** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

| **(Mark One)**                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                        | ** ** | ** ** |
| **x**                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                        | ** ** | ** ** |
| **For the quarterly period  ended: September 30, 2007**                                                                                           |
| ** **                                                                                                                                        | ** ** | ** ** |
| **or**                                                                                                                                            |
|                                                                                                                                              |   |   |
| **o**                                                                                                                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                        | ** ** | ** ** |
| **For the transition period  from         to         ** |

 

**CommissionFile Number: 001-12697**

 

**BPZ RESOURCES, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

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

 

**BPZ Energy, Inc.**

(Former Name, Former Address and Former FiscalYear, If Changed Since Last Report

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 

LargeAccelerated Filer o   Accelerated Filer x   Non-AcceleratedFiler o

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

 

Yes o 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 October 30, 2007, there were 63,923,121shares of common stock, no par value, outstanding.

 

 

----

 

**TABLE OFCONTENTS**

 
|            | **PART I**                                                                             | 3      |
|------------|---------------------------------------------------------------------------------------------|--------|
|       |                                                                                        |   |
| Item 1.    | Financial Statements                                                                        | 3      |
|       |                                                                                        |   |
|       | Consolidated Balance Sheets                                                                 | 3      |
|       |                                                                                        |   |
|       | Consolidated Statements of  Operations                                                      | 4      |
|       |                                                                                        |   |
|       | Consolidated Statements of  Cash Flows                                                      | 5      |
|       |                                                                                        |   |
|       | Notes to Consolidated  Financial Statements                                                 | 6      |
|       |                                                                                        |   |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 20     |
|       |                                                                                        |   |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                 | 31     |
|       |                                                                                        |   |
| Item 4.    | Controls and  Procedures                                                                    | 32     |
|       |                                                                                        |   |
| ** ** | **PART II**                                                                            | 32     |
|       |                                                                                        |   |
| Item 1.    | Legal Proceedings                                                                           | 32     |
|       |                                                                                        |   |
| Item 1A.   | Risk Factors                                                                                | 32     |
|       |                                                                                        |   |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 32     |
|       |                                                                                        |   |
| Item 3.    | Defaults Upon  Senior Securities                                                            | 32     |
|       |                                                                                        |   |
| Item 4.    | Submission of  Matters to a Vote of Security Holders                                        | 32     |
|       |                                                                                        |   |
| Item 5.    | Other Information                                                                           | 33     |
|       |                                                                                        |   |
| Item 6.    | Exhibits                                                                                    | 34     |
|       |                                                                                        |   |
| ** ** | **SIGNATURES**                                                                              | 35     |

 

2

----

 

**PART I**

 

**Item 1. Financial Statements**

 

**BPZ Resources, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                              | ** ** | **September 30,  2007** | ** **  | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **(Unaudited)**              | ** **  | **(Audited)**               | ** ** |
| **ASSETS**                                                                                                                                                              | ** ** | ** **                   | ** **  | ** **                  | ** ** |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Current assets:                                                                                                                                                         |       |                         |        |                        |       |
| Cash and cash equivalents                                                                                                                                               |       | $                            | 10,578,244  |                        | $          | 25,324,233 |   |
| Value added tax receivable                                                                                                                                              |       | 8,796,553                    |        | 3,159,698                   |       |
| Inventory                                                                                                                                                               |       | 3,696,948                    |        | 1,945,781                   |       |
| Prepaid and other current  assets                                                                                                                                       |       | 2,540,810                    |        | 1,972,500                   |       |
| Total current assets                                                                                                                                                    |       | 25,612,555                   |        | 32,402,212                  |       |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Property, equipment and  construction in progress, net                                                                                                                  |       | 83,698,187                   |        | 38,726,910                  |       |
| Restricted cash                                                                                                                                                         |       | 1,995,000                    |        | 1,150,000                   |       |
| Investment in Ecuador  property, net                                                                                                                                    |       | 1,616,916                    |        | 1,757,604                   |       |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Total assets                                                                                                                                                            |       | $                            | 112,922,658 |                        | $          | 74,036,726 |   |
|                                                                                                                                                                    |       |                         |        |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                           | ** ** | ** **                   | ** **  | ** **                  | ** ** |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Current liabilities:                                                                                                                                                    |       |                         |        |                        |       |
| Accounts payable                                                                                                                                                        |       | $                            | 9,333,738   |                        | $          | 7,376,310 |   |
| Accrued liabilities                                                                                                                                                     |       | 4,718,528                    |        | 2,849,376                   |       |
| Other liabilities                                                                                                                                                       |       | 205,521                      |        | 101,975                     |       |
| Accrued interest payable                                                                                                                                                |       | 312,592                      |        | —                      |       |
| Current maturity of long-term  debt                                                                                                                                     |       | 6,198,899                    |        | 17,345                      |       |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Total current liabilities                                                                                                                                               |       | 20,769,278                   |        | 10,345,006                  |       |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Long-term debt                                                                                                                                                          |       | 42,038                       |        | 55,815                      |       |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Commitments and contingencies  (See Note 11)                                                                                                                            |       |                         |        |                        |       |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Stockholders’ equity:                                                                                                                                              |       |                         |        |                        |       |
| Preferred stock, no par value,  25,000,000 authorized, none issued and outstanding                                                                                      |       | —                       |        | —                      |       |
| Common stock, no par value,  250,000,000 authorized; 63,771,069 and 54,143,717 shares issued and  outstanding at September 30, 2007 and December 31, 2006, respectively |       | 140,316,918                  |        | 96,574,326                  |       |
| Additional paid in capital                                                                                                                                              |       | 5,672,729                    |        | 5,092,341                   |       |
| Stock subscription receivable                                                                                                                                           |       | (230,825                     | )           | (230,825                    | )          |
| Deficit accumulated during the  exploratory stage                                                                                                                       |       | (53,647,480                  | )           | (37,799,937                 | )          |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Total stockholders’ equity                                                                                                                                         |       | 92,111,342                   |        | 63,635,905                  |       |
|                                                                                                                                                                    |       |                         |        |                        |       |
| Total liabilities and  stockholders’ equity                                                                                                                        |       | $                            | 112,922,658 |                        | $          | 74,036,726 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

3

----

 

**BPZ Resources, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                             | ** ** | **Cumulative**                | ** **  | ** **                                      | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|-------------|-------------------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                             | ** ** | **Amounts from**         | ** **  | ** **                                      | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **  | ** ** |
| ** **                                                             | ** ** | **August 20, 2001** | ** **  | ** **                                      | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **  | ** ** |
| ** **                                                             | ** ** | **(Inception) to**       | ** **  | **Three Months Ended September** | ** ** | **Nine Months Ended September ** | ** ** |
| ** **                                                             | ** ** | **September 30,**        | ** **  | **30,**                                         | ** ** | **30,**                                              | ** ** |
| ** **                                                             | ** ** | **2007**                      | ** **  | **2007**                                        | ** ** | **2006**                                             | ** ** | **2007**    | ** ** | **2006**    | ** ** |
| Revenue                                                                |       | $                             | —      |                                            | $          | —                                               |       | $           | —     |        | $          | — |   | $ | — |   |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Operating and administrative  expenses:                                |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| General and administrative                                             |       | 23,208,775                    |        | 2,763,633                                       |       | 2,373,475                                            |       | 7,724,642   |       | 5,813,311   |       |
| Stock-based compensation                                               |       | 16,379,942                    |        | 2,811,352                                       |       | 879,877                                              |       | 4,712,874   |       | 2,229,970   |       |
| Geological, geophysical and  engineering                               |       | 7,333,244                     |        | 1,955,155                                       |       | 638,504                                              |       | 3,925,406   |       | 1,502,211   |       |
| Depreciation expense                                                   |       | 407,047                       |        | 56,651                                          |       | 63,850                                               |       | 163,437     |       | 159,087     |       |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Total operating expenses                                               |       | 47,329,008                    |        | 7,586,791                                       |       | 3,955,706                                            |       | 16,526,359  |       | 9,704,579   |       |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Operating loss                                                         |       | (47,329,008                   | )           | (7,586,791                                      | )          | (3,955,706                                           | )          | (16,526,359 | )          | (9,704,579  | )          |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Other income (expense):                                                |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Income (loss) from investment  in Ecuadorproperty, net of amortization |       | 1,969,428                     |        | 180,382                                         |       | 395,217                                              |       | (50,457     | )          | 983,075     |       |
| Interest expense                                                       |       | (98,027                       | )           | (2,939                                          | )          | (27,007                                              | )          | (4,104      | )          | (29,845     | )          |
| Amortization of deferred  financing costs                              |       | (428,000                      | )           | —                                          |       | —                                               |       | —      |       | —      |       |
| Registration delay expense                                             |       | (4,068,480                    | )           | —                                          |       | (1,191,836                                           | )          | —      |       | (3,324,966  | )          |
| Interest income                                                        |       | 2,051,567                     |        | 256,557                                         |       | 216,525                                              |       | 754,304     |       | 644,558     |       |
| Merger costs                                                           |       | (5,470,455                    | )           | —                                          |       | —                                               |       | —      |       | —      |       |
| Net gain (loss) on sale of  asset                                      |       | (8,835                        | )           | —                                          |       | 150                                                  |       | (8,985      | )          | 150         |       |
| Miscellaneous income (expense)                                         |       | (226,669                      | )           | (17,730                                         | )          | (1,149                                               | )          | 27,059      |       | (10,678     | )          |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Total other income (expense)                                           |       | (6,279,471                    | )           | 416,270                                         |       | (608,100                                             | )          | 717,817     |       | (1,737,706  | )          |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Loss before income taxes                                               |       | (53,608,479                   | )           | (7,170,521                                      | )          | (4,563,806                                           | )          | (15,808,542 | )          | (11,442,285 | )          |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Income taxes                                                           |       | 39,001                        |        | (11,301                                         | )          | —                                               |       | 39,001      |       | —      |       |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Net loss                                                               |       | $                             | (53,647,480 | )                                               | $          | (7,159,220                                           | )          | $           | (4,563,806 | )           | $          | (15,847,543 | ) | $ | (11,442,285 | ) |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Basic and diluted net loss per  share                                  |       |                          |        | $                                               | (0.11      | )                                                    | $          | (0.10       | )          | $           | (0.27      | ) | $ | (0.26 | ) |
|                                                                   |       |                          |        |                                            |       |                                                 |       |        |       |        |       |
| Weighted average common shares  outstanding                            |       |                          |        | 63,222,433                                      |       | 47,320,202                                           |       | 58,771,664  |       | 43,593,613  |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

4

----

 

**BPZ Resources, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                         | ** ** | **Cumulative**                | ** **  | ** **                      | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|---------------------------------|------------|-------------|------------|
| ** **                                                                                         | ** ** | **Amounts from**         | ** **  | ** **                      | ** ** | ** **  | ** ** |
| ** **                                                                                         | ** ** | **August 20, 2001** | ** **  | **Nine months ended** | ** ** |
| ** **                                                                                         | ** ** | **(Inception) to**       | ** **  | **September 30,**          | ** ** |
| ** **                                                                                         | ** ** | **September 30,**        | ** **  | ** **                      | ** ** | ** **  | ** ** |
| ** **                                                                                         | ** ** | **2007**                      | ** **  | **2007**                        | ** ** | **2006**    | ** ** |
| Cash flow from operating  activites:                                                               | ** ** | ** **                    | ** **  | ** **                      | ** ** | ** **  | ** ** |
| Net loss                                                                                           |       | $                             | (53,647,480 | )                               | $          | (15,847,543 | )          | $ | (11,442,285 | ) |
| Adjustments to reconcile net  loss to net cash used by operating activities:                       |       |                          |        |                            |       |        |       |
| Stock-based compensation                                                                           |       | 16,379,942                    |        | 4,712,874                       |       | 2,229,970   |       |
| Stock issued in merger                                                                             |       | 979,981                       |        | —                          |       | —      |       |
| Options assumed in merger                                                                          |       | 4,490,474                     |        | —                          |       | —      |       |
| Stock issued for registration  delay expense                                                       |       | 2,602,739                     |        | —                          |       | 2,024,616   |       |
| Depreciation expense                                                                               |       | 407,047                       |        | 163,437                         |       | 159,087     |       |
| Net gain (loss) on sale of  asset                                                                  |       | 8,835                         |        | 8,985                           |       | (150        | )          |
| Amortization of investment in  Ecuador property                                                    |       | 507,584                       |        | 140,688                         |       | 140,688     |       |
| Amortization of deferred  financing fees                                                           |       | 428,000                       |        | —                          |       | —      |       |
| Expenses paid by affiliate                                                                         |       | 629,596                       |        | —                          |       | —      |       |
| Changes in operating assets  and liabilities:                                                      |       |                          |        |                            |       |        |       |
| Increase value added tax  receivable                                                               |       | (8,433,998                    | )           | (5,636,855                      | )          | (1,058,208  | )          |
| Increase in inventory                                                                              |       | (3,696,948                    | )           | (1,751,167                      | )          | (3,676,251  | )          |
| Increase in prepaid and other  current assets                                                      |       | (2,903,365                    | )           | (568,310                        | )          | (1,158,235  | )          |
| Increase (decrease) in  accounts payable                                                           |       | 9,333,738                     |        | 1,957,428                       |       | (197,702    | )          |
| Increase in accrued  liabilities                                                                   |       | 4,718,528                     |        | 1,869,152                       |       | 2,357,927   |       |
| Increase in other liabilities                                                                      |       | 222,866                       |        | 103,546                         |       | 4,831       |       |
| Net cash used by operating  activities                                                             |       | (27,972,461                   | )           | (14,847,765                     | )          | (10,615,712 | )          |
| Cash flows from investing  activities:                                                             |       |                          |        |                            |       |        |       |
| Property, equipment and  construction in progress additions                                        |       | (77,620,798                   | )           | (38,650,428                     | )          | (18,465,734 | )          |
| Restricted cash                                                                                    |       | (1,995,000                    | )           | (845,000                        | )          | (1,005,981  | )          |
| Investment in Ecuador property                                                                     |       | (1,440,000                    | )           | —                          |       | —      |       |
| Net cash used by investing  activities                                                             |       | (81,055,798                   | )           | (39,495,428                     | )          | (19,471,715 | )          |
| Cash flows from financing  activities:                                                             |       |                          |        |                            |       |        |       |
| Borrowings                                                                                         |       | 2,226,826                     |        | —                          |       | —      |       |
| Repayments of borrowings                                                                           |       | (478,384                      | )           | (12,902                         | )          | (10,650     | )          |
| Proceeds from exercise of  warrants, net                                                           |       | 3,868,260                     |        | —                          |       | —      |       |
| Proceeds from exercise of  options, net                                                            |       | 2,691,960                     |        | 2,691,960                       |       | —      |       |
| Proceeds from sale of common  stock, net                                                           |       | 111,297,841                   |        | 36,918,146                      |       | 17,335,500  |       |
| Net cash provided by financing  activities                                                         |       | 119,606,503                   |        | 39,597,204                      |       | 17,324,850  |       |
| Net increase (decrease) in  cash and cash equivalents                                              |       | 10,578,244                    |        | (14,745,989                     | )          | (12,762,577 | )          |
| Cash and cash equivalents at  beginning of period                                                  |       | —                        |        | 25,324,233                      |       | 29,455,130  |       |
| Cash and cash equivalents at end  of period                                                        |       | $                             | 10,578,244  |                            | $          | 10,578,244  |       | $ | 16,692,553 |   |
| Supplemental cash flow  information:                                                               |       |                          |        |                            |       |        |       |
| **Cash paid for:**                                                                                 | ** ** | ** **                    | ** **  | ** **                      | ** ** | ** **  | ** ** |
| Interest                                                                                           |       | $                             | 144,785     |                            | $          | 54,104      |       | $ | 29,845 |   |
| Foreign income tax                                                                                 |       | 6,374                         |        | 39,001                          |       | —      |       |
| **Non — cash items:**                                                                         | ** ** | ** **                    | ** **  | ** **                      | ** ** | ** **  | ** ** |
| Common stock issued for  property interest                                                         |       | $                             | 1,112,500   |                            | $          | —      |       | $ | — |   |
| Warrants issued to private  placement agent                                                        |       | 325,000                       |        | —                          |       | 248,645     |       |
| Purchase and additions to  equipment with the issuance of a capital lease obligation               |       | 6,180,679                     |        | 6,180,679                       |       | —      |       |
| Imputed financing costs                                                                            |       | 428,000                       |        | —                          |       | —      |       |
| Issuance of common stock for  subscription receivable                                              |       | 230,825                       |        | —                          |       | —      |       |
| Conversion of long-term debt  to common stock                                                      |       | 685,000                       |        | —                          |       | —      |       |
| Conversion of notes payable to  common stock                                                       |       | 1,020,529                     |        | —                          |       | —      |       |
| Interest capitalized to  property, equipment and construction in progress                          |       | 362,592                       |        | 362,592                         |       | —      |       |
| Depreciation on support  equipment capitalized to property, equipment and construction in progress |       | 555,189                       |        | 359,434                         |       | —      |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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**BPZ Resources, Inc. and Subsidiaries**

**(An Exploratory Stage Company)**

**Notes To Consolidated Financial Statements**

**(Unaudited)**

 

**Note 1 - Basis of Presentation and Significant AccountingPolicies**

** **

**Organization**

 

BPZResources, Inc., (the “Company” or “BPZ”) a Texas corporation, wasincorporated in 1993 and is based in Houston, Texas with offices in Lima, Peruand Quito, Ecuador. The Company is an exploratory stage company focused on theexploration and production of oil and natural gas and we intend to utilize partof our future natural gas production for the complementary development ofgas-fired power generation.

 

The Companymaintains a registered wholly owned subsidiary in Peru. Currently, it hasexclusive rights and license agreements for oil and gas exploration andproduction covering a total of approximately 2.4 million acres innorthwest Peru. Our license contracts cover 100% ownership of both Block Z-1(739,205 acres) and Block XIX (472,860 acres). The Block Z-1 contract wassigned in November 2001, and the Block XIX contract was signed inDecember 2003. The Company’s 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 theproperties during this period. If the exploration activities are successful,the total contract term can extend up to 30 years for oil exploration andproduction and up to 40 years for gas exploration and production. TheCompany has presented all necessary documentation requested by Perupetro inorder to become the qualified operator under a license contract for Block XXII(948,000 acres, referred to as Area VI in previous filings) which we previouslyheld under a Technical Evaluation Agreement. Subsequently, in March 2006, theCompany was notified by Perupetro that we qualified as an operator for BlockXXII. In July 2006 Perupetro officially informed the Company that itsproposal for the 248,000 acre Block XXIII, located onshore in northwest Perubetween our Blocks Z-1 and XIX, was the winning bid in their license tenderprocess. On September 20, 2007, the Company was officially notified byPerupetro that it also qualified as an operator for Block XXIII. It has beeninformed that the license contracts for both blocks XXII and XXIII have beenapproved by the Board of Directors of Perupetro and it is now waiting for theSupreme Decree to be issued which authorizes the signature for both licensecontracts. The Company anticipates both license contracts will be signed inmid November, 2007.

 

In addition,through the Company’s wholly owned subsidiary, SMC Ecuador Inc., aDelaware corporation, and its registered branch in Ecuador, it owns a 10%non-operated working interest in an oil and 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.

 

The Company isin the exploratory stage of its oil and natural gas business and to date itsactivities in Peru have been focused on the analysis and evaluation oftechnical data on the various properties; the preparation of the developmentplans for the properties, including detailed engineering and design of thepower plant and gas processing facilities; refurbishment of one of its offshoreplatforms, procuring machinery and equipment for an extended drilling campaign;procuring equipment for the production of oil from the Corvina Field; obtainingall necessary environmental and operating permits and securing the requiredcapital and financing to complete the current plan of operation. The Companycommenced drilling of its initial well, the CX11-21XD, in the Corvina Gas Fieldat the CX-11 platform in September 2006, and a total depth of 10,457 feet(9,234 feet true vertical depth) was reached in November 2006. In March 2007,after a total of six Drill Stem Tests (“DST”) were conducted on separatepotential pay zones from the Lower and Upper Zorritos formations, the welltested positive for both gas and oil in quantities that the Company believes tobe commercially producible. In June, 2007 it successfully recompleted theCorvina CX11-16X well as a natural gas producing well. A total of four DST’swere conducted on various zones in the well including a formation previouslyuntested in the entire basin. The well tested positive for gas in quantitiesthat the Company believes to be commercially producible. In October, theCompany completed seven DST’s on the CX11-14D well in the Corvina Field. Thefirst six tests were conducted in the Upper Zorritos formation, with the firsttwo testing the oil zone and the other four testing the gas zone, while theseventh test targeted the Cardalitos formation located immediately above theUpper Zorritos. The well tested positive for oil and gas in quantities that theCompany believes to be commercially producible. However, the Company cautions readers that test data is not necessarilyindicative of actual results. The Company has not drilled any other wells orrecognized any revenues from operations, and it does not anticipate generatingsignificant revenues from our properties prior to December 31, 2007. However, on October24, 2007, the Company entered into two short term contracts with the commercialdivision of the Peruvian Navy to lease two tankers to transport oil to marketearlier than scheduled. The two tankers leased from the Navy each have capacityof approximately 6,000 barrels. With the current production facilities andthese two tankers, the Company expects to produce approximately

 

6

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2,500 barrels of oilper day (bopd) beginning in early November barring any unforeseencircumstances.

 

**Reincorporation and Name Change**

** **

On October 11, 2007, BPZEnergy, Inc., a Colorado corporation, formerly named Navidec, Inc., completed areincorporation to the State of Texas pursuant to the Plan of Conversion asapproved by the shareholders at the 2007 annual meeting of shareholders held onAugust 17, 2007. The filings with the Secretary of State of Texas also includeda change of the company’s name from BPZ Energy, Inc. to BPZ Resources, Inc., aspart of an ongoing review of certain internal reorganizational matters relatedto the Company’s international tax planning and corporate structure. TheCompany continues to use the name BPZ Energy, Inc. as a D/B/A (“doing businessas”) in its regular business operations.

 

No changes to the members ofthe Board of Directors, the management, or the operations of the Company weremade in connection with the conversion from a Colorado corporation to a Texascorporation. The Company remains the same business entity following theconversion to Texas, with all of the assets, rights, privileges and powers of,and all property owned by, all debts due to, as well as all other causes ofaction belonging to the predecessor Colorado entity. As part of thereincorporation, a new Certificate of Formation and new Bylaws were adopted,and now govern the rights of holders of the Company’s common stock. At theeffective time of the conversion, each outstanding share of the Colorado entityprior to the conversion was automatically converted into one share of the Texasentity.

 

**Navidec Merger Transaction**

** **

On September 10, 2004,BPZ Energy, Inc., a Texas (“BPZ-Texas”) corporation consummated a reversemerger with Navidec, Inc., a Colorado corporation (“Navidec”), wherebyBPZ-Texas became a wholly owned subsidiary of Navidec (the “Merger”). As aresult of the Merger, the shareholders of BPZ-Texas received the majority ofthe voting interest and control of the Board of Directors and management of thecombined entity. Accordingly, for accounting purposes, BPZ-Texas was treated asthe acquiring entity. All financial statements herein represent the historicalfinancial statements of the accounting acquirer, BPZ — Texas. See “Business—NavidecMerger Transaction” andNote 2 to theCompany’s Consolidated Financial Statements on Form 10K for the year endedDecember 31, 2006, as amended for detailed discussion regarding the Merger. OnFebruary 4, 2005, Navidec changed its name to BPZ Energy, Inc. Although theCompany’s name has been changed, the pre-merger company may be referred to asNavidec in this filing, as the context may require, to avoid confusion.

 

TheMerger Agreement provided for the immediate issuance by Navidec of 9,000,000shares of its common stock to the shareholders of BPZ-Texas and the futureissuance of an additional 18,000,000 shares on an earn-out basis if the Companyachieves certain reserve and production goals. The first 9,000,000 earn-outshares were contingent on achieving certain reserve targets, which wereachieved in December 2004. The remaining 9,000,000 earn-out shares areissuable once the Company is entitled to receive as its proportionate sharefrom gross production from any oil and gas wells owned or operated by theCompany not less than 2,000 barrels of oil per day or its equivalent(approximately 12 million cubic feet of gas per day) prior to December 28,2007.

 

**Basis ofPresentation**

 

The Company’s unaudited consolidatedfinancial statements included herein have been prepared pursuant to the rulesand regulations of the Securities and Exchange Commission as they pertain toForm 10-Q. Accordingly, certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations. The unaudited financialstatements reflect all adjustments which are, in the opinion of management,necessary for a fair presentation of the financial position and results ofoperations for the interim periods on a basis consistent with the annual auditedfinancial statements. All such adjustments are of a normal recurring nature.The Company believes that the disclosures contained herein are adequate to makethe information presented not misleading. The consolidated balance sheet atDecember 31, 2006 is derived from the December 31, 2006 audited consolidatedfinancial statements. These interim financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K, as amended, for the yearended December 31, 2006. The results of operations for interim periods are notnecessarily indicative of the results to be expected for the full year.

 

***Reclassifications***

 

Certainreclassifications of prior year balances have been made to conform such amountsto corresponding 2007 classifications. These reclassifications have no impacton net income.

 

7

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***Principles of Consolidation***

*** ***

Our consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries and branch offices. All intercompany balances and transactionshave been eliminated.

 

**Recent AccountingPronouncements**

 

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

 

In June 2006, the FASB issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes - aninterpretation of Statementof Financial Accounting Standards (“SFAS”) No.109”**(“FIN 48”). This interpretationprovides guidance for recognizing and measuring uncertain tax positions, asdefined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes athreshold condition that a tax position must meet for any of the benefit of theuncertain tax position to be recognized in the financial statements. Guidanceis also provided regarding derecognition, classification and disclosure ofthese uncertain tax positions. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The adoption of FIN 48 is not expected to have amaterial impact on our consolidated financial position, results of operations,or cash flows.

 

In September 2006, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”), which establishes an approachrequiring the quantification of financial statement errors based on the effectof the error on each of the company’s financial statements and the relatedfinancial statement disclosures. This model is commonly referred to as a “dualapproach” because it requires quantification of errors under both the “ironcurtain” and “roll-over” methods. The roll-over method focuses primarily on theimpact of a misstatement on the income statement, including the reversingeffect of prior year misstatements; however, its use can lead to theaccumulation of misstatements in the balance sheet. The iron curtain methodfocuses primarily on the effect of correcting the period end balance sheet withless emphasis on the reversing effects of prior year errors on the incomestatement. The Company currently uses the iron curtain method for quantifyingfinancial statement misstatements. The Company applied the provisions of SAB108 in connection with the preparation of the Company’s annual financialstatements for the year ending December 31, 2006. The use of the dual approachdid not have a material impact on our consolidated financial position, resultsof operations, or cash flows.

 

In December 2006, the FASB issued FASB Staff PositionFSP EITF 00-19-2, *Accounting for Registration PaymentArrangements*. This FASB Staff Position, or FSP, specifies that thecontingent obligation to make future payments or otherwise transferconsideration under a registration payment arrangement, whether issued as aseparate agreement or included as a provision of a financial instrument or otheragreement, should be separately recognized and measured in accordance with FASBStatement No. 5, *Accounting for Contingencies*.This FSP also requires certain disclosures regarding registration paymentarrangements and liabilities recorded for such purposes. This FSP isimmediately effective for registration payment arrangements entered into ormodified after December 21, 2006. The guidance of this FSP is effective forfiscal years beginning after December 15, 2006, and interim periods withinthose fiscal years for registration payment arrangements entered into prior toDecember 21, 2006. This FSP requires adoption by reporting a change inaccounting principle through a cumulative-effect adjustment to the openingbalance of our stockholders’ equity accounts as of the first interim period ofthe year in which this FSP is initially applied. The Company does not expectthe adoption of this FSP to materially affect our financial position, resultsof operations or cash flows.

 

InSeptember 2006, the FASB issued SFAS No. 157 — *Fair ValueMeasurement* (“SFAS No. 157”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.SFAS No. 157 applies under other accounting pronouncements that require orpermit fair value measurements, the FASB having previously concluded in thoseaccounting pronouncements that fair value is the relevant measurementattribute. Accordingly, SFAS No. 157 does not require any new fair valuemeasurements. However, for some entities, the application of this SFAS No. 157will change current practice. The definition of fair value focuses on the pricethat would be received to sell the asset or paid to transfer the liability (anexit price), not the price that would be paid to acquire the asset or receivedto assume the liability (an entry price). SFAS No. 157 emphasizes that fairvalue is a market-based measurement, not an entity-specific measurement. Theprovisions of this Statement will be effective

 

8

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forfinancial statement issued for fiscal years beginning after November 15, 2007and interim periods within those fiscal years. The Company is continuing toassess the impact, if any, of SFAS 157.

 

InFebruary 2007, FASB issued SFAS No. 159, The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115 (“SFAS No. 159”). This standard permits an entity tochoose to measure many financial instruments and certain other items at fairvalue. Most of the provisions in SFAS No. 159 are elective; however, theamendment to FASB Statement No. 115, Accounting for Certain Investments inDebt and Equity Securities, applies to all entities with available-for-sale andtrading securities. SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently evaluating the impact, ifany, this adoption will have on our consolidated financial statements.

 

**Note 2 — ValueAdded Tax Receivable**

 

Value-added tax (referred to as “IGV” inPeru) is generally imposed on goods and services at a rate of 19%. Perucurrently has an IGV early recovery program for companies during theexploration phase. Under this program, IGV paid on the acquisition of certaingoods and services used directly in hydrocarbon exploration activities can berecovered prior to a commercial discovery taking place or production andrevenue billings begin. The Company has applied for early recovery of certainIGV paid since it does not anticipate first sales of oil to the Peruvian marketuntil December of 2007 nor does it anticipate first sales of gas to thePeruvian power market until early 2009.

 

The Company’svalue added tax receivable balance as of September 30, 2007 was $8.8 million. Ofthis balance, the Company has filed claims with the Peruvian tax authority torecover approximately $4.7 million under the IGV early recovery program. Approximately$2.4 million has been collected during the nine months ended September 30, 2007.In addition, during October 2007, an additional $3.4 million was collectedunder the IGV early recovery plan.

 

**Note 3 —Inventories**

 

Inventories consist primarily of tubulargoods, accessories and spare parts for production equipment, stated at thelower of average cost or market. The balance in inventory at September 30, 2007was $3,696,948.

 

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

 

Below is a summary of prepaid and othercurrent assets as of September 30, 2007 and December 31, 2006:

 
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Prepaid expenses and other        |       | $                      | 445,341    |                  | $          | 763,480 |   |
| Deposits                          |       | 51,962                 |       | 68,367                |       |
| Prepaid insurance                 |       | 1,431,474              |       | 517,974               |       |
| Insurance receivable              |       | 612,033                |       | 612,033               |       |
| Interest receivable               |       | —                 |       | 10,646                |       |
| Prepaid and other current  assets |       | $                      | 2,540,810  |                  | $          | 1,972,500 |   |

 

Prepaidexpenses and other are primarily related to prepayments for drilling services,equipment rental and material procurement. Depositsare primarily rent deposits in connection with the Company’s offices in Houstonand Peru. Prepaid insurance consists of premiums related to the Company’soperations as well as general liability and directors and officer’s insurancepolicies. Additional coverage was procured in response to increased businessactivity for the nine months ended September 30, 2007.

 

Insurance receivable is related to the bargeincident which occurred in early August 2006. The Company incurred anoperational delay of approximately three weeks resulting from a navigation incidentwhich caused the BPZ-01 barge to be grounded on a sand bank in Talara Bay innorthwest Peru during the second mobilization trip to the Corvina platform. Asof September 30, 2007, a claim of approximately $712,000 for repairs isexpected to be filed with the insurance carrier. A deductible of $100,000 willbe applied to this insurance claim when reimbursed. See Note 11 “Commitmentsand Contingencies”, included herein, for further discussion.

 

9

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**Note 5 — Property, Equipmentand Construction in Progress**

 

Below is a summary of property, equipment and construction in progress as of September 30, 2007 and December 31, 2006:

 
| ** **                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                                    |       |                   |       |                  |       |
| Construction in progress:                               |       |                   |       |                  |       |
| Power plant and related  equipment                      |       | $                      | 3,733,727  |                  | $          | 3,581,069 |   |
| Platforms and wells                                     |       | 64,489,307             |       | 25,759,009            |       |
| Pipelines and processing  facilities                    |       | 3,605,336              |       | 2,535,593             |       |
| Barge and related equipment                             |       | 11,446,699             |       | 6,461,877             |       |
| Office equipment, leasehold  improvements, and vehicles |       | 1,380,371              |       | 828,727               |       |
| Accumulated depreciation and  amortization              |       | (957,253               | )          | (439,365              | )          |
| Net property, equipment and  construction in progress   |       | $                      | 83,698,187 |                  | $          | 38,726,910 |   |

 

During the nine months ended September 30,2007, the Company incurred costs of $45.6 million associated with itsdevelopment initiatives for the exploration and production of natural gasreserves and the complementary development of proprietary gas-fired powergeneration for sale in Peru.

 

The Company spudded its first well, the CX11-21XD, in September of 2006. In March 2007, after a total of six Drill StemTests were conducted on separate potential pay zones from the Lower and UpperZorritos formations, the well tested positive for both gas and oil in quantitiesthat the Company believes to be commercially producible.

 

On May 17,2007, the Company began recompleting the shut-in CX11-16X well. Upon thecompletion of a thorough examination of the well bore which concluded that theexisting production casing was in good condition and that cement logs indicatedthat no additional remediation work was required, a total of four drill stemtests were completed on separate potential pay zones from the Lower and UpperZorritos formations. The well tested positive for gas in quantities that theCompany believes to be commercially producible.

 

On June 21,2007, the Company spudded a third well, the CX11-14D. The CX11-14D well wasstrategically placed to allow the Company to appraise the oil and gas producingzones discovered in the CX 11-21XD well and to investigate the potential of theCardalitos formation which is located right above the Upper Zorritos formation.In October, the Company completed seven DST’s on the CX11-14D well inthe Corvina Field. The first six tests were conducted in the Upper Zorritosformation, with the first two testing the oil zone and the other four testingthe gas zone, while the seventh test targeted the Cardalitos formation locatedimmediately above the Upper Zorritos. The well tested positive for oil and gasin quantities that the Company believes to be commercially producible.

 

The Companycautions readers that test data from the three wells mentioned above is notnecessarily indicative of actual results.

 

The Company hasnot drilled any other wells or recognized any revenues from operations, and itdoes not anticipate generating significant revenues from our properties priorto December 31, 2007.

 

In conjunction with the gas-to-power project, the recent discovery ofoil reserves in the Corvina field has prompted the Company to simultaneouslydirect its attention towards accelerating the development of potential oilproduction in the Corvina field. On June 13, 2007, the Company entered into acapital lease agreement,with an option to purchase, for two barges to assist in the development of theCorvina oil. The two barges were towed to Peru where they are being fitted withthe required equipment for their intended use. One of these barges will bemoored next to the CX11 platform, and will act as a floating production andstorage facility (“FPSO”) for oil produced from the Corvina field. The Companyhas also identified and placed orders for the necessary oil productionfacilities to be installed on the FPSO barge. The second barge will be used tooffload the produced oil from the FPSO and transport it to a refinery locatedapproximately 100 miles to the south in the port of Talara. Thecapital lease for the two barges began in August 2007 and expires in November2009. Lease payments are variable based on the working status of the bargeswith a purchase option of $5,000,000 after the first year of the lease and$4,000,000 after the maturity date of the lease. The assets will be depreciatedover the term of the capital lease obligation. The capital lease assets were recorded at $6,180,679, which representsthe present value of the minimum lease payments, or the aggregate fair marketvalue of the assets. See Note 8 “Debt”, included herein, for furtherdiscussion.

 

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In addition, the Company incurred costs foroffice equipment and leasehold improvements for its offices in Houston, Peruand Ecuador. In accordance with “successful efforts” method of accounting, theCompany capitalized $359,434 of depreciation expense related to supportequipment to construction in progress as well as capitalized interest ofapproximately $362,592 to construction in progress during the nine months endedSeptember 30, 2007.

 

**Note 6 —Investment in Ecuador Property**

 

The Company has an investment in an oil andgas property in Ecuador (the “Santa Elena Property”) totaling $1,616,916 and$1,757,604 as of September 30, 2007 and December 31, 2006, respectively. TheCompany accounts for this investment under the cost method and records itsshare of cash received or paid as other income or expense. Since the Company’sinvestment represents ownership of an oil and gas property, which is adepleting asset, the Company is amortizing the cost of the investment on astraight-line basis over the remaining term of the license agreement whichexpires in May 2016. Accordingly, the Company recorded amortizationexpense of $46,896 and $140,688 for the three and nine months ended September30, 2007, respectively, and the same amounts for the three and nine monthsended September 30, 2006, respectively.

 

**Note 7 — Restricted Cash andPerformance Bonds**

 

In connection with its properties in Peru,the Company has obtained three performance bonds totaling $2,350,000 toguarantee certain obligations and commitments. As of September 30, 2007, theCompany had restricted cash deposits of $1,995,000, which partiallycollateralizes the performance bonds. In addition to the cash collateral postedby the Company, an individual shareholder of the Company had provided aguarantee in the amount of $200,000 to the financial institution that issuedone of the bonds to secure the Company’s performance. During 2004, the Company issued 236,528 sharesto that individual investor for $119,175 of cash proceeds and a subscriptionreceivable of $230,825 for the guarantee. During the three months ended June30, 2007, the guarantee was replaced by a deposit of an additional $95,000 bythe Company to the same financial institution. All of the performance bonds areissued by Peruvian banks and their terms are governed by the correspondinglicense contract or technical evaluation agreement.

 

**Note 8 — Debt**

** **

The recent discovery of oil reserves in the Corvina field has promptedthe Company to direct its attention towards accelerating the development ofpotential oil production in the Corvina field. On June 13, 2007 the Companyentered into a capital lease agreement, with an option to purchase, for twobarges to assist in the development of the Corvina oil. The capital lease forthe two barges began in August 2007 and expires in November 2009. The leasecontains a purchase option which the Company anticipates, for accountingpurposes, it will exercise on the 15th month of the lease term. Leasepayments are variable, based on the working status of the barges, with apurchase option of $5,000,000 after the first year of the lease and $4,000,000after the maturity date of the lease. The capital lease obligation was recordedat the present value of the minimum lease payments at an imputed discount rateof 18%, which reflects the Company’s incremental borrowing rate for thistransaction. The capital lease obligation was recorded at $6,180,679, whichrepresents the present value of the minimum lease payments, or the fair marketvalue of the debt obligation.

 

In addition, on September 30, 2007, the Company had long-term debt of$42,038 compared to $55,815 in long-term debt as of December 31, 2006. Long-termdebt for both 2007 and 2006 includes two secured loans for the purchase ofoffice furniture. Both loans have a term of 60 months, bearing interest at5.94% and 9.44%, with principal and interest payments due on a monthly basis.

 

Maturities of notes payable are as follows:

 
| Less than one year   |   | $      | 6,198,899 |   |
|----------------------|--------|--------|-----------|--------|
| One to three years   |   | 42,038 |      |
| Three to five years  |   | — |      |
| More than five years |   | — |      |
| Total                |   | $      | 6,240,937 |   |

 

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**Note 9 — Stockholders’ Equity**

 

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

 

**Private Placement of Common Stock**

 

OnMay 4, 2007, with an over-allotment purchase that closed on June 15, 2007, theCompany completed a private placement of 7,170,000 shares of common stock, nopar value, to accredited investors pursuant to a Subscription Agreement. Thecommon stock was priced at $5.25 per share and the over-allotment was priced at$5.40 per share resulting in proceeds to the Company of approximately $37.7million. No warrants or dilutive securities were issued in connection with theoffering. The offering was placed directly by the Company. A placement fee of2% of the gross proceeds of this transaction was paid to Morgan Keegan forinvestment services and consulting related to the offering. The registrationstatement was declared effective by the Securities and Exchange Commission onJune 20, 2007.

 

**Potentially Dilutive Securities**

 

In addition to its shares issued and outstanding, the Company has the following potentially dilutive securities as of September 30, 2007 and December 31, 2006. None of these potentially dilutive shares have been included in the calculation of earnings per share as the effect would be anti-dilutive.

 
| ** **                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| Stock options outstanding                                                     |       | 3,006,800              |       | 4,306,152             |       |
| Warrants outstanding                                                          |       | 250,000                |       | 250,000               |       |
| Contingent incentive earn-out  shares                                         |       | —                 |       | 450,000               |       |
| Contingent Merger earn-out  shares                                            |       | 9,000,000              |       | 9,000,000             |       |
|                                                                          |       |                   |       |                  |       |
| Total potentially dilutive  securities                                        |       | 12,256,800             |       | 14,006,152            |       |
|                                                                          |       |                   |       |                  |       |
| Shares available for grant  pursuant to Long-Term Incentive Compensation Plan |       | 5,914,500              |       | 1,156,000             |       |

 

On January 1, 2006, the Companyadopted SFAS No. 123 — Revised 2004,*Share—Based Payment*(“SFAS No. 123(R)”), which establishes accounting for stock-based paymenttransactions for employee services and goods and services received fromnon-employees. SFAS No. 123(R) is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedes APBNo. 25, *Accounting for Stock Issued to Employees*.Under the provisions of SFAS No. 123(R), stock-based compensation cost ismeasured at the date of grant, based on the calculated fair value of the award,and is recognized as expense over the employee’s or non-employee’s serviceperiod, which is generally the vesting period of the equity grant.

 

Priorto January 1, 2006, the Company accounted for stock-based compensation inaccordance with SFAS No. 123. Asallowed under SFAS No. 123,the Company accounted for its stock-based compensation to employees using theintrinsic value method of accounting which bases compensation expense on thedifference between the quoted market price of the award at the measurement dateless the amount, if any, the employee is required to pay for the stock. As 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 intrinsicvalue method used; thus, no pro forma results of operations are required to bepresented.

 

In addition, stock-based awards tonon-employees as of January 1, 2006 consisted of options and restricted sharesissued in exchange for various legal and investment banking services. Equityinstruments issued to non-employees for services were accounted for at fairvalue at the date of grant. The fair value for awards issued to non-employeeswas measured using a Black-Scholes valuation model. Expenses determined foremployees and non-employees were recognized in the Company’s financialstatements over the applicable service period.

 

The Company adopted SFAS No. 123(R) using themodified prospective application method and, accordingly, no prior periods havebeen restated as a result of the adoption of this pronouncement. Under thismethod, compensation cost recognized during the year ended December 31, 2006included: (a) compensation cost for all stock-based payments granted

 

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prior to, but not yet vested as of January 1,2006, based on the grant-date fair value estimated in accordance with theoriginal provisions of SFAS No. 123; and (b) compensation cost for allstock-based payments granted on or after January 1, 2006, based on thegrant-date fair value estimated in accordance with SFAS No. 123(R). SFAS No.123(R) requires forfeitures to be estimated at the time of grant and revised,if necessary, in subsequent periods to reflect actual forfeitures. The Company’sforfeiture estimates were not changed as a result of adopting SFAS No. 123(R).

 

The following table summarizes stock-basedcompensation costs recognized under SFAS 123(R) for the three and nine monthsended September 30, 2007 and September 30, 2006, respectively:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Employee stock—based  compensation costs |       | $                                | 2,811,352  |                            | $          | 820,772 |   | $ | 4,718,765 |   | $ | 1,980,280 |   |
| Non-employee stock-based  compensation        |       | —                           |       | 59,105                          |       | (5,891 | ) | 249,690 |   |
|                                          |       | $                                | 2,811,352  |                            | $          | 879,877 |   | $ | 4,712,874 |   | $ | 2,229,970 |   |

 

See below for a detailed discussion regardingthe Company’s employee long-term incentive compensation plan and stock-basedpayments to non-employees.

 

**RestrictedStock Awards and Performance Shares**

 

The Company determines the fair value ofrestricted stock awards and performance shares based on the market price of theCompany’s common stock on the date of grant. Compensation cost for such awardsis recognized on a straight-line basis over the vesting or service period, netof forfeitures; however, compensation cost related to performance shares willnot be recorded or will be reversed if the Company does not believe it isprobable that such performance criteria will be met or if the service provider(employee or otherwise) fails to meet such criteria.

 

A summary of the Company’s restricted stockaward activity and related information is presented below:

 
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Non-vested balance at  December 31, 2006 |       | 746,500            |       | $                   | 4.01       |   |
| Granted                                       |       | 572,500            |       | 4.69                |       |
| Vested                                        |       | (340,000           | )          | 4.39                |       |
| Forfeited                                     |       | —             |       | —              |       |
| Non-vested balance at  September 30, 2007     |       | 979,000            |       | $                   | 4.48       |   |

 

As of September 30, 2007, there wasapproximately $1.3 million of total unrecognized compensation cost related tononvested restricted stock awards, which is expected to be recognized over aweighted-average period of approximately 1 year.

 

There were 450,000 performance sharesoutstanding as of September 30, 2007. See “Contingent Incentive Earn-out Shares”below.

 

**Stock Options**

 

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

 

The fair valueof each stock option granted is estimated on the date of grant using aBlack-Scholes option pricing model. The following table presents theweighted-average assumptions used in the option pricing model for optionsgranted

 

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duringthe nine months ended September 30, 2007. During the nine months endedSeptember 30, 2007, 533,000 options were granted by the Company under the 2007Long-term Incentive Plan. The expected life of the options represents theperiod of time the options are expected to be outstanding. For the nine monthsended September 30, 2007, 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. For the nine months ended September 30, 2006, the expectedterm of options granted was based on the contractual term. In the future, asinformation regarding post-vesting termination becomes more accessible, theCompany may change the method of deriving the expected term. This change couldimpact the fair value of options granted in the future. The Company expects torefine the method of deriving the expected term no later than January 1, 2008. Forthe nine months ended September 30, 2007 and September 30, 2006, our expectedvolatility is based on the historical volatility of our stock for a periodapproximating the expected life. The risk-free interest rate is based on theobserved U.S. Treasury yield curve in effect at the time the options weregranted. The dividend yield is based on our history of dividend payouts.

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life (years)                                |       | 6        |       | 10       |       |
| Risk-free interest rate                              |       | 4.4      | %          | 2.5      | %          |
| Volatility                                           |       | 83.76    | %          | 76.12    | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average fair value  per share at grant date |       | $        | 3.84       |     | $          | — |   |
|                                                      |            |          |            |          |            |  |  |

 

A summary of our stock option activity andrelated information is presented below:

 

During the nine months ended September 30,2007 a total of 1,493,700 options were exercised. As of September 30, 2007,there was approximately $3.3 million of total unrecognized compensation costrelated to non-vested stock options which is expected to be recognized over aweighted-average period of approximately 1.2 years.

 

The following tables summarize informationabout stock options outstanding as of September 30, 2007:

 
| ** **                                  | ** ** | **Outstanding**    | ** ** | **Exercisable**     | ** ** |
|---------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                  | ** ** | ** **         | ** ** | **Weighted-**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Average**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Remaining**       | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | **Contractual**     | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **Life**            | ** ** | **Exercise Price** | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| **Range of Exercise Prices** | ** ** | **Options**        | ** ** | **(In years)** | ** ** | **Per Option** | ** ** | **Options** | ** ** | **Per Option** | ** ** |
| 1.30                                        |       | 520,800            |       | 6.69                |       | $ | 1.30 |   | 520,800 |   | $ | 1.30 |   |
| 2.00                                        |       | 210,500            |       | 6.69                |       | 2.00 |   | 210,500 |   | 2.00 |   |
| 3.20                                        |       | 562,500            |       | 8.29                |       | 3.20 |   | 327,500 |   | 3.20 |   |
| 3.35                                        |       | 750,000            |       | 8.46                |       | 3.35 |   | 375,000 |   | 3.35 |   |
| 4.55                                        |       | 352,500            |       | 8.77                |       | 4.22 |   | 50,000 |   | 4.00 |   |
| Above                                       |       | 610,500            |       | 9.59                |       | 5.23 |   |   |   |   |   |
| Total                                       |       | 3,006,800          |       | 8.27                |       | $ | 3.36 |   | 1,483,800 |   | $ | 2.43 |   |

 
| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**      | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                                    | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                                    | ** ** | **Options**        | ** ** | **Per Option**     | ** ** |
| Non-vested balance at  December 31, 2006 |       | 2,102,500          |       | $                       | 3.07       |   |
| Granted                                       |       | 610,500            |       | 5.23                    |       |
| Vested                                        |       | (1,165,000         | )          | 1.69                    |       |
| Forfeited                                     |       | (25,000            | )          | 3.92                    |       |
| Non-vested balance at  September 30, 2007     |       | 1,523,000          |       | $                       | 4.98       |   |

 

Pursuant to a Settlement Agreement and MutualRelease entered into on May 19, 2006 between the Company, Mr. John McKowen andNavidec Financial Services (“NFS”), the vesting period related to 500,000 ofthe non-vested options outstanding as of December 31, 2006, was extended fromSeptember 10, 2006 to one year following the effective date of the registrationwith the SEC of the shares NFS received in the Merger with Navidec. Theregistration of these shares underlying

 

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these options became effective on December15, 2006 and, as a result, the expiration date for the remaining options wasextended to December 16, 2007. The extension of the vesting period did notresult in a revaluation of these options, because the number of options thatthe Company expects to vest did not change as a result of the modification. InMarch 2007, the required funding received by the Company exceeded the$6,000,000 target and as a result, the remaining 500,000 options vested.

 

The aggregate intrinsic value of stockoptions outstanding at September 30, 2007 was approximately $13.4 million, ofwhich approximately $8.0 million relates to awards vested and exercisable andapproximately $5.4 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 September 30, 2007 exceeds the exerciseprice of the option.

 

**Warrants**

 

As of September 30, 2007, the Company had250,000 warrants outstanding. For their role as placement agent, in connectionwith the private placement of 11,466,000 shares of common stock in July 2005,Morgan Keegan & Company, Inc. received fully vested warrants to purchase100,000 shares of the Company’s common stock at an exercise price of $3.00 pershare. These warrants expire on July 19, 2010 and were valued at $325,000 usingthe Black-Scholes model, which amount was treated as additional non-cash stockoffering costs. Additionally, for their financial advisory services, inconnection with the private placement of 4,482,000 shares of common stock inJune 2006, Morgan Keegan & Company, Inc. received fully vested warrants topurchase 150,000 shares of the Company’s common stock at an exercise price of$3.00 per share. These warrants expire on June 30, 2011 and were valued at$248,645 using the Black-Scholes model, which amount was treated as additionalnon-cash stock offering costs.

 

All warrants issued were valued using theBlack-Scholes model, which amount was treated as additional non-cash stockoffering costs. The following table presents the weighted-average assumptionsused in the option pricing model for options granted during the nine monthsended September 30, 2007 and the same period ended 2006. No warrants weregranted during the nine months ended September 30, 2007 or September 30, 2006. Thesame methodologies applied to determine the assumptions used to value theoptions noted above were also used in valuing the warrants issued to MorganKeegan & Company, Inc.

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life (years)                                |       | 1.6      |       | 1.6      |       |
| Risk-free interest rate                              |       | 4.6      | %          | 4.9      | %          |
| Volatility                                           |       | 85.3     | %          | 64.7     | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average fair value  per share at grant date |       | $        | —     |     | $          | — |   |
|                                                      |            |          |            |          |            |  |  |

 

No warrants were exercised during the ninemonths ended September 30, 2007.

 

**Contingent Incentive Earn-Out Shares**

 

During 2005, the Company’s Board of Directorsawarded a total of 485,000 shares of incentive stock awards to three of theCompany’s officers. The incentive stock awards vest and the earn-out shares areissuable once the Company is entitled to receive as its proportionate sharefrom gross production from any oil and gas wells owned or operated by theCompany not less than 2,000 barrels of oil per day or its equivalent(approximately 12 million cubic feet of gas per day) prior to December 28,2007, the same target applicable to the Merger earn-out shares (see immediatelybelow). However, one of the Company’s officers entitled to receive earn-outshares resigned from the Company and its subsidiaries effective June 15, 2006,and as a result 225,000 of the unvested contingent incentive stock awards,representing $990,000 of future possible compensation expense, were forfeited. Subsequently,190,000 shares of those 225,000 shares were awarded to the officer’s successorto supplement a previous award of 35,000 shares. As of September 30, 2007, thetotal of outstanding awards related to the incentive stock awards was 450,000shares with a possible combined future expense of $1,980,000. Of this amount,approximately $1,782,000 was recorded as compensation expense for the three andnine months ended September 30, 2007. Because the Company expected to attainqualified entitlement to production before December 28, 2007, based on a newlyrevised operations plan, the Company determined that the compensation expenserelated to the Incentive Earn-Out Shares should be proportionally recognizedduring the three months ended September 30, 2007. On October 24, 2007,the Company entered into two short term contracts with the commercial divisionof the Peruvian Navy to lease two tankers to transport oil to market earlierthan scheduled. The two tankers leased from the Navy each have capacity ofapproximately

 

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6,000 barrels. Withthe current production facilities and these two tankers, the Company expects toproduce approximately 2,500 barrels of oil per day (bopd) beginning in earlyNovember barring any unforeseen circumstances.

 

**Merger Earn-Out Shares**

** **

Under the terms of the Merger Agreement, theCompany committed to issue 18,000,000 shares to the former shareholders ofBPZ-Texas on a contingent earn-out basis if the Company achieves certainreserve and production goals. The first earn-out target relating to reserveswas achieved in December 2004 and 9,000,000 of the earn-out shares were issued.The remaining 9,000,000 earn-out shares are issuable once the Company is entitledto receive as its proportionate share from gross production from any oil andgas wells owned or operated by the Company not less than 2,000 barrels of oilper day or its equivalent (approximately 12 million cubic feet of gas per day)prior to December 28, 2007.As noted immediately above, on October 24, 2007, the Company entered into twoshort term contracts with the commercial division of the Peruvian Navy to leasetwo tankers to transport oil to market earlier than scheduled. The two tankersleased from the Navy each have capacity of approximately 6,000 barrels. Withthe current production facilities and these two tankers, the Company expects toproduce approximately 2,500 barrels of oil per day (bopd) beginning in earlyNovember barring any unforeseen circumstances.

 

For accounting purposes, the earn-outarrangement is treated as a stock dividend because the earn-out is payable tothe shareholders of the accounting acquirer, BPZ-Texas. Accordingly, except fora retroactive increase in the number of common shares outstanding for allperiods presented, which will occur when the Board of Directors declares thedividend, no accounting entry is required upon the issuance of the earn-outshares.

 

**Long-TermIncentive Compensation Plan and Directors’ Compensation Incentive Plan**

** **

On August 17, 2007, the Company adopted the 2007Long-Term Incentive Compensation Plan (the “2007 LTIP”), which is an amendmentand restatement of the BPZ Energy, Inc. 2005 Long-Term Incentive CompensationPlan (the “2005 LTIP”). The amendment and restatement was recommended by theBoard of Directors and adopted pursuant to the approval of the shareholders atthe 2007 annual meeting of shareholders held on August 17, 2007. The 2007 LTIPsupersedes and replaces the 2005 LTIP but will not impair the vesting orexercise of any award granted under the 2005 LTIP prior to the date the 2007LTIP became effective. The provisions of the 2005 LTIP applicable to directorsare set forth in a separate 2007 Directors’ Compensation Incentive Plan (the “Directors’Plan”), which was also adopted by the Company pursuant to the approval of theshareholders at the 2007 annual meeting of shareholders held August 17, 2007.

 

The 2007 LTIP increases the amount of securitiesavailable for incentive awards to an aggregate of 4,000,000 shares, subject toadjustment to reflect stock splits and other similar events. The 2007 LTIPterminates on the earlier of (1) ten years from the date the 2007 LTIP becomeseffective, or (2) at such time as no shares of common stock of the Companyremain available for issuance through the plan. The Company’s officers,employees and consultant and the employees of certain of the Company’saffiliates are eligible to participate in the 2007 LTIP. The 2007 LTIP allowsfor the award of (1) incentive stock options under Section 422 of the Tax Code,(2) non-statutory stock options not covered under Section 422 of the Tax Code,(3) stock appreciation rights granting the recipient the right to receive anexcess in the fair market value (as defined in the 2007 LTIP) of shares ofstock over a specified reference price, (4) restricted stock, which will besubject to a risk of forfeiture and nontransferable until it vests over time,(5) qualified performance-based incentive to employees who qualify as coveredemployees within the meaning of Section 162(m) of the Tax Code, as amended, (6)unrestricted stock, which will be immediately transferable, and (7) otherstock-based incentive awards. Any vesting provisions for an award made underthe 2007 LTIP may be determined by the Compensation Committee. Awards willgenerally vest in four years unless otherwise determined by the CompensationCommittee.

 

**The Directors’ Plan supersedes and replaces the portions ofthe 2005 LTIP applicable to non-employee directors, but will not impair thevesting or exercise of any incentive granted to a director under the 2005 LTIPprior to the date the Directors’ Plan became effective. The Directors’ Planwill terminate on the earlier of (1) ten years from the date that the Directors’Plan becomes effective, or (2) at such time as no shares of common stock of theCompany remain available for issuance through the plan. The Company’snon-employee directors are eligible to participate in the Directors’ Plan. TheDirectors’ Plan provides for the issuance of up to 2,500,000 shares of theCompany’s common stock to non-employee directors, subject to adjustment toreflect stock splits and similar events. The Directors’ Plan allows for theaward of (1) non-statutory stock options not covered under Section 422 of theTax Code, (2) stock appreciation rights, granting the recipient the right toreceive an excess in the fair market value (as defined in the Directors’ Plan)of shares of stock over a specified reference price, (3) restricted stock,which will be subject to a risk of forfeiture and nontransferable until itvests over time, (4) unrestricted stock, which will be immediatelytransferable, and (5) other stock-based incentive awards. Vesting under theDirectors’ Plan will be determined by the Compensation Committee. Awards willgenerally vest in four years unless**

 

16

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**otherwise determined by the Compensation Committee.**

** **

**Note 10 — Affiliate and RelatedParty Transactions**

** **

As of September 30, 2007 andSeptember 30, 2006, the Company had no outstanding balances with affiliates orrelated parties.

 

**Note 11 —Commitments and Contingencies**

 

*Transfer of NFS*

 

On September 9, 2004, the day prior to theeffective date of the Merger, Navidec assigned all of its pre-merger businessoperations, assets and liabilities to NFS and all issued and outstanding sharesof NFS were subsequently transferred to the Navidec pre-merger shareholders ofrecord as of September 9, 2004, for no cash consideration.

 

The transfer of NFS shares was effected byNFS to the pre-merger Navidec shareholders of record as of September 9, 2004.Consistent with the terms of the Merger Agreement, the Company had no controlin the actions resulting in the transfer of the NFS shares and the Companybelieved, based on information provided by NFS and its advisors that NFS hadundertaken the necessary actions to comply with applicable registrationrequirements. However, because a registration of the NFS shares was noteffective at the time of the transfer of the NFS shares, and has still notbecome effective, it might be determined that the transfer of the NFS shareswas 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 state regulators mightconclude that the Company was subject to responsibility for registration of theshares, the Company regards the possibility of liability arising from thedistribution of the NFS shares as remote for the following reasons:  The Company took no action with respect tothe transfer of NFS shares which, pursuant to the terms of the MergerAgreement, was agreed to be handled by NFS, including any necessaryqualifications or registrations under applicable securities laws. Further, theCompany believed, based on information provided by NFS and its advisors, thatNFS had undertaken to comply with all applicable registration requirements.Additionally, the transfer, which was tantamount to a stock dividend to thepre-merger shareholders of Navidec, Inc., did not involve cash consideration,making a finding 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 Company regards the possibilityof liability resulting from the transfer of NFS as remote, the Company doesrecognize the risk of such liability, and therefore cautions current andprospective Company shareholders of such risk.

 

*Barge Incident*

 

In early August 2006, the Company incurred anoperational delay of approximately three weeks resulting from a navigationincident which caused the BPZ-01 barge to be grounded on a sand bank in TalaraBay in northwest Peru during the second mobilization trip to the Corvinaplatform. No injuries were sustained by any of the Company’s staff, nor to anyof the tug boat operator’s crew members. The BPZ-01 is a U.S. flagged vesseland as such was inspected after the incident by the U.S. Coast Guard. Uponsatisfactory completion of the inspection, the barge resumed normal operationsimmediately thereafter. Based upon information currently available, the Companyestimates that total expenditures related to this incident will beapproximately $1.1 million. As of September 30, 2007, approximately $382,000has been incurred for barge recovery and temporary repairs to the vessel. Inaddition, the Company expects to incur approximately $330,000 in permanentrepairs to the barge and approximately $432,000 of consequential damages,primarily stand-by charges. As of November 9, 2007, the Company has notpresented a final claim to its insurance carrier for the barge repairs and isnegotiating a settlement agreement with a third party for recovery of anydamages not covered through its insurance. The Company believes the majority ofthe costs associated with this incident will be reimbursed through insurance orthrough a third party. No assurances can be given, however, that any suchrecoveries will be sufficient to cover all costs associated with this incidentor to the timing of any such recoveries. This incident is not expected to havea material impact on the Company’s operations or business plan.

 

17

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*Peru Properties*

 

As of September 30, 2007, in connection withits Peru properties, the Company obtained three performance bonds totalingapproximately $2.4 million to guarantee certain obligations and commitments. Asof September 30, 2007, the Company had restricted cash deposits ofapproximately $2.0 million, which partially collateralizes the performancebonds. The Company was required to deposit approximately $750,000 as restrictedcash to collateralize a performance bond in connection with the beginning ofthe third exploration period under the Block Z-1 license contract, which beganin June 2007. In addition, the Company was required to deposit approximately$245,000 as restricted cash to collateralize performance bonds under the BlockXIX license contract in connection with the first exploration period. TheCompany also was required to post a $1 million performance bond to guaranteepayment under a service agreement, which is set to expire in January 2008. Theperformance bonds were issued by Peruvian banks and their terms are governed bythe corresponding license contract or agreement.

 

The Company has been officially notified byPerupetro that it also qualified as an operator for Blocks XXII and XXIII. Thelicense contacts for both blocks have been approved by the Board of Directorsof Perupetro and the Company anticipates the Supreme Decree authorizing bothlicense contracts to be signed in mid November 2007. The Company anticipateshaving to deposit funds as restricted cash to collateralize performance bondsto guarantee the obligations undertaken by signing the license contracts. Theperformance bonds are expected to total approximately $3.7 million, of whichapproximately $0.3 million relates to Block XXII and $3.4 million to BlockXXIII. The Company continues to seek full or partial reduction of the amountrequired to be deposited with the corresponding issuing bank for theperformance bonds.

 

In connectionwith the Block XIX license contract, the Company recently completed shooting200 kilometers of 2-D seismic. The cost to acquire this seismic data wasapproximately $3.6 million. It will take approximately two to three months toprocess and interpret the data. Based on the results of the 2-D seismic surveyand in order to comply with the requirements under the next phase of thelicense contract, the Company plans to drill a well in Block XIX in late 2008at an estimated cost of $8.0 million.

 

The Company acquired four offshore platformsin connection with its Block Z-1 property. The Company completed therefurbishment of one of the offshore platforms and intends to maintain all ofthe platforms for use throughout the life of the Block Z-1 contract. Theseplatforms revert back to the Government of Peru at the end of the contract,provided they are in good working condition, with no further obligation to thecompany to dismantle or remove them. The Company and its legal advisors havereviewed Peruvian law and existing regulations from the Peruvian Ministry ofEnergy and Mines in conjunction with the requirements of SFAS No. 143 “Accountingfor Asset Retirement Obligations” (“ARO”) as it applies to tangible long livedassets and their future retirement and dismantlement. The Company has concludedthere is no legal obligation to dismantle the platforms, as defined in SFAS No.143, 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 adrilling contract with Petrex S.A., a subsidiary of Saipem SpA of Italy. Underthe contract, Petrex S.A. will provide a platform rig capable of drilling to16,000 feet and upgrade the rig to meet the Company’s specifications. TheCompany is utilizing the rig for the initial development of the Corvina fieldand may also utilize it for the expected development of the Albacora oil field,and potential appraisal wells in the Piedra Redonda gas field. The Company paida $5.5 million fee to mobilize and upgrade the rig. In exchange, the Companyreceived a discounted fixed day rate and exclusive rights to use the rig, atits option, during the two-year period which commenced in September 2006. Inaddition, after the guaranteed two-year period, the Company has the option toextend the contract for an additional year at market rates.

 

*Financing Activities*

 

On October 22, 2007, the Company entered into a non-binding term sheetagreement with the International Finance Corporation (“IFC”), the privatesector arm of the World Bank Group based in Washington, D.C., delineating thekey terms and conditions for the first tranche (see Loan “C” immediately below)of a debt package with IFC. Previously,the Company announced a total debt package, approved by IFC, of $100.5 millionapproved by the IFC but subject to final due diligence and documentation. TheCompany is actively negotiating with IFC to increase the debt package to anestimated $165 million for further development of our assets.

 

18

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The initial$120 million financing package was approved by the Credit Committee of the IFCon November 29, 2006, which included an investment by IFC in BPZ’s common stockand took place on December 18, 2006. Thecommon stock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million. The offering was placed directly by the Companyand there were no placement fees. IFCcurrently holds approximately a 10% equity position in the Company with 6.5million shares. IFC’s total equity and senior debt investment in the Company,subject to execution and funding of the increased debt agreement, as describedabove, will reach approximately $185 million. Any increased debt package willbe subject to final internal approvals by appropriate representatives of bothIFC and BPZ. The proposed $165 million facility is anticipated toconsist of the following:

 

•                  Loan “C”, comprised ofwhich is the $15.5 million of convertible debt, is expected to close in earlyNovember, pending approval and execution of closing documents in their finalform. The conversion price is $10.39 per share and includes a forced conversionprice of $18.19 per share. The instrument will have a 10 year term with avariable interest rate of 2% per annum above 6-month LIBOR.

 

•                  Loan “A”, which willbe for IFC’s own account, is anticipated to be $34.5 million in long-termsenior debt. This second tranche is expected to close by early next year,pending approval and execution of closing documents in their final form.

 

•                  Loan “B”, comprised ofsenior debt to be syndicated by IFC, is projected to be approximately $115million. This third tranche is expected to close in the latter part of firstquarter 2008, or by early second quarter. This remaining debt portion of thefinancing will be subject to identification of the lending syndicate membersand subsequent negotiation and approval of the necessary loan documentation.

 

As of November 9, 2007, neither the finalloan documents nor the third-party debt syndication have been completed.

 

In conjunction with the gas-to-power project, the recent discovery ofoil reserves in the Corvina field has prompted the Company to simultaneouslydirect its attention towards accelerating the development of potential oilproduction in the Corvina field. On June 13, 2007 the Company entered into acapital lease agreement, with an option to purchase, for two barges to assistin the development of the Corvina oil. The capital lease for the two bargesbegins in August 2007 and expires in November 2009. Lease payments arevariable, based on the working status of the barges with a purchase option of$5,000,000 after the first year of the lease and $4,000,000 after the maturitydate of the lease. The capital lease obligation was recorded at the presentvalue of the minimum lease payments at an imputed discount rate of 18%, whichreflects the Company’s incremental borrowing rate for this transaction. Theassets will be depreciated over the term of the capital lease obligation. Thecapital lease assets were recorded at $6,180,679, which represents the presentvalue of the minimum lease payments, or the aggregate fair market value of theassets.

 

*Charter of Navy Tankers*

 

On October 24, 2007, theCompany entered into two short term contracts with the commercial division ofthe Peruvian Navy to lease two tankers to transport oil to market earlier thanscheduled. The two tankers leased from the Navy each have capacity ofapproximately 6,000 barrels. With the current production facilities and thesetwo tankers, the Company expects to produce approximately 2,500 barrels of oilper day (bopd) beginning in early November barring any unforeseencircumstances.

 

As noted above, the Company currently has twoadditional barges under a capital lease agreement. The Company intends to usethe tank barges as floating production and storage facility (“FPSO”) andtransport barges in the Company’s oil production operations. These barges arecurrently being outfitted with equipment in the port of Paita, but haveencountered some delays due to scheduling. The two barges under a capitallease, the Na Moku and the Nu’uanu, each have a capacity of approximately40,000 barrels. The Na Moku will be used as a FPSO, moored adjacent to the CX11platform, while the Nu’uanu will be used to transport oil between the offshoreCorvina field in the Z-1 block in northwest Peru and the refinery in Talaraapproximately 100 miles south of the Company’s operations. The Company expectsto increase projected production from 2,500 bopd to approximately 4,000 bopdusing these two barges when they become available, which is now expected to betowards the end of this year or early next year.

 

The Company will continue to make commitmentsin the ordinary course of business as it pursues its development plans for theproperties.

 

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**Note 12 — LegalProceedings**

 

*SEC Inquiry of Navidec*

 

Navidec was advised in February 2004 that theSEC was conducting an informal inquiry to determine whether Navidec hadviolated federal securities laws. Based on the information made available tothe Company, it believes the SEC’s investigation related, at least in part, tothe restatement of Navidec’s reported earnings for the first and secondquarters of 2003. This restatement was reported in Navidec’s Form 10-Q for thethird quarter of 2003 filed on December 11, 2003.

 

In December 2004, the Company received noticethat the SEC had issued an Order Directing a Private Investigation andDesignating Officers to Take Testimony and would be conducting a formalinvestigation. Pursuant to the Merger Agreement, the Company has beenindemnified by NFS for the costs of the SEC investigation, and NFS has bornethe costs incurred to date. The Company is not aware of any activity concerningthis matter during the last year or of any actions the SEC may intend to takewith respect to this matter. No assurance can be given, however, that theinvestigation has been and will be resolved without negative consequences tothe Company.

 

**Note 13 —Subsequent Events**

 

*Financing Activities*

 

On October 22, 2007, the InternationalFinance Corporation (“IFC”), the private sector arm of the World Bank Groupbased in Washington, D.C., entered into a non-binding debt term sheet agreementwith us delineating the key terms and conditions for the first tranche of adebt package with IFC, “Loan C”. Loan “C”, is comprised of $15.5 million ofconvertible debt and is expected to close in early November, pending approvaland execution of closing documents in their final form. The conversion pricewill be $10.39 per share and includes a forced conversion price of $18.19 pershare. The instrument will have a 10 year term with a variable interest rate of2% per annum above 6-month LIBOR. See “*Financing Activities*”in Note 11 above for further detail.

 

As of November 9, 2007, neither the finalloan documents nor the third-party debt syndication have been completed.

 

*Charter of Navy Tankers*

 

On October 24, 2007 theCompany entered into two short-term contracts with the commercial division ofthe Peruvian Navy to lease two tankers to transport oil to market earlier thanwe had previously scheduled. The two tankers leased from the Navy each havecapacity of approximately 6,000 barrels. With the current production facilitiesand these two tankers, the Company expects to produce approximately 2,500barrels of oil per day (bopd) beginning in early November barring anyunforeseen circumstances. See “*Financing Activities*”and “*Charter of Navy Tankers”* in Note 11above for further details.

 

**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

You should readthe following discussion and analysis together with our consolidated financialstatements and notes thereto and the discussion Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, Item7A, “Quantitative and Qualitative Disclosures About Market Risk” andItem 1A.  “Risk Factors” included in our Annual Report onForm 10-K, as amended, for the year ended December 31, 2006. The followinginformation contains forward-looking statements that involve risks,uncertainties and assumptions. Should one or more of these risks oruncertainties materialize, our actual results may differ from those expressedor implied by the forward-looking statements. See “Disclosure RegardingForward-Looking Statements” below.

 

BPZResource, Inc., (the “Company” or “BPZ”) a Texas corporation, wasincorporated in 1993 and is based in Houston, Texas with offices in Lima, Peruand Quito, Ecuador. We are an exploratory stage company focused on theexploration and production of oil and natural gas and we intend to utilize partof our future natural gas production for the complementary development ofgas-fired power generation.

 

OnSeptember 10, 2004, BPZ Energy, Inc., a Texas, (BPZ-Texas”) corporationconsummated a reverse merger with Navidec, Inc., a Colorado corporation (“Navidec”),whereby BPZ-Texas became a wholly owned subsidiary of Navidec (the

 

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“Merger”).See “Business—Navidec Merger Transaction” and Note 2 to the Company’sConsolidated Financial Statements, both included our December 31, 2006 Form10-K, for detailed discussion regarding the Merger.

 

Currently, wehave exclusive rights and license agreements for oil and gas exploration andproduction covering a total of approximately 2.4 million acres innorthwest Peru. Our license contracts cover 100% ownership of both Block Z-1(739,205 acres) and Block XIX (472,860 acres). The Block Z-1 contract wassigned in November 2001, and the Block XIX contract 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 this period.If the exploration activities are successful, the total contract term canextend up to 30 years for oil exploration and production and up to40 years for gas exploration and production. We have presented allnecessary documentation requested by Perupetro in order to become the qualifiedoperator under a license contract for Block XXII (948,000 acres, referred to asArea VI in previous filings) which we previously held under a TechnicalEvaluation Agreement. Subsequently, in March 2006, we were notified byPerupetro that we qualified as an operator for Block XXII. In July 2006Perupetro officially informed us that our proposal for the 248,000 acre BlockXXIII, located onshore in northwest Peru between our Blocks Z-1 and XIX, wasthe winning bid in their recent license tender process. On September 20, 2007,we were officially notified by Perupetro that we also qualified as an operatorfor Block XXIII. We have been informed that the license contracts for bothblocks XXII and XXIII have been approved by the Board of Directors of Perupetroand we are now waiting for the Supreme Decree to be issued which authorizes thesignature for both license contracts. We anticipate both license contracts willbe signed in mid November, 2007.

 

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

 

We are in theexploratory stage of our oil and natural gas business and to date ouractivities in Peru have been primarily focused on the analysis and evaluationof technical data on the various properties; the preparation of the developmentplans for the properties, including detailed engineering and design of thepower plant and gas processing facilities; refurbishment of one of our offshoreplatforms, procuring machinery and equipment for an extended drilling campaign;procuring equipment for the production of oil from the Corvina Field; obtainingall necessary environmental and operating permits and securing the requiredcapital and financing to complete the current plan of operation. We commenceddrilling of our initial well, the CX11-21XD, in the Corvina Gas Field at theCX-11 platform in September 2006, and a total depth of 10,457 feet (9,234 feettrue vertical depth) was reached in November 2006. In March 2007, after a totalof six Drill Stem Tests (“DST”) were conducted on separate potential payzones from the Lower and Upper Zorritos formations, the well tested positivefor both gas and oil in quantities that we believe to be commerciallyproducible. In June, 2008 we successfully recompleted the Corvina CX11-16X wellas a natural gas producing well. A total of four DST’s were conducted onvarious zones in the well including a formation previously untested in theentire basin. The well tested positive for gas in quantities that we believe tobe commercially producible. In October, the Company completed seven DST’s onthe CX11-14D well in the Corvina Field. The first six tests were conducted inthe Upper Zorritos formation, with the first two testing the oil zone and theother four testing the gas zone, while the seventh test targeted the Cardalitosformation located immediately above the Upper Zorritos. The well testedpositive for oil and gas in quantities that we believe to be commerciallyproducible. We have not drilled anyother wells or recognized any revenues from operations, and we do notanticipate generating significant revenues from our properties prior toDecember 31, 2007. However, on October 24, 2007, the Company entered into twoshort term contracts with the commercial division of the Peruvian Navy to leasetwo tankers to transport oil to market earlier than scheduled. The two tankersleased from the Navy each have capacity of approximately 6,000 barrels. Withthe current production facilities and these two tankers, the Company expects toproduce approximately 2,500 barrels of oil per day (bopd) beginning in earlyNovember barring any unforeseen circumstances.

 

**Plan of Operation**

 

*Corvina Oil Development andGas-to-Power*

 

Our plan ofoperation is initially focused on the development and exploitation of the oiland natural gas resource opportunities in the offshore Block Z-1 innorthwest Peru, in which we own a 100% working interest. In order to achieveour objectives, we must obtain significant financing from external sources. Todate we have raised approximately $121 million through several privateplacements of our common stock to fund our capital program

 

As part of ourprivate placement equity financing on May 8, 2007, we closed on an initialprivate placement of common stock, with an over-allotment that closed on June15, 2007, resulting in gross proceeds of $37.7 million to us. The

 

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proceedsfrom this offering have been used primarily in an effort to accelerate theCorvina oil development and otherwise will be used consistent with theoperating plan as described in our public filings. The private placement shareswere issued under Regulation D of the Securities Act of 1933, as amended. Theshares issued are restricted shares and will not be eligible for trading untilregistered with the SEC. The registration statement for these shares wasdeclared effective by the Securities and Exchange Commission on June 14, 2007,and the related prospectus was filed on June 20, 2007.

 

On October 22, 2007, the IFCand the Company entered into a non-binding debt term sheet agreement as part ofthe Company’s $100.5 million debt financing package for approximately $15.5million (See “-Liquidity, Capital Resources and Capital Expenditures”). Thefinancing is subject to IFC’s preparation of the final documentation based onthe terms of the non-binding agreement. However, the Company is activelynegotiating with IFC to increase the debt package to an estimated $165 millionfor further development of the assets of the Company. IFC currently holdsapproximately a 10% equity position in the Company with 6.5 million shares. IFC’stotal equity and senior debt investment in the Company, based upon executionand funding of the increased debt agreement, as described above, may reachapproximately $185 million. Anyincrease in funding of the debt package is subject to final internal approvalsby the appropriate representatives of both IFC and BPZ.

 

Our Corvina OilDevelopment project has an estimated initial capital budget of $11.7 million. OnOctober 24, 2007, in order to accelerate our oil production program in theCorvina field, we entered into two short-term contracts with thecommercial division of the Peruvian Navy to lease two tankers to transport oilto market earlier than scheduled. The two tankers leased from the Navy eachhave capacity of approximately 6,000 barrels. With the current productionfacilities, the two navy tankers and the results of the oil zones tested at theCX-11 21XD and 14D wells,we project potential sustained production ofapproximately 2,500 barrels of oil per day (bopd) beginning in early November,barring any unforeseen circumstances.

 

We currently have two additional barges under a capitallease agreement. We intend to use these barges as a floating production andstorage facility (“FPSO”) and a transport barge in the Company’s oil productionoperations. These barges are currently being outfitted with equipment in theport of Paita, but have encountered some delays due to scheduling. The twobarges under a capital lease, the Na Moku and the Nu’uanu, each have a capacityof approximately 40,000 barrels. The Na Moku will be used as a FPSO, mooredadjacent to the CX11 platform, while the Nu’uanu will be used to transport oilbetween the offshore Corvina field in the Z-1 block in northwest Peru and therefinery in Talara approximately 100 miles south of the Company’s operations. Weexpect to increase production from 2,500 bopd to approximately 4,000 bopd usingthese two barges when they become available, which is now expected to betowards the end of this year or early next year, though this schedule issubject to many factors outside our control, including obtaining all necessaryequipment and no assurance can be given that we can meet this schedule.

 

Our CorvinaGas-to-Power project, with an estimated capital budget of $200.1 million,entails the refurbishment of the Corvina CX-11 platform, rehabilitation of anexisting well and the drilling of two new wells, installation of a 10-mile gaspipeline from the platform to shore, construction of gas processing facilitiesand a 160 megawatt (“MW”) simple-cycle electric generating plant, andsubsequently, the construction of a 40-mile gas pipeline to supply gas to thirdparty generators in Arenillas, Ecuador

 

Our firstpriority in the Corvina Gas-to-Power project is drilling the initial gas wellsin the Corvina Gas Field to develop reserves and establish deliverability atexpected levels. In December 2005, we signed a drilling contract withPetrex S.A., a subsidiary of Saipem SpA of Italy. Under this contract, PetrexS.A. provided us with a platform rig capable of drilling to 16,000 feet andupgraded the rig to meet our specifications. We are utilizing the rig for theinitial development of the Corvina Field and may also utilize it for theexpected development of the Albacora oil field, and potential appraisal well inthe Piedra Redonda gas field. We paid $5.5 million to upgrade and mobilizethe rig. In exchange, we received a competitive fixed day rate and exclusiverights to use the rig, at our option, during the two-year period commencingwith delivery of the rig in September 2006. In addition, after theguaranteed two-year period, we have the option to extend the contract for anadditional year at market rates.

 

InApril 2006, we acquired and equipped a deck barge that was used totransport the drilling rig to the Corvina CX-11 platform and then act as atender for offshore drilling operations at Corvina, and eventually at our otherproperties. The deck barge, officially named BPZ-01, is equipped with a 200 toncrane for loading and off-loading. BPZ-01 and related equipment, including asmaller 35 ton crane, two winches and related spare parts, were acquired forapproximately $6.0 million. The BPZ-01 is an important element in ourstrategy to control drilling costs by allowing the use of existing platformsand avoiding the use of high-priced drill ships or barges.

 

The CorvinaField has two existing platforms, the CX-11, which we recently refurbished andthe CX-13, which we

 

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plan torefurbish in the future. The CX-11platform was evaluated as fit for operationsby the independent risk management consulting firm of ABSGConsulting, Inc.

 

We havecompleted drilling our first well the CX11-21XD, recompleted the CX 11-16X welland have begun drilling a third well, CX 11-14D. We commenced drilling of ourinitial well, the CX11-21XD, in the Corvina Field at the CX-11 platform inSeptember 2006, and a total depth of 10,457 feet (9,234 feet true verticaldepth) was reached in November 2006. In March 2007, after a total of six DrillStem Tests (“DST”) were conducted on separate potential pay zones fromthe Lower and Upper Zorritos formations, the well tested positive for both gasand oil in quantities that we believe to be commercially producible. In June2008, we successfully recompleted the Corvina CX11-16X well as a natural gasproducing well. A total of four DST’s were conducted on various zones in thewell including a formation previously untested in the entire basin. The welltested positive for gas in quantities that we believe to be commerciallyproducible. In October, we completed seven DST’s on the CX11-14D well. Thefirst six tests were conducted in the Upper Zorritos formation, with the firsttwo testing the oil zone and the other four testing the gas zone, while theseventh test targeted the Cardalitos formation located immediately above theUpper Zorritos. The well tested positive for oil and gas in quantities that webelieve to be commercially producible. We have not drilled any other wells or recognized any revenues fromoperations, and we do not anticipate generating significant revenues from ourproperties prior to December 31, 2007.

 

Our initialplan of operation envisions the installation of a Company-owned 160 MWsimple-cycle, gas-fired, electric generation plant at Nueva Esperanza, near thetown of Caleta Cruz, in northwest Peru. In August 2005, we awarded theturnkey contract for the engineering, procurement and construction of the powerplant project to BTEC Turbines LP of Houston (“BTEC”). The contract was awardedfollowing a comprehensive six-month bidding process that included field visitsby all of the bidders. The engineering portion of the contract is ongoing andnearing completion. Final terms of the procurement and construction portions ofcontract are currently being negotiated. BTEC is expected to supply two GeneralElectric Frame 7EA simple-cycle gas-fired turbines. BTEC will also act asthe main contractor for the design, transportation, construction, startup andcommissioning of the power plant. Our plan is to own 100% of the power plant.Accordingly, our revenues from the natural gas delivered to the power plantwill be derived from the sale of electricity, which is currently projected forearly 2009, though this schedule is subject to many factors outside ourcontrol, including obtaining all necessary equipment and no assurance can begiven that we can meet this schedule.

 

To transportthe natural gas from the Corvina Field to our planned power plant we intend toconstruct a 10-mile offshore pipeline. The power plant site is located adjacentto an existing substation and power transmission lines which, with certain upgrades,are expected to be capable of handling up to 360 MW of power. In order tosupport our proposed electric generation project, we commissioned anindependent power market analysis for the region. The Peruvian electricitymarket is deregulated and power is transported through an interconnectednational grid managed by the Committee for Economic Dispatching of Electricity.Based on this study, we believe we will be able to sell economic quantities ofelectricity from the initial 160 MW power plant. The market study alsoindicates that there may be future opportunities for us to generate and sellsignificantly greater volumes of power into the Peruvian and Ecuadorian powermarkets.

 

In addition tothe local power market by our initial project in Peru, we intend tosimultaneously develop a gas sales strategy for nearby Ecuador to capitalize onwhat we believe to be significant upside gas potential for the Corvina andPiedra Redonda Fields located in Block Z-1, as well as the potentiallysignificant natural gas resources in the adjacent onshore Block XIX. Theseproperties are within 30 miles of the Ecuadorian border and we plan to developthem for export sales of either raw gas or power generation via connection tothe transmission system of Ecuador. Our plan for eventual Ecuadorian gas salesincludes the construction of a 40-mile pipeline from Caleta Cruz, the terminalpoint of our offshore pipeline from the Corvina Gas Field, to Arenillas,Ecuador. We intend to sell gas for the generation of electricity by third partypower producers in the local market in Ecuador. We are planning to completethis pipeline for first sales of gas to Ecuador in mid-to-late 2009, thoughthis schedule is subject to many factors outside our control, including allnecessary financing and no assurance can be given that we can meet thisschedule or obtain the required financing.

 

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

 

*Block Z-1*

 

Future plansfor Block Z-1 include:  furtherdevelopment of natural gas in the Corvina and Piedra Redonda Fields

 

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forfuture industrial markets, such as petrochemicals, and for additional gas salesinto Guayaquil, Ecuador, known as the industrial center of Ecuador; thedevelopment of the Albacora Oil Field for which we have completed the baselinefield work towards the securing of the environmental permits required forrepair of an existing platform, the workover of three shut-in wells, and therelated drilling program.  We have completed our internal evaluation ofthe Albacora oilfield’s estimated reserves based on the definitions andstandards adopted in 1997 by the Society of Petroleum Engineers & WorldPetroleum Congresses (SPE/WPC), and we are seeking an independent certificationof such reserves, though no assurance can be given that any such reserves canbe proven, or will be certified as proven, or that we can demonstrate ourtechnical or financial ability to recover any such reserves. We also have begunplanning for eventual exploration and development work in the deeper water(water depths of approximately 500 to 1,000 feet) sections of Block Z-1

 

*Block XIX*

 

In connectionwith our onshore Block XIX license contract, we completed shooting 200kilometers of 2-D seismic surveys during the second and third quarter of 2007. Basedon the results of the 2-D seismic surveys and the requirements under the nextphase of the license contract, we plan to drill a well in late 2008.

 

*Blocks XXII and XXIII*

 

Block XXII,which until December 31, 2005, we held under a Technical Evaluation Agreement (“TEA”).Block XXII is a large onshore block in northwest Peru which encompasses theLancones Basin. In December 2005, we notified Perupetro that we wished toexercise our exclusive option to convert the TEA into a license contract. InMarch 2006, we were notified by Perupetro that we qualified as an operator ofBlock XXII.

 

In July 2006,Perupetro officially informed us that our proposal for the 248,000 acre BlockXXIII, located onshore in northwest Peru between our Blocks Z-1 and XIX, wasthe winning bid in their tender process. We are also currently negotiating theterms of this License Contract. On September 20, 2007, we were officiallynotified by Perupetro that we also qualified as an operator for Block XXIII.

 

We have beeninformed that the license contracts for both blocks XXII and XXIII have beenapproved by the Board of Directors of Perupetro and we are now waiting for theSupreme Decree authorizing the signature for both license contracts. Weanticipate both license contracts will be signed in mid November,2007.

 

**Results of Operations**

 
| ** **                               | ** ** | **For the three months** | ** ** | **For the nine months** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **ended September 30,**       | ** ** | **ended September 30,**      | ** ** |
| ** **                               | ** ** | **2007**                                | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| General and administrative               |       | $                                       | 2,763,633  |                                   | $          | 2,373,475 |   | $ | 7,724,642 |   | $ | 5,813,311 |   |
| Stock-based compensation                 |       | 2,811,352                               |       | 879,877                                |       | 4,712,874 |   | 2,229,970 |   |
| Geological, geophysical and  engineering |       | 1,955,155                               |       | 638,504                                |       | 3,925,406 |   | 1,502,211 |   |
| Depreciation expense                     |       | 56,651                                  |       | 63,850                                 |       | 163,437 |   | 159,087 |   |
| Total operating expenses                 |       | $                                       | 7,586,791  |                                   | $          | 3,955,706 |   | $ | 16,526,359 |   | $ | 9,704,579 |   |

 

Our operating and administrative expenses todate have consisted principally of general and administrative costs as well asgeological, geophysical and engineering costs. General and administrative costshave increased significantly from $2,373,475 and $5,813,311 during the threeand nine months ended September 30, 2006 to $2,763,633 and $7,724,642 duringthe three and nine months ended September 30, 2007 as a result of our increasedactivity levels, necessary additional personnel and costs associated with beinga public company. We incurred $1,955,155 and $3,925,406 of geological,geophysical and engineering costs in the three and nine months ended September30, 2007 primarily related to the continued development of our CorvinaGas-to-Power project and 2-D seismic expense on Block XIX, compared to $638,504and $1,502,211 during the comparable periods of 2006 primarily as a result ofthe commencement of our Corvina Gas-to-Power project.

 

Stock-basedcompensation expense for the three and nine months ended September 30, 2007 wasapproximately $2,811,352 and $4,712,874 compared to $879,877 and $2,229,970during the same period in 2006. Stock based compensation expense is primarilyrelated to our restricted stock grants, accrued stock-based compensation underour 2007

 

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Long-TermIncentive Plan and the recognition of Incentive Earn-out Stock Compensation,for two of our executive officers, in the third quarter of 2007due to theprobable achievement of rights to production of notless than 2,000 barrels of oil per day or its equivalent (approximately 12million cubic feet of gas per day) prior to December 28, 2007.

 

We received net cash distributions from ourinvestment in Ecuador property of $242,844 and $250,797 during the three andnine months ended September 30, 2007, compared to net cash distributions of $442,113and $1,123,763 during the three and nine months ended September 30, 2006. Dueto capacity problems at the local refinery in Ecuador, anticipated oil salesfrom the December production were not realized during January 2007 in theamount of approximately $145,000 of otherwise expected revenues. In addition,we received approximately $15,566 in advance for administrative servicesthrough November, 2007. Since our investment consists of an interest in aproducing oil and gas property, we are amortizing the investment on astraight-line basis over the remaining term of the license agreement coveringthe property. Accordingly, we recorded $46,896 and $140,688 of amortizationexpense during the three and nine months ended September 30, 2007, and thethree and nine months ended September 30, 2006.

 

We incurred interest expense of $2,939 and$4,104 for the three and nine months ended September 30, 2007, compared with$27,007 and $29,845 for the three and nine months ended September 30, 2006. Thedifference is primarily due to interest incurred on a guaranteed letter ofcredit during 2006.

 

We did not incur any registration delay expense for the three and nine months ended September 30, 2007. During the three and nine month periods ended September 30, 2006 we recorded registration delay expense totaling $1,191,836 and $3,324,966, respectively, of which approximately $273,356 and $1,300,350 was paid in cash and $918,480 and $2,024,616 was paid by the issuance of 313,594 and 763,184 shares of common stock, respectively. In connection with the private placement of 11,466,000 common shares in July 2005, we were obligated to prepare and file with the SEC a Registration Statement on Form S-1 and to use our best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days from closing. The Registration Statement had not been declared effective by the required date and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $343,000, for each thirty day period until the Registration Statement is declared effective by the SEC. In addition, in connection with the private placement of 4,482,000 common shares in March 2006, the Company was obligated to prepare and file with the SEC a Registration Statement on Form S-1 within ninety days, and to use its best efforts to cause the Registration Statement to be declared effective by the SEC no later than ninety days, from March 8, 2006. The Registration Statement was not filed or declared effective by the required dates and we were liable to the investors for liquidated damages in an amount equal to 1.0% of the purchase price of the shares, approximately $50,010, for each thirty day period until the Registration Statement is declared effective by the SEC. On November 8, 2006, the SEC declared effective the Registration Statement on Form S-1 covering the common shares issued in connection with the July 19, 2005, March 10, 2006, and June 30, 2006, private placements.

 

As a result of the increased cash balancefrom the various private placements of our common stock during 2005, 2006 and2007, we received interest income of $256,557 and $754,304 during the three andnine months ended September 30, 2007 as compared to $216,525 and $644,558 forthe three and nine month period ended September 30, 2006.

 

We realized foreign tax benefit of $12,748for the three months ended September 30, 2007, as well as federal income tax of$1,448 and $39,001 for the three and nine months ended September 30, 2007. Thetax is related to the revenues from our 10% non-operated working interest in the Santa Elena Property insouthwestern Ecuador. No tax expense was incurred for the three and nine monthsended September 30, 2006.

 

We realized a net loss of $7,159,220 or $0.11per share and $15,847,543 or $0.27 per share, during the three and nine monthsended September 30, 2007, compared to a net loss of $4,563,806 or $0.10 pershare and $11,442,285 or $0.26, for the same periods in 2006.

 

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**Project Capital Budget (CorvinaOil and Gas-to-Power)**

 
| ** **                           | ** ** | **($ in millions)** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| Power plant and related  equipment   |       | $                             | 59.4       |   |
| Pipelines and processing  facilities |       | 35.7                          |       |
| Platform and wells                   |       | 100.0                         |       |
| Oil development                      |       | 11.7                          |       |
| Contingencies                        |       | 5.0                           |       |
| Total estimated capital budget       |       | $                             | 211.8      |   |

 

We increased our projectedcapital budget to reflect the drilling of three additional wells at the Corvinaplatform based on the favorable results of the three recently completed wellsand the potential to further delineate the oil and gas discoveries.

 

**Liquidity, Capital Resources and CapitalExpenditures**

 

We currentlyhave no source of revenue or cash flow from operations, and our primary sourceof cash flow has been cash proceeds from private placements of our common stock.As of October 31, 2007, our cash balance was approximately $7.5 million.

 

OnMay 4, 2007, with an over-allotment purchase that closed on June 15, 2007, wecompleted a private placement of 7,170,000 shares of common stock, no parvalue, to accredited investors pursuant to a Subscription Agreement. The commonstock was priced at $5.25 per share and the over-allotment was priced at $5.40per share resulting in proceeds to us of approximately $37.7 million. Nowarrants or dilutive securities were issued in connection with the offering. Theoffering was placed directly by us. A placement fee of 2% of the gross proceedsof this transaction was paid to Morgan Keegan for investment services andconsulting related to the offering. The registration statement was declaredeffective by the Securities and Exchange Commission on June 14, 2007, and therelated prospectus was filed on June 21, 2007.

 

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

 

The initial$120 million aggregate debt and equity financing package was approved by theCredit Committee of the IFC on November 29, 2006, and included an investment byIFC in BPZ’s common stock which took place on December 18, 2006. Thecommon stock was priced at $3.00 per share resulting in proceeds to us ofapproximately $19.5 million. The offering was placed directly by us and therewere no placement fees. IFCcurrently holds approximately 10% equity position in the Company with 6.5million shares. IFC’s total equity and senior debt investment in the Company,based upon execution and funding of the increased debt agreement, as describedabove, may reach approximately $185 million. Any increase in funding of thedebt package is subject to final internal approvals by the appropriaterepresentatives of both IFC and BPZ. The $165 million facility isexpected to consist of the following:

 

•      Loan “C”, comprised of $15.5 million convertibledebt, is expected to close in early November, pending approval and execution ofclosing documents in their final form. The conversion price is $10.39 per shareand includes a forced convert price of $18.19 per share. The instrument willhave a 10 year term with a variable interest rate of 2% per annum above 6-monthLIBOR.

 

•      Loan “A”, which will be for IFC’s own account,is anticipated to be $34.5 million in long-term senior debt. This secondtranche is expected to close by early next year, pending approval and executionof closing documents in their final form.

 

•      Loan “B”, comprised of senior debt to besyndicated by IFC, is projected to be approximately $115 million. This thirdtranche is expected to close in the latter part of first quarter 2008, or byearly second quarter. This remaining debt portion of the financing will besubject to identification of the lending syndicate members and subsequentnegotiation and approval of the necessary loan documentation.

 

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As of November 9, 2007, neither thethird-party debt syndication nor the final loan documents have been completed.

 

During the ninemonths ended September 30, 2007, we incurred capital expenditures ofapproximately $38.8 million primarily related to drilling, completion andtesting activity on the three Corvina wells as well as $6.2 million related tothe capital lease of two barges to be used for production, storage and deliveryof oil produced from Corvina oil and $.6 million for miscellaneous property andequipment. In comparison, during the nine months ended September 30, 2006, weincurred capital expenditures of approximately $18.9 million primarilyon the purchase of a deck barge and related equipment for approximately $6.5million, modernization and refurbishment costs of the platform tender assistdrilling rig of approximately $10.3 million, continued work on therefurbishment of the Corvina platform and power plant and gas processing facilitiesdesigns of approximately $1.7 million, and $0.4 million on other miscellaneousproperty and equipment.

 

In earlyAugust 2006, we incurred an operational delay of approximately three weeksresulting from a navigation incident which caused the BPZ-01 barge to begrounded on a sand bank in Talara Bay in northwest Peru during the secondmobilization trip to the Corvina CX-11 platform. No injuries were sustained byany of our staff, nor to any of the tug boat operator’s crew members. TheBPZ-01 is a U.S. flagged vessel and as such was inspected after the incident bythe U.S. Coast Guard, to its satisfaction. The barge resumed normal operationsimmediately thereafter. Based upon information currently available, the Companyestimates that total expenditures related to this incident will beapproximately $1.1 million. As of December 31, 2006, approximately$382,000 has been incurred for barge recovery and temporary repairs to thevessel. In addition, the Company expects to incur approximately $330,000 inpermanent repairs to the barge and approximately $432,000 of consequentialdamages, primarily stand-by charges. As of the October 22, 2007, we havenot presented a final claim to our insurance carrier for the barge repairs andwe are negotiating a settlement agreement with a third party for recovery ofany damages not covered through our insurance. We believe the majority of thecosts associated with this incident will be reimbursed through insurance orthrough a third party. No assurances can be given, however, that any suchrecoveries will be sufficient to cover all costs associated with this incidentor to the timing of any such recoveries. This incident did not have a materialimpact on our operations or business plan.

 

As of September 30, 2007, in connection withour Peru properties, we obtained three performance bonds totaling $2.4 millionto guarantee certain obligations and commitments. As of September 30, 2007, wehad restricted cash deposits of approximately $2.0 million which partiallycollateralizes the performance bonds. We were required to deposit approximately$750,000 as restricted cash to collateralize a performance bond in connectionwith the beginning of the third exploration period under the Block Z-1 licensecontract, which began in June 2007. In addition, we were required to depositapproximately $245,000 as restricted cash to collateralize performance bondsunder the Block XIX license contract in connection with the first explorationperiod. We were also required to post a $1 million performance bond toguarantee payment under a service agreement, which is set to expire in January2008. The performance bonds were issued by Peruvian banks and their terms aregoverned by the corresponding license contract or agreement.

 

We have been officially notified by Perupetrothat we qualified as an operator for Blocks XXII and XXIII. We have beeninformed that the license contacts for both blocks have been approved by theBoard of Directors of Perupetro and we anticipate the Supreme Decreeauthorizing both license contracts to be signed in November, 2007. Weanticipate having to deposit funds as restricted cash to collateralizeperformance bonds to guarantee the obligations undertaken by signing thelicense contracts. The performance bonds are expected to total approximately$3.7 million, of which approximately $0.3 million relates to Block XXII and$3.4 million to Block XIII. We continue to seek full or partial reduction inthe amount required to be deposited with the corresponding issuing bank for theperformance bonds.

 

In connectionwith the Block XIX license contract, we have recently completed shooting 200kilometers of 2-D seismic. The cost to acquire this seismic data wasapproximately $3.6 million. It will take approximately two months to threemonths to process and interpret the data. Based on the results of the 2-Dseismic surveys and in order to comply with the requirements under the nextphase of the related license contract, we plan to drill a well in Block XIX inlate 2008 at an estimated cost of $8 million.

 

October 24, 2007 we entered into two short termcontracts with the commercial division of the Peruvian Navy to lease twotankers to transport oil to market earlier than scheduled. The two tankersleased from the Navy each have capacity of approximately 6,000 barrels. Withthe current production facilities and these two tankers, we expect to produceapproximately 2,500 barrels of oil per day (bopd) beginning in early Novemberbarring any unforeseen circumstances.

 

We currently have two additional barges under a capitallease agreement. We intend to use the tank barges as floating production andstorage facility (“FPSO”) and transport barges in our oil production operations.These barges are currently being outfitted with equipment in the port of Paita,but have encountered some delays due to scheduling. The two barges under acapital lease, the Na Moku and the Nu’uanu, each have a capacity ofapproximately 40,000 barrels. The Na

 

27

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Moku will be used as aFPSO, moored adjacent to the CX11 platform, while the Nu’uanu will be used totransport oil between the offshore Corvina field in the Z-1 block in northwestPeru and the refinery in Talara approximately 100 miles south of the Company’soperations. We expect to increase production from 2,500 bopd to approximately4,000 bopd using these two barges when they become available, which is nowexpected to be towards the end of this year or early next year.

 

We believethat, based upon the oil test results from the CX 11-21XD and 14D wells, theadditional recent equity financing, our barge storage and transportationcapabilities, there is a high probability the Company will achieve the rightsto the entitlement of production goal as set forth in the Merger Agreement. TheMerger Agreement provides for the issuance of an additional 9,000,000 shares ofcommon stock to the former shareholders of BPZ-Texas. The issuance of theseearn-out shares is triggered once the Company is entitled to receive as itsproportionate share from gross production from any oil and gas wells owned oroperated by the Company of not less than 2,000 barrels of oil per day or itsequivalent (approximately 12 million cubic feet of gas per day) prior toDecember 28, 2007. As of September 30, 2007, the totalof outstanding incentive awards related to the Merger Agreement was 450,000shares with a possible combined future expense of $1,980,000. Of this amount,approximately $1,782,000 was recorded as compensation expense for the three andnine months ended September 30, 2007. Because we expect to achieve rights toproduction as required before December 28, 2007 based on a revised operationsplan, we have determined that the compensation expense related to the IncentiveEarn-Out Shares should be proportionally recognized during the three monthsended September 30, 2007.

 

With ourcurrent cash balance, proceeds from the expected IFC debt facilities,anticipated upcoming Corvina Oil development cash flow, other potentialthird-party financing and potentially from future equity raises, we believe wewill have sufficient capital resources to execute our initial Corvina oildevelopment project and gas-to-power project as we currently envision it.However, the timing and execution of our project is dependent on a variety offactors, including the technical design of facilities, permitting, availabilityof equipment, time and costs required for delivery and construction,performance by contractors and the success of planned financing, many of whichfactors are outside our control and cannot be assured.

 

**Off-Balance Sheet Arrangements**

 

As of September 30, 2007, we had notransactions, agreements or other contractual arrangements with unconsolidatedentities or financial partnerships, often referred to as special purposeentities, which generally are established for the purpose of facilitatingoff-balance sheet arrangements.

 

**Contractual Obligations**

 
| ** **                     | ** ** | **Payments Due by Period at September 30, 2007** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                                                          | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| ** **                     | ** ** | **Total**                                                                           | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| **Contractual Obligations:**   |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Operating lease obligations(1) |       | 502,072                                                                             |       | 179,658 |   | 322,414 |   | — |   | — |   |
| Purchase obligations(2)        |       | 836,850                                                                             |       | 836,850 |   | — |   | — |   | — |   |
| Debt obligations(3)            |       | 8,227,853                                                                           |       | 8,185,815 |   | 42,038 |   | — |   | — |   |
| Total                          |       | $                                                                                   | 9,566,775  |   | $ | 9,202,323 |   | $ | 364,452 |   | $ | — |   | $ | — |   |
|                                |            |                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Operatingleases for our executive office in Houston, Texas, our branch office in Quito,Ecuador, and our branch office and corporate apartments in Lima, Peru.

 

(2)           Primarilyconsists of purchase obligations for various equipment and services related tothe Company’s drilling operations as well as powerplant and pipeline projectsin Peru.

 

(3)           Capitallease for two production and storage barges. Began in August 2007 and expires in November 2009. Lease payments arevariable, based on the working status of the barges, with a purchase option of$5,000,000 after the first year of the lease and $4,000,000 after the maturitydate of the lease. Also include the capital lease for office furniturein our executive office in Houston, Texas expiring in 2010.

 

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**Critical Accounting Policies and Recent Accounting Pronouncements**

 

The discussion and analysis of our financialcondition and results of operations is based on our consolidated financialstatements, which have been prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”). Management uses estimates and assumptions inpreparing the consolidated financial statements in accordance with GAAP. Thoseestimates and assumptions affect the reported amounts of assets, liabilities,revenues and expenses in the consolidated financial statements, and thedisclosure of contingent assets and liabilities. We have identified thefollowing as critical accounting policies directly related to our business andoperations, and the understanding of our financial statements.

 

***Successful Efforts Method of Accounting***

 

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

 

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

 

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

 

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

 

We periodically evaluate the recoverabilityof the carrying value of our long-lived assets and identifiable intangibles bymonitoring and evaluating changes in circumstances that may indicate that thecarrying amount of the asset may not be recoverable. Examples of events orchanges in circumstances that indicate the recoverability of the carryingamount of an asset should be assessed include, but are not limited to, (a) asignificant decrease in the market value of an asset, (b) a significant changein the extent or matter in which an asset is used or a significant physicalchange in an asset, (c) a significant adverse change in legal factors or in thebusiness climate that could affect the value of an asset or an adverse actionor assessment by a regulator, (d) an accumulation of costs significantly inexcess of the amount originally expected to acquire or construct an asset,and/or (e) a current period operating or cash flow loss combined with a historyof operating or cash flow losses or a projection or forecast that demonstratescontinuing losses associated with an asset used for the purpose of producingrevenue.

 

We consider historical performance andanticipated future results in our evaluation of potential impairment.Accordingly, when indicators of impairment are present, we evaluate thecarrying value of these assets in relation to the operating performance of thebusiness and future discounted and non-discounted cash flows expected to resultfrom the use of these assets. Impairment losses are recognized when theexpected future cash flows from an asset are less than its carrying value.

 

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***Future Dismantlement, Restoration, and Abandonment Costs***

 

The accounting for future development andabandonment costs changed on January 1, 2003, with the issuance of Statement ofFinancial Accounting Standards (“SFAS”) No. 143 “Accounting for AssetRetirement Obligation” (“ARO”), which requires the fair value of a liabilityfor an asset retirement obligation to be recognized in the period in which itis incurred if a reasonable estimate of fair value can be made. The associatedasset retirement costs are capitalized as part of the carrying amount of thelong-lived asset. The accrual is based on estimates of these costs for each ofour properties based upon the type of production structure, reservoircharacteristics, depth of the reservoir, market demand for equipment, currentlyavailable procedures and consultations with construction and engineeringconsultants. Because these costs typically extend many years into the future,estimating these costs is difficult and requires management to make estimatesand judgments that are subject to future revisions based on numerous factors,including changing technology, the political and regulatory environment andestimates as to the proper discount rate to use and timing of abandonment.

 

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

 

We have acquired four offshoreplatforms in connection with its Block Z-1 property. We have completed the refurbishmentof one of these offshore platforms and intend to maintain all of such platformsfor use throughout the life of the Block Z-1 contract. These platforms revertback to the Government of Peru at the end of the contract, provided they are ingood working condition, with no further obligation to us to dismantle or removethem. We and our legal advisors have reviewed Peruvian law and existingregulations from the Peruvian Ministry of Energy and Mines in conjunction withthe requirements of SFAS No. 143 as it applies to tangible long lived assetsand their future retirement and dismantlement. We have concluded there is nolegal obligation to dismantle the platforms, as defined in SFAS No. 143, andtherefore recognition of an ARO is not required. Accordingly, no such provisionis reflected in the accompanying consolidated financial statements. If,however, current laws or regulations were changed or the platforms were nolonger in good working order, we could be obligated to dismantle and removethem. The current estimated cost to dismantle an offshore platform is estimatedto be approximately $2 million, depending upon the condition of the platformand the depth of the water.

 

***Accounting Changes and ErrorCorrections***

*** ***

In June 2005, the Financial AccountingStandards Board issued SFAS No. 154, Accounting Changes and Error Corrections,which replaced Accounting Principles Board Opinion No. 20, Accounting Changes (“APB20”), and SFAS No. 3, Reporting Accounting Changes in Interim FinancialStatements. SFAS 154 requires retrospective application to prior periodfinancial statements of a voluntary change in accounting principle unless it isimpracticable. In contrast, APB 20 previously required that most voluntarychanges in accounting principle be recognized by including the cumulativeeffect of changing to the new accounting principle in net income in the periodof change. SFAS 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. Earlier applicationis permitted for accounting changes and correction of errors made in fiscalyears beginning after June 1, 2005. SFAS 154 does not change the transitionprovisions of any existing accounting pronouncements, including those that arein a transition phase as of its effective date. We have elected to adopt theprovisions of SFAS 154 on January 1, 2006. We do not expect adoption to have amaterial effect on our results of operations or financial position.

 

**DisclosureRegarding Forward-Looking Statements**

 

We caution that this document contains forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995,Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. All statements, other than statements of historicalfacts, included in or incorporated by reference into this Form 10-Q whichaddress activities, events or developments which we expect, believe oranticipate will or may occur in the future are forward-looking statements. Thewords “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,”“predicts,” “plans” and similar expressions, or the negative thereof, are alsointended to identify forward-looking statements. In particular, statements,expressed 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. Thesestatements are based on certain assumptions and analyses made by the managementof BPZ in light of its experience and its perception of historical trends,current conditions and expected future developments as well as other factors itbelieves are appropriate in the circumstances. However, forward-lookingstatements are not guarantees of performance and no assurance can be given thatthese expectations will be achieved.

 

30

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Important factors that could cause actual results to differ materiallyfrom the expectations reflected in the forward-looking statements include, butare not limited to any of the following in the jurisdictions in which BPZ orits subsidiaries are doing business:  thetiming and extent of changes in commodity prices for crude oil, natural gas andrelated products, currency exchange rates, interest rates, inflation, theavailability of goods and services, drilling and other operational risks,availability of capital resources, timing of syndication of and disbursementsunder the anticipated IFC debt facility, legislative or regulatory changes,political developments, acts of war and terrorism. A more detailed discussionon risks relating to the oil and natural gas industry and to us is included inthe Company’s Annual Report on Form 10-K, as amended, for the year endedDecember 31, 2006.

 

In light of these risks, uncertainties and assumptions, we caution thereader that these forward-looking statements are subject to risks anduncertainties, many of which are beyond our control, which could cause actualevents or results to differ materially from those expressed or implied by thestatements. All subsequent written and oral forward-looking statementsattributable to us or persons acting on our behalf are expressly qualified intheir entirety by the cautionary statements. We undertake no obligations toupdate or revise its forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

The primary objective of the followinginformation is to provide forward-looking quantitative and qualitativeinformation about our potential exposure to market risks. The term “market risk”refers to the risk of loss arising from adverse changes in interest rates, oiland natural gas prices and foreign currency exchange rates. The disclosures arenot meant to be precise indicators of expected future losses, but ratherindicators of reasonable possible losses. This forward-looking informationprovides indicators of how we view and manage our ongoing market riskexposures. All of our market risk sensitive instruments were entered into forpurposes other than speculative trading.

 

*Interest Rate Risk.*

 

As of September 30, 2007, the Company hadlong-term debt of $42,038 and current maturities of long-term debt of$6,198,899, consisting of a capital lease obligation for the two barges to beused in the Corvina oil production and two secured loans for the purchase ofoffice furniture. The capital lease obligation has an imputed interest rate of18.00% over a lease term of 27 months and includes a purchase optionwhich we anticipate, for accounting purposes we will exercise on the 15th month of the lease term.The other two loans have a term of 60 months and bear interest at fixed ratesof 5.94% and 9.44%, with principal and interest payments due on a monthlybasis. We do not expect a significant change in the market interest rate toimpact the interest on our term debt. However, significant changes in marketinterest rates may significantly affect the level of financing that the IFCwill structure with respect to our project in Peru.

 

*Commodity Price Risk.*

 

With respect to our oil and gas business, anyrevenues, cash flow, profitability and future rate of growth we achieve will begreatly dependent upon prevailing prices for oil and gas. Our ability tomaintain or increase our borrowing capacity and to obtain additional capital onattractive terms is also expected to be dependent on oil and gas prices. Oiland natural gas are commodities, and, therefore, their prices are subject towide fluctuations in response to relatively minor changes in supply and demand.Historically, oil and gas prices and markets have been volatile and are likelyto continue to be volatile in the future. Prices for oil and gas are subject topotentially wide fluctuations in response to relatively minor changes in supplyof and demand for oil and gas, market uncertainty, and a variety of additionalfactors that are beyond our control.

 

Lower oil and natural gas prices may not onlydecrease our revenues on a per unit basis, but may also reduce the amount ofoil and natural gas we can produce economically, if any. A substantial orextended decline in oil and natural gas prices may materially affect our futurebusiness, financial condition, results of operations, liquidity and borrowingcapacity, and we may require a reduction in the carrying value of our oil andgas properties. While our revenues may increase if prevailing oil and gasprices increase significantly, exploration and production costs and acquisitioncosts for additional properties and reserves may also increase.

 

With respect to our planned electricitygeneration business, the price we can obtain for the sale of power may not riseat the same rate, or may not rise at all, to match a rise in the Company’s costto produce and transport gas reserves to our initial 160MW power plant inCaleta Cruz. Prices for both electricity and natural gas have been veryvolatile in the past year and have increase significantly over the past twoyears. The profitability of this business depends in large part on thedifference between the price of power and the price of fuel used to generatepower, or “spark spread.”

 

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*Foreign Currency Exchange Rate Risk.*

 

The U.S. Dollar is the functional currencyfor our operations in both Peru and Ecuador. Ecuador has adopted the U.S.Dollar as its official currency. Peru, however, still uses its local currency,Nuevo Soles, in addition to the U.S. Dollar, and therefore, our financialresults are subject to favorable or unfavorable fluctuations in the exchangerate and inflation of that country. Transaction differences have been nominalto-date but are expected to increase as our activities in Peru continue toescalate. During the nine months ended September 30, 2007, we incurred anexchange rate gain of approximately $11,117 primarily related to the earlyrecovery of IGV or Value Added Taxes in Peru.

 

**Item 4. Controls and Procedures**

 

**(a) Evaluation of DisclosureControls 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 uponthat evaluation our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this report to ensure 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.

 

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

 

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

 

**PART II**

 

**Item 1. Legal Proceedings**

 

See Note 12 ofthe Notes to Consolidated Financial Statements included in Part I, Item I,which is incorporated herein by reference.

 

**Item 1A. Risk Factors**

 

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

 

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

 

OnMay 4, 2007, we completed a private placement of 7,170,000 shares of common stock,no par value, to accredited investors with an over-allotment purchase thatclosed on June 15, 2007. The common stock was priced at $5.25 per share and theover-allotment was priced at $5.40 per share resulting in proceeds to us ofapproximately $37.7 million. No warrants or dilutive securities were issued inconnection with the offering. The offering was placed directly by us. Aplacement fee of 2% of the gross proceeds of this transaction was paid toMorgan Keegan for investment services and consulting related to the offering. Theregistration statement was declared effective by the Securities and ExchangeCommission on June 20, 2007, and the related prospectus was filed on June 21,2007.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

The 2007 annual meeting of shareholders was held onAugust 17, 2007. At this meeting, the following six directors were re-electedby the following vote:

 

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| **Director**                                     | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| Dr. Fernando Zúñiga y Rivero (2)  |       | 44,896,106         |       | 110,089                 |       |
| Manuel Pablo Zúñiga-Pflücker  (3) |       | 44,936,228         |       | 69,967                  |       |
| Gordon Gray (1)                                  |       | 43,903,788         |       | 1,102,407               |       |
| John J. Lendrum, III (3)                         |       | 44,826,578         |       | 179,617                 |       |
| E. Barger Miller, III (1)                        |       | 44,314,762         |       | 691,433                 |       |
| Dennis G. Strauch (2)                            |       | 44,402,278         |       | 603,917                 |       |

 

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(1)  Class I Directors to serve until the2008 annual meeting of shareholders or their successors are elected andqualified.

(2)  Class II Directors to serve until the 2009annual meeting of shareholders or their successors are elected and qualified.

(3)  Class III Directors to serve until the2010 annual meeting of shareholders or their successors are elected andqualified.

 

Other proposals were approved at the 2007 annualmeeting of shareholders as follows:

 
| **Proposal**                                                                                                                                                                                                                                  | ** ** | **Votes For** | ** ** | **Votes  Against** | ** ** | **Abstentions** | ** ** | **Broker  Non-votes** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------|------------|-----------------------|------------|
| Ratification of Johnson  Miller & Co., CPA’s PC as the Company’s independent public  accountants                                                                                                                           |       | 44,910,961         |       | 73,697             |       | 21,537          |       | 0                     |       |
|                                                                                                                                                                                                                                          |       |               |       |               |       |            |       |                  |       |
| Reincorporation of the Company  in the State of Texas                                                                                                                                                                                         |       | 42,914,176         |       | 2,059,104          |       | 32,915          |       | 0                     |       |
|                                                                                                                                                                                                                                          |       |               |       |               |       |            |       |                  |       |
| Change the corporate name of  the Company to “BPZ Resources, Inc.”                                                                                                                                                                  |       | 42,838,253         |       | 321,911            |       | 1,846,031       |       | 0                     |       |
|                                                                                                                                                                                                                                          |       |               |       |               |       |            |       |                  |       |
| Establishment of a classified  board of directors                                                                                                                                                                                             |       | 34,197,433         |       | 10,774,670         |       | 34,092          |       | 0                     |       |
|                                                                                                                                                                                                                                          |       |               |       |               |       |            |       |                  |       |
| Amendment and restatement of  the BPZ Energy, Inc. 2005 Long-Term Incentive Compensation Plan to increase  the amount of securities available for incentive awards and to provide for a  separate Directors’ Compensation Incentive Plan |       | 33,579,855         |       | 11,349,899         |       | 76,441          |       | 0                     |       |
|                                                                                                                                                                                                                                          |       |               |       |               |       |            |       |                  |       |

** **

**Item 5. Other Information**

 

None.

 

33

 

**Item 6. Exhibits**

 
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes -  Oxley Act of 2002. (Filed herewith)                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes -  Oxley Act of 2002. (Filed herewith)                                                     |
|   |   |                                                                                                                                                                              |
| 32.1   |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed  herewith) |
|   |   |                                                                                                                                                                              |
| 32.2   |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed  herewith) |
|   |   |                                                                                                                                                                              |
| 99.1   |   | Stock  Certificates for BPZ Resources, Inc. a Texas Corporation. (Filed herewith)                                                                                                 |

 

34

 

**SIGNATURES**

 

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

 
| Date: November 8, 2007 |     |                                               |
|------------------------|----------|----------------------------------------------------|
|                   |     |                                               |
|                   |     | BPZ  RESOURCES, INC.                               |
|                   |     |                                               |
| * *               | * * | */s/ Manuel Pablo  Zúñiga-Pflücker* |
|                   |     | Manuel  Pablo Zúñiga-Pflücker       |
|                   |     | President  and Chief Executive Officer             |

 

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