $                           | 2,476,120  |                            | $          | 2,252,413 |   |
| Platforms and wells                                     |       | 8,088,909                   |       | 1,190,707                       |       |
| Pipelines and processing facilities                     |       | 1,297,510                   |       | 512,357                         |       |
| Barge and  related equipment                            |       | 5,832,376                   |       | —                          |       |
| Office  equipment, leasehold improvements, and vehicles |       | 796,808                     |       | 439,359                         |       |
| Accumulated  depreciation and amortization              |       | (125,032                    | )          | (29,796                         | )          |
| Net property,  equipment and construction in process    |       | $                           | 18,366,691 |                            | $          | 4,365,040 |   |

 

Asof June 30, 2006, the Company incurred costs associated with exploration andproduction of natural gas reserves and the complementary development ofgas-fired power generation for its own use in Peru.  The costs relate to the initial engineeringdesign work for the power plant, gas processing facility and pipelines, modernizationand refurbishment costs of the platform tender assist drilling rig, andacquiring and refurbishing one of the Company’s offshore platforms located inBlock Z-1, and the purchase of a deck barge and related equipment. The Companyalso incurred costs for office equipment and leasehold improvements for itsoffices in Houston, Peru and Ecuador and for vehicles used in the Peruvianoperations.

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

In connection with itsproperties in Peru, the Company has obtained two performance bonds totaling$1,650,000 to guarantee its obligations and commitments.  As of June 30, 2006 BPZ had restrictedcash deposits of $1,455,953 ($5,953 represents interest earned), which collateralizesthe performance bonds.  In addition tothe cash collateral posted by BPZ, an individual shareholder of the Companyprovided a guarantee in the amount of $200,000 to the financial institutionwhich issued such bond to secure the Company’s performance.  Both performance bonds were issued byPeruvian banks and their terms are governed by the corresponding licensecontract or technical evaluation agreement.

**Note 9 — Investment in EcuadorProperty**

The Company has an investment in an oil and gas property inEcuador (the “Santa Elena Property”) totaling $1,851,396 and $1,945,188 as ofJune 30, 2006 and December 31, 2005, respectively.  The Company accounts for this investmentunder the cost method and records its share of cash received or paid as otherincome or expense.  Since the Company’sinvestment represents ownership of an oil and gas property, which is adepleting asset, the Company is amortizing the cost of the investment on astraight-line basis over the remaining term of the license agreement whichexpires in May 2016.  Accordingly,the Company recorded amortization expense of $46,896 and $93,792 for the threeand six months ended June 30, 2006, respectively, compared to $21,380 and$42,760 in the comparable periods of 2005.

**Note 10 — Stockholders’ Equity**

The Company has25,000,000 shares of preferred stock, no par value and 250,000,000 shares ofcommon stock, no par value, authorized for issuance.

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**Private Placement of Common Stock**

On June 30, 2006 the Company completed a private placement of common stock for proceeds of $12,325,500.  The proceeds were received in July 2006.  The company sold 4,482,000 shares to eight institutional and accredited investors at a price of $2.75 per share.  There were no warrants or dilutive securities issued to the investors in connection with the offering.  The offering was placed directly by the Company and there were no placement fees.  However, the Company issued warrants to purchase 150,000 shares of the Company’s common stock to Morgan Keegan & Company, Inc. in consideration for their financial advisory services. In connection with the private placement, the Company is obligated to prepare and file with the SEC a Registration Statement on Form S-1 no later than 30 days after the filing of its restated Form 10-K for the years ended December 31, 2005 and 2004, including the quarterly periods contained therein, as well as its restated Form 8-K/A filed on January 17, 2006 and its Form 10-Q for the quarter ended March 31, 2006, and will use its reasonable best efforts to obtain its effectiveness no later than 150 days after closing.  If the Registration Statement is not filed by the required date, the Company must pay a one-time amount equal to 3.0% of the purchase price of the shares, approximately $369,750. In addition, if the Registration Statement is not declared effective by the required dates and the Company became liable to the investors for liquidated damages in an amount equal to 2.0% of the purchase price of the shares, approximately $246,500, for each thirty day period until the Registration Statement is declared effective by the SEC.  However, payments under the liquidated damage rate are subject to a cap of 10% or five 30-day periods.  If the Registration Statement has not been declared effective by 150 days after closing, then the Company shall make a one-time payment to the investors equal to 5% of the purchase price of the shares, approximately $616,250.  As such, total liquidated damages are subject to a cap of 18% of the purchase price of the shares, approximately $2,218,500. These liquidated damages, if applicable, are payable at the sole discretion of the Company, by cash or by the issuance of Company common stock.

On March 10, 2006 the Company completed a private placement of 1,670,000 shares of common stock, no par value, to four institutional and accredited investors pursuant to a Stock Purchase Agreement. The common stock was priced at $3.00 per share resulting in proceeds to the Company of $5,010,000.  In connection with the private placement, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 within sixty 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 the Company became liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,100, for each thirty day period until the Registration Statement is declared effective by the SEC. These liquidated damages are payable, at the sole discretion of the Company, by cash or by the issuance of Company common stock.  As such, 22,511 shares of common stock were issued during the three months ended June 30, 2006, to those investors for liquidated damages.

On July 19, 2005, the Company completed a private placement of 11,466,000 shares of common stock, no par value, pursuant to a Stock Purchase Agreement.  The common stock was priced at $3.00 per share, resulting in net proceeds to the Company of $31,917,214.  In connection with the private placement, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days from July 19, 2005. The Registration Statement was not declared effective by the required date and the Company became liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $343,980, for each thirty day period until the Registration Statement is declared effective by the SEC. Certain of the private placement investors, totaling 79% of the aggregate investment, have agreed to accept common stock in lieu of cash for a maximum period of 90 days.  As such, 230,455 and 427,079 shares of common stock were issued during the three and six months ended June 30, 2006, respectively to those certain investors for liquidated damages.

**Stock Subscription Receivable**

During 2004, the Company issued 236,528 shares to an individual investor for $119,175 of cash proceeds and a subscription receivable of $230,825.  The investor has pledged assets to a Peruvian bank which secure one of the Company’s performance bonds.  The subscription receivable is due at such time as the Company obtains its own performance bond to replace the one posted by the investor or until the performance bond is no longer required.

**Potentially Dilutive Securities**

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

17

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| ** **                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Stock options outstanding                                                     |       | 3,933,652         |       | 2,878,652             |       |
| Warrants outstanding                                                          |       | 250,000           |       | 100,000               |       |
| Shares issuable to consultant for services                                    |       | —            |       | 10,000                |       |
| Contingent incentive earn-out shares                                          |       | 260,000           |       | 485,000               |       |
| Contingent Merger earn-out shares                                             |       | 9,000,000         |       | 9,000,000             |       |
| Total potentially  dilutive securities                                        |       | 13,443,652        |       | 12,473,652            |       |
|                                                                          |       |              |       |                  |       |
| Shares available for grant pursuant to Long-Term Incentive  Compensation Plan |       | 3,110,000         |       | 2,880,000             |       |

 

**Stock Options Outstanding**

In connection with theMerger, BPZ, as the accounting acquirer, assumed all Navidec stock options outstanding, which were fully vested on thedate of the Merger and expire on September 10, 2007.  Exerciseprices on these stock options range from $1.30 to $1.93 per share.  Under the terms of the Merger agreement, NFSis entitled to receive all proceeds from the exercise of these options.  As of December 31, 2005, there were653,652 Navidec stock options outstanding. During the six month period ended June 30, 2006, 275,000 Navidecstock options were exercised and378,652 stock options remain outstanding.

In connection with the Merger, BPZ also issued optionsto purchase 1,500,000 shares of common stock at an exercise price of $2.00 pershare to NFS. Such options expire on July 31, 2006. Subsequent to theMerger, NFS conveyed 540,000 of such options to third parties. During 2005,275,000 options had been exercised, resulting in net proceeds to the Company of$550,000. As of June 30, 2006 there were 1,225,000 of such optionsoutstanding, of which 810,000 were held by NFS.

Additionally, the Companygranted options to purchase 1,000,000 shares of common stock at an exerciseprice of $1.30 per share to the former CEO of Navidec in connection with hisservice as a director and financial consultant to the Company.  Of such stock options, 500,000 were fullyvested on the date of the Merger.  Vestingof the remaining 500,000 stock options is contingent upon the receipt ofadditional investment proceeds totaling $6 million, including proceeds from theexercise of outstanding warrants, provided such funding is received no laterthan September 10, 2006. These stock options, when vested, will expire 10years from the date of grant. They were recorded at a fair value of $1.20 pershare using the Black-Scholes model. The unvested options are being amortizedover the 24-month vesting period at the rate of $25,000 per month unless theCompany concludes that such options are no longer probable of vesting.

Allof the above stock options were recorded at fair market value on the date ofthe Merger.  Accordingly, no disclosureof pro forma results of operations under SFAS 123(R) is required.

**Warrants Outstanding**

In connection with the private placement of 11,466,000shares of common stock, Morgan Keegan & Company, Inc. alsoreceived warrants to purchase 100,000 shares of the Company’s common stock atan exercise price of $3.00 per share. Such warrants expire on July 19,2010. These warrants were valued at $325,000 using the Black-Scholes model,which amount was treated as additional non-cash stock offering costs.

In connection with the private placement of 4,482,000shares of common stock, Morgan Keegan & Company, Inc. alsoreceived warrants to purchase 150,000 shares of the Company’s common stock atan exercise price of $3.00 per share for their financial advisory services.Such warrants expire on June 30, 2011. These warrants were valued at $248,645using the Black-Scholes model, which amount was treated as additional non-cashstock offering costs.

**Contingent Incentive Earn-Out Shares**

During 2005, the Company’s Board of Directors awardeda total of 485,000 shares of incentive stock awards to three of the Company’sofficers. The incentive stock awards vest and the earn-out shares are issuableonce the 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, the same target asthe Merger earn-out shares (see below). The total future stock-basedcompensation expense associated with these contingent incentive stock awards is$2,134,000 of which $441,517 and $441,517 correspond to the six months endingJune 30, 2006 and twelve months ending December 31, 2005, respectively. As theCompany has not yet obtained a firm financing commitment for its gas-to-powerproject, the Company does not consider the achievement of

18

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thistarget to be probable for accounting purposes and is not currently accruing theassociated stock-based compensation expense. However, one of the Company’s officers resigned from the Company and itssubsidiaries effective June 15, 2006, and as such 225,000 of the unvestedcontingent incentive stock awards, representing $990,000 were forfeited.

**Merger Earn-Out Shares**

Under the terms of the Merger Agreement, the Companyis committed to issue 18,000,000 shares to the former shareholders of BPZ-Texason a contingent earn-out basis if the Company achieves certain reserve andproduction goals. The first earn-out target relating to reserves was achievedin December 2004 and 9,000,000 of the earn-out shares were issuable atthat time. However, the contingent earn-out shares could only be issued afterthe shareholders approved an increase in the number of authorized common sharesof the Company. The shareholders approved an increase in the number ofauthorized shares from 20,000,000 to 250,000,000 at its 2005 Annual Meetingheld on July 1, 2005 and the 9,000,000 shares were issued at that time.The remaining 9,000,000 earn-out shares are issuable once the Company isentitled to receive as its proportionate share from gross production from anyoil and gas wells owned or operated by the Company not less than 2,000 barrelsof oil per day or its equivalent (approximately 12 million cubic feet of gasper day) prior to December 28, 2007

For accounting purposes, the earn-out arrangement is treatedas a stock dividend because the earn-out is payable to the shareholders of theaccounting acquirer, BPZ-Texas. Accordingly, except for a retroactive increasein the number of common shares outstanding for all periods presented, noaccounting entry is required upon the issuance of the earn-out shares.

**Long-Term Incentive Compensation Plan**

The BPZ Energy, Inc. 2005 Long-Term IncentiveCompensation Plan (the “LTIP” or “Plan”) permits the Board of Directors toaward eligible employees, directors and consultants with incentive-based andnon-incentive-based compensation. The maximum number of shares of stock of theCompany that may be subject to incentives under the Plan, including withoutlimitation incentive options, is 4,000,000 shares, and such shares shall bereserved at all times until issued under the Plan. Of such amount, no more than1,600,000 shares in the aggregate shall be eligible for the issuance ofperformance shares, stock grants, restricted stock grants and other stock-basedincentives. The LTIP will be administered and managed within the discretion ofcompensation committee of the Company or, in the absence of such committee, bythe Board of Directors. Incentives under the LTIP may be granted to eligibleemployees, directors or consultants in any one or a combination of incentiveoptions, non-statutory stock options, stock appreciation rights, restrictedstock grants, stock grants and performance shares. As of June 30, 2006 therewere 1,780,000 shares available to be granted by the Company under the LTIP.

**Note 11 — Commitments andContingencies**

*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 affected 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 noaction with respect to the transfer of NFS shares which, pursuant to the termsof the Merger Agreement, was agreed to be handled by NFS, including anynecessary qualifications or registrations under applicable

19

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securities laws. Further, the Company believed, basedon information provided by NFS and its advisors, that NFS had undertaken tocomply with all applicable registration requirements. Additionally, thetransfer, which was tantamount to a stock dividend to the pre-mergershareholders of Navidec, Inc., did not involve cash consideration, making afinding of any damage to shareholders unlikely. Finally, it is the Company’sunderstanding that NFS is taking action to register the NFS shares and iscommunicating with the SEC to address this issue to the SEC’s satisfaction.

Although the Companyregards the possibility of liability resulting from the transfer of NFS asremote, the Company does recognize that there may be a risk of such liability,and therefore cautions current and prospective Company shareholders of suchrisk.

*PeruProperties*

The Company has various obligations and commitments inconnection with its properties in Peru. In connection with its Block Z-1property, the Company posted a $1,300,000 performance bond inJanuary 2005. To satisfy its current performance obligation under thesecond exploration phase of the Block Z-1 license agreement, the Company mustdrill at least one well or acquire a specified amount of seismic data prior toJuly 2007. The Company intends to satisfy its obligation by drilling awell which is currently budgeted to cost approximately $6,000,000. In addition,in connection with its Block XIX property, the Company posted a $350,000 performancebond in August 2005. To satisfy its current performance obligation underthe second exploration phase of the Block XIX license agreement which began inAugust 2005 and will last for 24 months, the Company must acquire andprocess a specified amount of 2-D seismic data and prepare an integratedgeological, geochemical and reservoir engineering evaluation of hydrocarbonprospects.

The Company acquired four offshore platforms inconnection with its Block Z-1 property. The Company is currently in the processof refurbishing one of the offshore platforms and intends to maintain all ofsuch platforms for use throughout the life of the Block Z-1 contract. Theseplatforms revert back to the Government of Peru at the end of the contract,provided they are in good working condition, with no further obligation to thecompany to dismantle or remove them. The Company and its legal advisors havereviewed Peruvian law and existing regulations from the Peruvian Ministry ofEnergy and Mines in conjunction with the requirements of FAS 143 “Accountingfor Asset Retirement Obligations” (“ARO”) as it applies to tangible long livedassets and their future retirement and dismantlement. The Company has concludedthat there is no legal obligation to dismantle the platforms, as defined in FAS143, and therefore recognition of an ARO is not required. Accordingly, no suchprovision is reflected in the accompanying consolidated financial statements.If, however, current laws or regulations were changed or the platforms were nolonger in good working order, the Company could be obligated to dismantle andremove them. The current estimated cost to dismantle an offshore platform isestimated to be approximately $2 million, depending upon the condition of theplatform and the depth of the water.

In December 2005, the Company signed a drillingcontract with Petrex S.A., a subsidiary of Saipem SpA of Italy. Under thecontract, Petrex S.A. will provide a platform rig capable of drilling to 16,000feet and upgrade the rig to meet the Company’s specifications. The Companyintends to utilize the rig for the initial development of the Corvina gas fieldand may also utilize it for the expected development of the Albacora oil field,and potential appraisal wells in the Piedra Redonda gas field. The Company hasagreed to pay a $5.5 million fee to mobilize and upgrade the rig. In exchange,the Company will receive a competitive fixed day rate and exclusive rights touse the rig, at its option, during the two-year period commencing with deliveryof the rig.

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 will be renamedas Block XXII consisting of approximately 948,000 acres and will encompass a significantportion of the Lancones basin.  Inconnection with this block the Company will have to post a performance bond toguarantee its various obligations and commitments. 

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However, negotiations onthe terms of the license contract are still underway, 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 informed the Company that itsproposal for Block XXIII, which consists of approximately 248,000 acres and islocated onshore in northwest Peru between the Company’s Blocks Z-1 and XIX, wasthe winning bid in their recent tender process. The Company is in the process of presenting all necessary documentationto become the qualified operator of this new block and will then beginnegotiation of the exploration and production license contract. The Company’sproposal covers only the exploration period and commits the Company to drill acertain number of wells, acquire certain amount of either 2-D or 3-D seismicdata and prepare an integrated geological, geochemical and reservoirengineering evaluation of the hydrocarbon prospects in the block.  In connection with this block, after the licensecontract has been signed, the Company will have to post a performance bond toguarantee its various obligations and commitments. However, the Company doesnot have sufficient information to determine the timing, nor estimate the valueof the performance bond to be posted in connection with this property.

*FinancingActivities*

On May 27, 2005, BPZ signed a Mandate Letter withthe International Finance Corporation (“IFC”), a member of the World Bank Groupbased in Washington, D.C., to facilitate the financing of the Company’s initialcapital expenditure program in Block Z-1 in northwest Peru. On November 1,2005, an amendment was signed extending the original term of the Mandate Letterfrom December 31, 2005 to August 31, 2006. On August 29, 2006, anamendment was signed extending the original term of the Mandate Letter fromAugust 31, 2006 to November 30, 2006. The Mandate Letter specifies thatIFC will appraise BPZ’s project in Peru to determine the feasibility andstructure of a potential financing transaction. Any IFC investment will dependon the project and the Company meeting IFC’s financing criteria, the overallfinancing plan being acceptable to IFC, approval of the investment bymanagement and the Board of IFC, and the execution of all appropriatedocumentation, in form and substance satisfactory to IFC. As part of theMandate, BPZ agreed to pay total fees of $285,000 during the appraisal periodand customary expenses. As of June 30, 2006, $85,000 of fees andapproximately $62,682 of reimbursable out-of-pocket expenses had been incurred.

In connection with the July 2005 private placement of11,466,000 common shares, the Company was obligated to prepare and file withthe SEC a Registration Statement on Form S-1 and to use its best efforts tocause the Registration Statement to be declared effective by the SEC no laterthan ninety days from July 19, 2005. The Registration Statement was notdeclared effective by the required date and the Company became liable to theinvestors for liquidated damages in an amount equal to 1.0% of the purchase priceof the shares, approximately $343,980, for each thirty day period until theRegistration Statement is declared effective by the SEC. Certain of the privateplacement investors, totaling 79% of the aggregate investment, have agreed toaccept common stock in lieu of cash for a maximum period of 90 days. The 90-dayperiod ended on February 14, 2006 and the Company began paying the full amountof liquidating damages in cash.  A newagreement was made on April, 17 2006 with certain private placement investors,totaling 76% of the aggregate investment to accept common stock in lieu of cashuntil the Registration Statement on Form S-1 is declared effective by the SEC.As of June 30, 2006, the Company’s Registration Statement on Form S-1 had notbeen declared effective by the SEC and Company continues to be liable to theinvestors for the aforementioned liquidated damages.

In connection with the March 10, 2006 private placement of1,670,000 common shares, the Company was obligated to prepare and file with theSEC a Registration Statement on Form S-1 and to use its best efforts to causethe Registration Statement to be declared effective by the SEC no later thanninety days, from March 8, 2006.  TheRegistration Statement was not declared effective by the required date and theCompany became liable to the investors for liquidated damages in an amountequal to 1.0% of the purchase price of the shares, approximately $50,100, foreach thirty day period until the Registration Statement is declared effectiveby the SEC.  Such liquidated damages arepayable in common stock or cash at the Company’s discretion.  As of the date of this filing, the Company’sRegistration Statement on Form S-1 had not been declared effective by the SECand Company continues to be liable to the investors for the aforementionedliquidated damages.

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

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**Note 12 — Legal Proceedings**

*SECInquiry of Navidec*

Navidec, Inc. was advised in a letter datedFebruary 24, 2004 that the SEC was conducting an informal inquiry todetermine whether Navidec, Inc. had violated federal securities laws. TheSEC made an informal request that Navidec voluntarily produce certaindocuments, which were provided to the SEC in May 2004. Based on theinquiries made and the information requested, the Company believes that the SEC’sinvestigation relates, at least in part, to the restatement of reportedearnings for the first and second quarters of 2003 by Navidec, Inc. Thisrestatement was reported in Navidec, Inc.’s Form 10-Q for the thirdquarter of 2003 filed on December 11, 2003.

In December 2004, the Company received notice that theSEC had issued an Order Directing a Private Investigation and DesignatingOfficers to Take Testimony, and would be conducting a formal investigation. BPZis cooperating fully with the SEC in this matter. As of December 31, 2005, atotal of approximately $ 50,000, primarily in legal fees, had been incurred inconnection with the SEC investigation. Pursuant to the Merger Agreement, theCompany has been indemnified by NFS for the costs of the SEC investigation andNFS has borne the costs incurred to date. BPZ is not aware of the futureactions, if any, which the SEC intends to pursue in this matter, but noassurance can be given that the investigation will be resolved without negativeconsequences to the Company.

*Transferof Ownership in NFS*

On July 8, 2004, Navidecand BPZ-Texas entered into a Merger Agreement which was consummated onSeptember 10, 2004. The Merger Agreement provided that all of the pre-mergerbusiness operations, assets and liabilities of Navidec would be transferred toa wholly-owned subsidiary, Navidec Financial Services, Inc., followed by thetransfer of NFS to the pre-merger shareholders of record as of September 9,2004, the day prior to the consummation of the Merger. See Note 2 to the ConsolidatedFinancial Statements, included in this filing, for detailed discussionregarding the Merger.

The Merger Agreementprovided that the transfer of all of the pre-merger business operations, assetsand liabilities of NFS was effective as of September 9, 2004. Accordingly, theCompany originally believed that it had no continuing ownership of NFS and,therefore, did not account for the post-merger operations of NFS in thepresentation of its financial statements. After receipt of comments from the SECin connection with its review of the Company’s registration statement on FormSB-2 originally filed on July 27, 2005 and further review of this issue, theCompany concluded it was the record, but not beneficial, owner of NFS shares,and that any ownership interest was at most temporary. The Company thereforedecided to restate its financial statements to more accurately reflect theimpact of its temporary ownership of NFS on the equity method. However, the SECcontinued to comment on the accounting presentation of the Company’s ownershipof NFS.

In part because ofdifficulty obtaining necessary information from NFS to clarify the ownershipissue, the Company commenced an action against NFS (the “Action”) on or aboutFebruary 13, 2006, in District Court, Arapahoe County, Colorado, seekingdissolution of NFS, the appointment of a receiver, and access to NFS corporaterecords. The Company commenced the Action uncertain whether or when therequired spin-off of NFS shares pursuant to the terms and conditions of theMerger had occurred under Colorado corporate law. The Company asserted in theAction that it believed it was a record shareholder of NFS as of the date ofthe request and had standing for the relief sought. NFS denied that the Companyhad standing to act as a shareholder and asserted that the Company had not beena shareholder of NFS since September 9, 2004.

**Note 13 —Subsequent Events**

In July 2006, Perupetro officially informed the Companythat its proposal for the 248,000 acre Block XXIII, located onshore innorthwest Peru between the Company’s Blocks Z-1 and XIX, was the winning bid intheir recent tender process.  The Companyis in the process of presenting all necessary documentation to become thequalified operator of this new block and will then begin negotiation of theexploration and production license contract.

Inearly August 2006 the Company incurred a delay of approximately three weeks asa result of a navigation incident which caused the BPZ-01 barge to be groundedon a sand bank in Talara Bay in northwest Peru during the second mobilizationtrip to the Corvina platform. There were no injuries to any of the Company’sstaff, nor to any of the tug boat operator’s crew members. The BPZ-01 is a U.S.flagged vessel and as such was inspected after the incident by the U.S. CoastGuard, to their satisfaction. The barge resumed normal operations immediatelythereafter. Based upon information currently available, the Company estimatesthat total expenses related to this incident to be approximately $1.1 million.The Company believes that the majority of the costs associated with thisincident will be reimbursed through the Company’s insurance or through thirdparties. No assurances can be given that any such recoveries will be sufficientto cover all costs associated with this incident or to the timing of any suchrecoveries. This incident is not expected to have a material impact on theCompany’s operations or business plan.

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

**Business**

BPZ Energy, Inc., aColorado corporation, formerly named Navidec, Inc., was incorporated in 1993and is based in Houston, Texas.  We arean exploratory stage company focused on the exploration and production of oiland natural gas and the complementary development of gas-fired powergeneration.

On September 10,2004, BPZ Energy, Inc., a Texas corporation, consummated a reverse mergerwith Navidec, Inc. whereby BPZ-Texas became a wholly owned subsidiary ofNavidec.  However, in the Merger, thestockholder group of BPZ-Texas obtained majority ownership and managementcontrol of the combined company.  TheMerger was treated, for accounting purposes, as a capital transaction ratherthan a business combination.  It isequivalent to the issuance of common stock by BPZ-Texas for the net assets ofNavidec, accompanied by a recapitalization. This accounting treatment is identical to that resulting from a reversemerger under SFAS 141, except that no goodwill or other intangible asset hasbeen recorded.  On February 4, 2005,we changed our name from Navidec, Inc. to BPZ Energy, Inc.  Although our name has been changed, thepre-merger company may be referred to as Navidec in this filing to avoidconfusion.

The Merger Agreement provided that all of thepre-merger business operations, assets and liabilities of Navidec would betransferred to a wholly owned subsidiary, NFS, followed by the transfer ofownership of NFS to the shareholders of record as of September 9, 2004,the day prior to the consummation of the Merger.  Accordingly, the pre-merger shareholders ofBPZ-Texas were not entitled to receive shares of NFS.  Upon consummation of the Merger, we becamecontractually and irrevocably bound to the spin-off of NFS to such pre-mergershareholders.  All legal requirements forthe transfer of ownership of NFS have been completed except for registration ofthe NFS shares with the Securities and Exchange Commission and the finaldistribution of NFS common shares to the pre-merger shareholders of the Company.  We have no control over the registrationprocess of NFS and cannot predict when, or if, the management of NFS will beable to complete the registration of NFS common shares.  NFS’ results are excluded from the Company’sfinancial statements for all periods presented.

We maintain a registeredbranch office in Peru.  Currently, wehave exclusive rights and license agreements for oil and gas exploration andproduction covering a total of approximately 2.4 million acres in northwestPeru.  Our license contracts cover 100%ownership of both Block Z-1 (739,205 acres), which was signed inNovember 2001 and Block XIX (472,860 acres), which was signed inDecember 2003. Our license contracts provide for an initial explorationperiod of seven to thirteen years and seven to ten years, respectively andrequire that we conduct specified activities on the properties during thisperiod.  If our exploration activitiesare successful, the total contract term can extend up to 30 years for oilexploration and production and 40 years for gas exploration andproduction.  We are currently negotiatinga license contract for Block XXII (948,000 acres) which we previously heldunder a Technical Evaluation Agreement and was referred to as Area VI in ourprevious filings.  In July 2006 Perupetroofficially informed us that our proposal for the 248,000 acre Block XXIII,located onshore in northwest Peru between our Blocks Z-1 and XIX, was thewinning bid in their recent tender process. We are in the process of presenting all necessary documentation tobecome the qualified operator of this new block and will then begin negotiationof the exploration and production license contract.

Through our wholly ownedsubsidiary, SMC Ecuador Inc. (a Delaware corporation), and its registeredbranch in Ecuador, we also own a 10% non-operated working interest in an oiland gas producing property, Block 2, located in the southwest region of Ecuador(the “Santa Elena Property”).  Thelicense agreement covering the property extends through May 2016.

We are in the exploratorystage and to date our activities in Peru have been limited to analysis andevaluation of technical data on the properties and preparation of thedevelopment plans for the properties, including detailed engineering and designof the power plant and gas processing facilities, refurbishment of one of ouroffshore platforms, procuring machinery and equipment for our drillingcampaign, obtaining all necessary environmental and operating permits, as wellas securing the required capital and financing to complete our current plan ofoperation. We have not drilled any wells or recognized any revenues fromoperations and we do not anticipate generating significant revenues from ourproperties prior to the second half of 2007.

**Results of Operations**

Our operating and administrative expenses to date haveconsisted principally of general and administrative costs and

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geological,geophysical and engineering costs. General and administrative costs have increased significantly from$924,197 during the second quarter of 2005 and $1,884,986 during the six monthsended June 30, 2005 to $1,864,396 during the second quarter of 2006 and$3,439,836 during the six months ended June 30, 2006 as a result of ourincreased activity levels, additional personnel and costs associated with beinga public company.  We incurred $397,304of geological, geophysical and engineering costs in the second quarter of 2006and $863,707 during the six months ended June 30, 2006 primarily relatedto our Block Z-1 gas-to-power project, compared to $291,126 and $429,191 in thecomparable periods of 2005.

Also, during the three and six month periods endedJune 30, 2006, we incurred $807,178 and $1,350,093, respectively, instock-based compensation as a result of amortizing the deferred compensationexpense related to (i) a grant of 150,000 shares of restricted commonstock to our independent directors; (ii) a grant of 970,000 shares ofrestricted common stock to three of our officers; (iii) 500,000 stockoptions issued to the former CEO of Navidec; and (iv) shares issued to aconsultant for services, as compared to $179,270 and $254,270  in the three and six month periods ended June30, 2005, respectively as a result of amortizing the deferred compensationexpense related to 500,000 stock options issued to the former CEO of Navidec.

We received net cash distributions from our Ecuadorproperty of $445,099 and $681,650 during the three months and six months endedJune 30, 2006, respectively, compared to net cash distributions of $96,015and $205,189 during the three and six months ended June 30, 2005,respectively.  Since our investmentconsists of an interest in a producing oil and gas property, we are amortizingthe investment on a straight-line basis over the remaining term of the licenseagreement covering the property. Accordingly, we recorded $46,896 and $93,792 of amortization expenseduring the three months and six months ended June 30, 2006, respectively,compared to $21,380 and $42,760 during the three and six months endedJune 30, 2005.

We incurred interest expense of $1,386 and $2,838 duringthe three and six months ending June 30, 2006, respectively, primarily relatedto other debt and interest expense of $2,305 and $7,967 and amortization ofdeferred financing costs of $28,955 and $57,910 for the three and six monthsended June 30, 2005, principally from notes payable incurred to finance theacquisition of SMC in June 2004.

For the three and six months ended June 30, 2006, we recorded registration delay expense totaling $1,101,184 and $2,133,130, respectively, 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 has not been declared effective by the required date and we are liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $343,980, for each thirty day period until the Registration Statement is declared effective by the SEC. 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 sixty 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 the Company became liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,100, for each thirty day period until the Registration Statement is declared effective by the SEC.

As a result of our increased cash balance from the privateplacement of common stock, we received interest income of $206,030 and $428,033during the three and six months ended June 30, 2006, respectively.

We realized a net loss of $3,639,813 or $0.09 per share,during the three months ended June 30, 2006, compared to a net loss of$1,348,168, or $0.05 per share, for the same period in 2005.  For the six months ended June 30, 2006,we realized a net loss of $6,878,479, or $0.17 per share, as compared to a net lossof $2,461,017, or $0.10 per share, for the same period in 2005.

**Plan of Operation**

Our current plan of operation is focused primarily onexploiting the resource opportunities in the offshore Block Z-1 innorthwest Peru, in which we own a 100% working interest.  Our initial project is the development of anintegrated gas-to-power project which is more fully described below.  The capital budget for our plan totalsapproximately $126.7 million. To achieve our objectives, we must obtainsignificant financing from external sources. We are attempting to securefinancing for the project, but we do not have firm commitments from externalsources to allow us to undertake all of the operations envisioned in this plan. See “Liquidity, Capital Resources and Capital Expenditures,”below, for further discussion.

Our first priority is drilling the initial gas wells in theCorvina Field to develop reserves and establish gas

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deliverabilityat expected levels.  InDecember 2005, we signed a drilling contract with Petrex S.A., asubsidiary of Saipem SpA of Italy. Under the contract, Petrex S.A. will providea platform rig capable of drilling to 16,000 feet and upgrade the rig to meetour specifications.  We agreed to pay a$5.5 million fee to mobilize and upgrade the rig.  In exchange, we will receive a competitivefixed day rate and exclusive rights to use the rig, at our option, during thetwo-year period commencing with delivery and final acceptance of the rig which occurredin September 2006.  In addition, afterthe guaranteed two-year period, we have the option to extend the contract foran additional year at market rates.

The Corvina Field has an existing platform which has beenrefurbished.   The platform was evaluatedas fit for operations by the independent risk management consulting firm ofABSG Consulting, Inc. and is ready for drilling operations. Accordingly, wecommenced mobilization of the drilling rig to the Corvina platform in July 2006,and began drilling operations in September 2006.

In April 2006 we acquired and equipped a deck barge thatwill be used to transport the drilling rig to the Corvina platform and then actas a tender for drilling operations at Corvina, and our other properties.  The large deck barge is also adequate to hostproduction facilities.  The deck barge,officially named BPZ-01, is equipped with a 200 ton crane for loading andoff-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 an important element in the Company’sstrategy to control costs by allowing the use of existing platforms andavoiding the use of high priced drill ships or barges.

Our initial plans call for the drilling of three new wellsfrom the existing platform.  There isalso a shut-in gas well which we intend to recomplete and utilize for gasproduction.  We have secured all tubulargoods to meet our planned needs for the first two gas wells of the initialthree-well drilling campaign.  We haveobtained the required environmental and drilling permits in order to commencedrilling operations.  The Company spudits first well in the Corvina field in September 2006 and drilling to totaldepth is expected to take approximately 28 days.  The drilling of this first well at Corvinawill satisfy our contractual exploration commitment under the current secondexploration period of the Block Z-1 License Contract.  Further development drilling from theexisting platform, encompassing three additional wells, is expected to befunded from project cash flows after the power plant is operational.

Our plan of operation envisions the installation of acompany-owned 160 megawatt (‘‘MW’’) gas-fired electric generation plant nearthe town of Caleta Cruz, in northwest Peru. In August 2005 we awarded the turnkey contract for the engineering,procurement and construction (EPC) of the power plant project to BTEC TurbinesLP of Houston (“BTEC”).  The contract wasawarded following a comprehensive six month bidding process that included fieldvisits by all of the bidders.  Under theEPC contract, the final terms of which are being negotiated, BTEC is expectedto supply two General Electric Frame 7 simple-cycle gas-fired turbines.  BTEC will also act as the main contractor forthe design, transportation, construction, startup and commissioning of thepower plant.  Our plan is to own 100% ofthe power plant.  Accordingly, our revenuesfrom the natural gas delivered to the power plant will be derived from the saleof electricity.

We intend to construct a 10-mile offshore pipeline totransport natural gas from the Corvina Field to the power plant site at CaletaCruz.  The power plant site has anexisting substation and power transmission lines which, with certain upgrades,are expected to be capable of handling up to 300 MW of power.  In order to support our proposed electricgeneration project, we recently commissioned an independent power marketanalysis for the region.  The Peruvianelectricity market is deregulated and power is transported through aninterconnected national grid managed by the Committee for Economic Dispatchingof Electricity (known as “COES”).  Basedon this study, we believe that we will be able to sell economic quantities ofelectricity from our initial 160 MW power plant at Caleta Cruz.  We believe there may be an opportunity in thefuture to generate and profitably sell significantly greater volumes of powerinto the Peruvian and Ecuadorian power markets.

Primarily as a result of delays in obtaining a drillingrig, the projected goal for first sales of power to the Peruvian powermarket is nowthe second half of 2007.  This timelineis subject to many factors, including securing necessary financing commitments,which are beyond our control.  Based onthe revised timeline, we intend to focus our capital expenditures on criticaldrilling activities.  Procurementactivities on other phases of the project will be delayed or rescheduledaccordingly.  We believe that we havesufficient capital resources to fund our initial drilling program.  See “Liquidity,Capital Resources and Capital Expenditures” below for further discussion.

In addition to the local power market targeted by ourproject in Peru, we intend to simultaneously develop a gas sales strategy innearby Ecuador to capitalize on what we believe to be significant upside gaspotential of the Corvina and Piedra Redonda Fields located in Block Z-1, aswell as the potentially significant natural gas resources in the adjacentonshore Block XIX.  These properties arewithin 30 miles of the Ecuadorian border and can be developed for export salesof either raw gas or power generation via connection to the transmission systemof Ecuador.  Our initial plan ofoperation calls for us to construct a 40-mile pipeline from Caleta Cruz, theterminal point of our offshore pipeline from the Corvina Field, to Arenillas,Ecuador.  We intend to sell gas for thegeneration of electricity by third party power producers in the local market inEcuador.  We have negotiated severalpreliminary agreements for sales of gas. We are planning to complete this pipeline

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for firstsales of gas to Ecuador during the second half of 2007, though thisschedule is subject to many factors outside our control and no assurance canbe given that we can meet this schedule.

In addition to the initial Corvina Field developmentproject, we have other fields within Block Z-1 and other properties which weintend to exploit in the future.  Werecently completed our technical evaluation of Area VI, now named Block XXII,and have initiated negotiations to obtain a license contract for explorationactivities.  Block XXII is a largeonshore block in northwest Peru and encompasses a significant portion of theLancones Basin.  In July 2006 Perupetroofficially informed us that our proposal for the 248,000 acre Block XXIII,located onshore in northwest Peru between our Blocks Z-1 and XIX, was thewinning bid in their recent tender process. We are in the process of presenting all necessary documentation tobecome the qualified operator of this new block and will begin negotiating theexploration and production license contract thereafter. We have secured theenvironmental permits and other authorizations to shoot seismic inBlock Z-1 and Block XIX.  We areseeking to obtain additional funding for these projects from industry orcapital market sources, but we are not currently planning to make significantcapital expenditures for seismic acquisition or other exploration andproduction activities outside the Corvina Field until we have secured suchadditional financing.

We are continuing to develop our engineering plans anddesigns for the various components of our initial plan of operation.  We have paid in full or in part for somecomponents of our initial plan and have obtained cost estimates for most of theremaining major equipment components and the shipping, construction,installation and associated services. However, the costs of these procurement and construction activities canbe difficult to accurately predict and are subject to change andcontingencies.  Based on our currentestimates, we expect that our initial project, including the cost of thenatural gas pipeline to Arenillas, Ecuador, will require total capitalexpenditures on the order of $126.7 million, including import duties andcontingencies.  Our budget has increasedas a result of higher projected drilling costs due to the tight market for oiland gas drilling equipment, the acquisition of the deck barge, the selection oflarger capacity turbines and other significant cost increases in other industryrelated items such as insurance.  Thisestimate of capital expenditures does not include value added tax (referred toas “IGV” in Peru).  IGV is generallyimposed on goods and services at a rate of 19%. Certain expenditures are exempt from IGV or eligible for acceleratedrefund.  IGV paid on capital expendituresis generally recoverable from our future revenue billings within Peru and isnot considered part of the capitalized costs of the equipment to which itrelates.  We may also be able to deferpayment of certain of these expenditures or obtain separate financing for theIGV.

**Project Capital Budget**

 
|                                      | ** ** | **($ millions)** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| Power plant and  related equipment   |       | $                     | 53.2       |   |
| Pipelines and  processing facilities |       | 37.4                  |       |
| Platform and  wells                  |       | 30.7                  |       |
| Contingencies                        |       | 5.4                   |       |
| Total estimated  capital budget      |       | $                     | 126.7      |   |

 

**Liquidity, Capital Resources and Capital Expenditures**

Our initial project in the offshoreBlock Z-1 in northwest Peru, totaling approximately $126.7 million, includesthe refurbishment of the CX-11 platform, rehabilitation of an existing well andthe drilling of three new wells, installation of a 10-mile gas pipeline fromthe platform to shore, construction of a 160 MW simple-cycle electricgenerating plant, and the construction of a 40-mile gas pipeline to supply gasto third party generators in Arenillas, Ecuador.

In connection with theMerger, we received net proceeds of approximately $5.5 million from aprivate placement of our common stock. In July 2005, we completed a private placement of 11,466,000 sharesof common stock for net proceeds of approximately $31.9 million.  Morgan Keegan & Company, Inc.served as placement agent for the offering. We also received $3.4 million from the exercise of warrants during thethird andfourth quarters of 2005.  In March 2006and June 2006, we completed private placements of 1,670,000 shares and4,482,000 shares of common stock, respectively, for net proceeds ofapproximately $5.0 million and $12.3 million, respectively.  As of March 31, 2006 and June 30, 2006, ourcash balances were approximately $27.0 million and $11.8 million,respectively.  However, on June 30, 2006we completed a private placement of common stock for proceeds of$12,325,500.  The proceeds were receivedin July 2006.

In May 2005, wesigned a Mandate Letter with International Finance Corporation (“IFC”), amember of the World Bank Group based in Washington, D.C.  The Mandate Letter specifies that the IFCwill appraise our project in Peru to determine the feasibility and structure ofa potential financing of up to $100 million. The IFC’s appraisal of the projectwill include a review of the technical, economic, commercial, financial,environmental and legal aspects of the project. IFC’s financing, the structureof which would be defined during the appraisal process, will depend on theproject and the Company

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meeting the IFC’s financing criteria, the overallfinancing plan being acceptable to IFC, approval of the investment bymanagement and the Board of IFC, and the execution of all appropriatedocumentation, in form and substance satisfactory to IFC.  As part of the Mandate, we have agreed to payfees of $285,000 and customary expenses during the appraisal period.  The IFC is continuing its due diligence on theproject.  In recognition of the reviseddrilling timeline, the IFC recently extended the Mandate period to November 30,2006 and is reviewing an increase in the total amount of the financing based onthe increased capital budget for the project.

During the six months ended June 30, 2006 we incurredcapital expenditures of approximately $14.1 million primarily on the purchaseof a deck barge and related equipment for approximately $6 million,modernization and refurbishment costs of the platform tender assist drillingrig of approximately $5.5 million and continued work on the refurbishment ofthe Corvina platform and power plant and gas processing facilitiesdesigns.  In addition, during the yearended December 31, 2005, we incurred capital expenditures of approximately$4.4 million, primarily on refurbishment of the Corvina platform and powerplant design costs. During 2005, we also deposited $1.3 million asrestricted cash to secure our performance obligations under the secondexploration period of the Block Z-1 license contract.  We intend to satisfy this obligation bydrilling the initial Corvina well (which commenced in September 2006), which iscurrently expected to cost approximately $6.0 million and is included in thecapital budget for the project.

With our current cash balance and proceeds from theexpected IFC financing, we believe we will have sufficient capital resources toexecute the project as we currently envision it.  However, the timing and execution ofour project 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 financing, many ofwhich are outside our control.

**Off-Balance Sheet Arrangements**

As of June 30, 2006, we had no transactions,agreements or other contractual arrangements with unconsolidated entities orfinancial partnerships, often referred to as special purpose entities, whichgenerally are established for the purpose of facilitating off-balance sheetarrangements.

**CriticalAccounting 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 usesestimates and assumptions in preparing the consolidated financial statements inaccordance with GAAP.  Those estimatesand assumptions affect the reported amounts of assets, liabilities, revenuesand expenses in the consolidated financial statements, and the disclosure ofcontingent assets and liabilities.  Wehave identified the following as critical accounting policies directly relatedto our business and operations, and the understanding of our financialstatements.

***SuccessfulEfforts Method of Accounting***

We follow the successful efforts method of accounting forour investments in oil and gas properties. Under this method, oil and gas lease acquisition costs and intangibledrilling costs associated with exploration efforts that result in the discoveryof proved reserves and costs associated with development drilling, whether ornot successful, are capitalized when incurred. Certain costs of exploratory wells are capitalized pendingdeterminations that proved reserves have been found.  If the determination is dependent upon theresults of planned additional wells and required capital expenditures toproduce the reserves found, the drilling costs will be capitalized as long assufficient reserves have been found to justify completion of the exploratorywell and additional wells are underway or firmly planned to complete theevaluation of the well.  All costsrelated to unsuccessful exploratory wells are expensed when such wells aredetermined to be non-productive or at the one year anniversary of completion ofthe well if proved reserves have not been attributed and capital expendituresas described in the preceding sentence are not required.  We assess our capitalized exploratory wellspending evaluation each quarter to determine whether costs should remaincapitalized or should be charged to earnings. Other exploration costs, including geological and geophysical costs, areexpensed as incurred.  We will recognizegains or losses on the sale of properties, should they occur, on afield-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 results from a drilling operation cantake considerable time to analyze, and the determination that commercialreserves have been discovered requires both judgment and application ofindustry experience.  Wells may becompleted that are assumed to be productive and actually deliver oil and gas inquantities insufficient to be economic, which may result in the abandonment ofthe wells at a later date.  Theevaluations of oil and gas leasehold acquisition costs requires management’sjudgment to estimate the fair value of exploratory costs related to drillingactivity in a given area.

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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 be substantial which willresult in additional exploration expenses when incurred.  The initial exploratory wells may beunsuccessful and the associated costs will then be expensed as dry hole costsand any associated leasehold costs may be impaired.

***Impairmentof 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 in circumstances that indicate that therecoverability of the carrying amount of an asset should be assessed includebut are not limited to (a) a significant decrease in the market value ofan asset, (b) a significant change in the extent or matter in which an assetis used or a significant physical change in an asset, (c) a significantadverse change in legal factors or in the business climate that could affectthe value of an asset or an adverse action or assessment by a regulator,(d) an accumulation of costs significantly in excess of the amountoriginally expected to acquire or construct an asset, and/or (e) a currentperiod operating or cash flow loss combined with a history of operating or cashflow losses or a projection or forecast that demonstrates continuing lossesassociated with an asset used for the purpose of producing revenue.

We consider historical performance and anticipated futureresults in our evaluation of potential impairment.  Accordingly, when indicators of impairmentare present, we evaluate the carrying value of these assets in relation to theoperating performance of the business and future discounted and non-discountedcash flows expected to result from the use of these assets.  Impairment losses are recognized when theexpected future cash flows from an asset are less than its carrying value.

***FutureDismantlement, Restoration, and Abandonment 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 asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset.  The accrual is based on estimates of thesecosts for each of our properties based upon the type of production structure,reservoir characteristics, depth of the reservoir, market demand for equipment,currently available procedures and consultations with construction andengineering consultants.  Because thesecosts typically extend many years into the future, estimating these costs isdifficult and requires management to make estimates and judgments that aresubject to future revisions based on numerous factors, including changingtechnology, the political and regulatory environment and estimates as to theproper discount rate to use and timing of abandonment.

The Company acquired fouroffshore platforms in connection with its Block Z-1 property. These platformsrevert back to the Government of Peru at the end of the contract, provided theyare in good working condition, with no further obligation to the company todismantle or remove them. The Company and its legal advisors have reviewedPeruvian law and existing regulations from the Peruvian Ministry of Energy andMines in conjunction with the requirements of SFAS 143 and have concluded thatthere is no legal obligation to dismantle the platforms, as defined in SFAS143, and therefore recognition of an ARO is not required. If, however, currentlaws or regulations were changed or the platforms were no longer in goodworking order, the Company could be obligated to dismantle and remove them. Inaddition, ourplan of operations includes the drilling of wells and the construction of anelectric power generation plant.  We willbe required to plug and abandon those wells and restore the well site and powergeneration site upon completion of their production.  However, due to the fact that we have not yetbegun operations, we do not have sufficient information to determine thetiming, nor calculate the present value, of the obligation.  Therefore, no ARO provision is reflected inthe accompanying consolidated financial statements.

**Disclosure RegardingForward-Looking Statements**

Wecaution that this document contains forward-looking statements.  All statements, other than statements ofhistorical facts, included in or incorporated by reference into thisForm 10-Q which address activities, events or developments which weexpect, believe or anticipate will or may occur in the future areforward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,”“projects,” “estimates,” “predicts,” “plans” and similar expressions, or thenegative thereof, are also intended to identify forward-lookingstatements.  In particular, statements,expressed or implied, concerning future operating results, the ability toreplace or increase reserves, or to increase production, or the ability togenerate income or cash flows are by nature, forward-looking statements.  These statements are based on certainassumptions and analyses made by the management of BPZ in light of itsexperience and its perception of historical trends, current conditions andexpected future developments as well as other factors it believes areappropriate in the circumstances. 

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However, forward-lookingstatements are not guarantees of performance and no assurance can be given thatthese expectations will be achieved.

Importantfactors that could cause actual results to differ materially from theexpectations reflected in the forward-looking statements include, but are notlimited to any of the following in the jurisdictions in which BPZ or itssubsidiaries are doing business:  thetiming and extent of changes in commodity prices for crude oil, natural gas andrelated products, currency exchange rates, interest rates, inflation, theavailability of goods and services, drilling and other operational risks,availability of capital resources, legislative or regulatory changes, politicaldevelopments, acts of war and terrorism. A more detailed discussion on risks relating to the oil and natural gasindustry and to us is included in the Company’s Annual Report onForm 10-KSB/A for the year ended December 31, 2005.

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

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

In addition to the U.S. Dollar, we conduct ourbusiness in Peruvian Nuevo Soles and therefore are subject to foreign currencyexchange rate risk on cash flows related to expenses and investing transactions.We do not expect to generate significant revenue from activities in Peru priorto 2007. In recent years, the exchange rate between U.S. Dollars and NuevoSoles has been relatively constant, consequently, we have experienced nosignificant fluctuations in the value of goods and services we purchase in Perubecause of currency exchange.

Themajority of our costs to operate our Peruvian offices and our exploration costsincurred for activities currently underway in Peru are denominated in U.S. Dollars.However, our exploration costs in Peru may be incurred under contractsdenominated in Peruvian Nuevo Soles or U.S. Dollars. To date, we have notengaged in hedging activities to hedge our foreign currency exposure. In thefuture, we may enter into hedging instruments to manage our foreign currencyexchange risk or continue to be subject to exchange rate risk.

**Item 4. Controls and Procedures**

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

As of the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand procedures as defined in Rule 13a-15(e) of the Exchange Act.  Based upon that evaluation our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were not effective as of the end of the period coveredby this report to provide reasonable assurance that information required to bedisclosed by the Company in the reports that the Company files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms.

On January 17, 2006, the Company amended its 2004Annual Report on Form 10-KSB/A and Quarterly Reports on Form 10-QSB/A for theperiods ended March 31, 2005 and June 30, 2005. On September 26, 2006, the Company amended its 2005 Annual Report onForm 10-KSB filed on March 31, 2006.  Therestatements are a result of deficiencies in our internal controls and relateto the failure to properly (i) account for and describe the September 2004merger with Navidec, Inc.; (ii) value certain options assumed by the Company;(iii) account for the post-merger operations of Navidec Financial Services,Inc.; and (iv) account for expenses incurred on the Company’s behalf by itsformer parent, BPZ & Associates, Inc., prior to the merger. TheCompany’s management and Audit Committee have discussed these restatementissues and related internal controls deficiencies with Johnson Miller &Co., CPA’s PC, its independent registered public accounting firm, and hasappropriately recorded and disclosed those items in the Amendment No. 1 to its2005 Annual Report on From 10-KSB/A.

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

We are in the process of improving our internalcontrols in an effort to remediate the deficiencies noted above. Theseimprovements include strengthening our accounting staff through the hiring of aController and an accounting and financial reporting manager in 2005 and 2006,respectively.  We have also engaged anindependent consulting firm to document and test our internal controls and makerecommendations for improvement. Additional effort may be needed to fullyremedy these deficiencies and we are continuing our efforts to improve andstrengthen our control processes and procedures. Our

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management and directors will continue to work withour auditors and other outside advisors to ensure that our controls andprocedures become adequate and effective.

**PART II**

**Item 1.  Legal Proceedings**

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

**Item 1A.  Risk Factors**

None.

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

On March 10, 2006, theCompany completed a private placement of 1,670,000 shares of common stock, nopar value, to four institutional and accredited investors pursuant to a StockPurchase Agreement dated as of March 8, 2006. The common stock was priced at$3.00 per share resulting in proceeds to the Company of $5,010,000.  In connection with the offer and sale of thecommon stock in the private placement, the Company relied on an exemption fromregistration under Section 4(2) of the Securities Act of 1933, as amended, andRegulation D, Rule 506 promulgated there under. The sale of common stock wasmade to accredited investors as defined in Regulation D, Rule 501(a). Nounderwriters were engaged in connection with the foregoing issuance ofsecurities.

On June 30, 2006, theCompany completed a private placement of 4,482,000 shares of common stock, nopar value, to eight institutional and accredited investors pursuant to a StockPurchase Agreement dated as of June 30, 2006. The common stock was prices at$2.75 per share resulting in proceeds to the Company of $12,325,500.  In connection with the offer and sale of thecommon stock in the private placement, the Company relied on an exemption fromregistration under Section 4(2) of the Securities Act of 1933, as amended, andRegulation D, Rule 506 promulgated there under. The sale of common stock wasmade to accredited investors as defined in Regulation D, Rule 501(a). Nounderwriters were engaged in connection with the foregoing issuance ofsecurities.

**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**
| 10.2   | Stock Purchase Agreement dated as of March 8, 2006 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 14, 2006)                                             |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                           |
| 10.3   | Stock Purchase Agreement dated as of June 30, 2006 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 6, 2006)                                               |
|   |                                                                                                                                                                           |
| 31.1   | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                |
|   |                                                                                                                                                                           |
| 31.2   | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)                                                |
|   |                                                                                                                                                                           |
| 32.1   | Certification of 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**

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

 
| BPZ ENERGY, INC.                      |
|---------------------------------------|
|                                  |
| */s/ Manuel Pablo Zuniga-Pflucker*    | * * |
| Manuel Pablo Zuniga-Pflucker          |
| President and Chief Executive Officer |
|                                  |
| Date: September 26, 2006              |

 

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