Table of Contents

 

 

 

**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: June 30, 2008** |
| ** **                                        |
| **or**                                            |
| ** **                                        | ** **                                                                                               |
| **o**                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

** **

**For the transition periodfrom         to         **

** **

**CommissionFile Number: 001-12697**

 

**BPZRESOURCES, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

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

 

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

 

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

 

**N/A**

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

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

 

Yes o No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 

Asof July 31, 2008, there were 78,451,890 shares of common stock, no par value,outstanding.

 

 

 

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**TABLEOF CONTENTS**

 
|            | **PART I**                                                                             | 3      |
|------------|---------------------------------------------------------------------------------------------|--------|
|       |                                                                                        |   |
| Item 1.    | Financial Statements                                                                        | 3      |
|       |                                                                                        |   |
|       | Consolidated Balance Sheets                                                                 | 3      |
|       |                                                                                        |   |
|       | Consolidated Statements of  Operations                                                      | 4      |
|       |                                                                                        |   |
|       | Consolidated Statements of  Cash Flows                                                      | 5      |
|       |                                                                                        |   |
|       | Notes to  Consolidated Financial Statements                                                 | 6      |
|       |                                                                                        |   |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19     |
|       |                                                                                        |   |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                 | 28     |
|       |                                                                                        |   |
| Item 4.    | Controls and  Procedures                                                                    | 29     |
|       |                                                                                        |   |
| ** ** | **PART II**                                                                            | 30     |
|       |                                                                                        |   |
| Item 1.    | Legal Proceedings                                                                           | 30     |
|       |                                                                                        |   |
| Item 1A.   | Risk Factors                                                                                | 30     |
|       |                                                                                        |   |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 31     |
|       |                                                                                        |   |
| Item 3.    | Defaults  Upon Senior Securities                                                            | 31     |
|       |                                                                                        |   |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                        | 31     |
|       |                                                                                        |   |
| Item 5.    | Other Information                                                                           | 32     |
|       |                                                                                        |   |
| Item 6.    | Exhibits                                                                                    | 33     |
|       |                                                                                        |   |
| ** ** | **SIGNATURES**                                                                              | 34     |

 

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** **

**PART I**

** **

**Item 1. Financial Statements**

 

**BPZ Resources, Inc. and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                         | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| ** **                                                                                                                                                         | ** ** | **(Unaudited)**   | ** **  | **(Audited)**         | ** ** |
| **ASSETS**                                                                                                                                                         |       |              |        |                  |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Current assets:                                                                                                                                                    |       |              |        |                  |       |
| Cash and cash equivalents                                                                                                                                          |       | $                 | 9,821,455   |                  | $          | 7,514,188 |   |
| Restricted cash                                                                                                                                                    |       | —            |        | 1,013,152             |       |
| Accounts receivable                                                                                                                                                |       | 4,034,065         |        | 2,950,089             |       |
| Value added tax receivable                                                                                                                                         |       | 10,810,528        |        | 7,496,547             |       |
| Inventory                                                                                                                                                          |       | 5,791,964         |        | 3,372,883             |       |
| Prepaid and other current assets                                                                                                                                   |       | 2,829,808         |        | 2,271,282             |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total current assets                                                                                                                                               |       | 33,287,820        |        | 24,618,141            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Property, equipment and construction in  progress, net                                                                                                             |       | 146,343,403       |        | 100,366,091           |       |
| Restricted cash                                                                                                                                                    |       | 4,837,571         |        | 2,834,519             |       |
| Prepaid and other non-current assets                                                                                                                               |       | —            |        | 230,433               |       |
| Investment in Ecuador property, net                                                                                                                                |       | 1,476,228         |        | 1,570,020             |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total assets                                                                                                                                                       |       | $                 | 185,945,022 |                  | $          | 129,619,204 |   |
|                                                                                                                                                               |       |              |        |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                     |       |              |        |                  |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Current liabilities:                                                                                                                                               |       |              |        |                  |       |
| Accounts payable                                                                                                                                                   |       | $                 | 18,278,575  |                  | $          | 11,774,316 |   |
| Accrued liabilities                                                                                                                                                |       | 7,710,569         |        | 4,384,049             |       |
| Other liabilities                                                                                                                                                  |       | 473,533           |        | 263,439               |       |
| Accrued interest payable                                                                                                                                           |       | —            |        | 458,279               |       |
| Current income tax payable                                                                                                                                         |       | 148,179           |        | —                |       |
| Current maturity of long-term debt and capital  lease obligations                                                                                                  |       | 13,488,810        |        | 6,188,668             |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total current liabilities                                                                                                                                          |       | 40,099,666        |        | 23,068,751            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Asset retirement obligation                                                                                                                                        |       | 423,001           |        | 273,048               |       |
| Long-term debt and capital lease  obligations                                                                                                                      |       | 27,565            |        | 15,537,293            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total long-term liabilities                                                                                                                                        |       | 450,566           |        | 15,810,341            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Commitments and contingencies (Note 15)                                                                                                                            |       |              |        |                  |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Stockholders’ equity:                                                                                                                                         |       |              |        |                  |       |
| Preferred stock, no par value, 25,000,000  authorized; none issued and outstanding                                                                                 |       | —            |        | —                |       |
| Common stock, no par value, 250,000,000  authorized; 78,251,890 and 73,914,471 shares issued and outstanding at June  30, 2008 and December 31, 2007, respectively |       | 215,783,048       |        | 149,050,032           |       |
| Accumulated deficit                                                                                                                                                |       | (70,388,258       | )           | (58,309,920           | )          |
|                                                                                                                                                               |       |              |        |                  |       |
| Total stockholders’ equity                                                                                                                                    |       | 145,394,790       |        | 90,740,112            |       |
|                                                                                                                                                               |       |              |        |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                    |       | $                 | 185,945,022 |                  | $          | 129,619,204 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Consolidated Statements ofOperations**

**(Unaudited)**

 
| ** **                                                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                              | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                 |       | $                                               | 7,035,454  |                                          | $          | — |   | $ | 11,402,716 |   | $ | — |   |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Operating and administrative expenses:                                  |       |                                            |       |                                          |       |   |   |   |   |
| General and administrative                                              |       | 9,922,652                                       |       | 3,766,736                                     |       | 18,237,568 |   | 6,862,531 |   |
| Lease operating expense                                                 |       | 1,140,331                                       |       | —                                        |       | 3,359,622 |   | — |   |
| Geological, geophysical and engineering                                 |       | 115,914                                         |       | 1,868,663                                     |       | 296,611 |   | 1,970,251 |   |
| Depreciation, depletion and amortization  expense                       |       | 1,081,970                                       |       | 52,289                                        |       | 2,273,368 |   | 106,786 |   |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Total operating expenses                                                |       | 12,260,867                                      |       | 5,687,688                                     |       | 24,167,169 |   | 8,939,568 |   |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Operating loss                                                          |       | (5,225,413                                      | )          | (5,687,688                                    | )          | (12,764,453 | ) | (8,939,568 | ) |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Other income (expense):                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Income/(loss) from investment in Ecuador property,  net of amortization |       | 253,104                                         |       | (46,896                                       | )          | 506,208 |   | (230,839 | ) |
| Interest expense                                                        |       | —                                          |       | —                                        |       | — |   | (1,165 | ) |
| Interest income                                                         |       | 147,014                                         |       | 257,453                                       |       | 196,494 |   | 497,747 |   |
| Net loss on sale of asset                                               |       | —                                          |       | —                                        |       | — |   | (8,985 | ) |
| Other income/(expense)                                                  |       | 317,330                                         |       | 38,128                                        |       | 223,993 |   | 44,789 |   |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Total other income                                                      |       | 717,448                                         |       | 248,685                                       |       | 926,695 |   | 301,547 |   |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Loss before income taxes                                                |       | (4,507,965                                      | )          | (5,439,003                                    | )          | (11,837,758 | ) | (8,638,021 | ) |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Income taxes                                                            |       | 148,179                                         |       | 43,928                                        |       | 240,580 |   | 50,302 |   |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Net loss                                                                |       | $                                               | (4,656,144 | )                                             | $          | (5,482,931 | ) | $ | (12,078,338 | ) | $ | (8,688,323 | ) |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted net loss per share                                    |       | $                                               | (0.06      | )                                             | $          | (0.08 | ) | $ | (0.16 | ) | $ | (0.13 | ) |
|                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average common shares outstanding                              |       | 77,680,924                                      |       | 67,685,317                                    |       | 76,103,102 |   | 65,509,394 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**BPZResources, Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

** **
| ** **                                                                              | ** ** | **Six months ended** | ** **  |
|-----------------------------------------------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                                                              | ** ** | **June 30,**              | ** **  |
| ** **                                                                              | ** ** | **2008**                       | ** **  | **2007** | ** ** |
| Cash flows from operating activities:                                                   | ** ** | ** **                     | ** **  | ** ** | ** ** |
| Net loss                                                                                |       | $                              | (12,078,338 | ) | $ | (8,688,323 | ) |
| Adjustments to reconcile net loss to net  cash provided/(used) by operating activities: |       |                           |        |   |   |
| Stock-based compensation                                                                |       | 8,459,764                      |        | 1,901,522 |   |
| Depreciation, depletion and amortization  expense                                       |       | 2,273,368                      |        | 106,786 |   |
| Net loss on the retirement of assets                                                    |       | —                         |        | 8,985 |   |
| Amortization of investment in Ecuador  property                                         |       | 93,792                         |        | 93,792 |   |
| Changes in operating assets and  liabilities:                                           |       |                           |        |   |   |
| Increase in accounts receivable                                                         |       | (1,083,976                     | )           | — |   |
| Increase in value added tax receivable                                                  |       | (3,313,981                     | )           | (2,188,301 | ) |
| Increase in inventory                                                                   |       | (2,275,312                     | )           | (9,859 | ) |
| Decrease in restricted cash                                                             |       | 1,013,152                      |        | — |   |
| Increase in other assets                                                                |       | (558,526                       | )           | (404,590 | ) |
| Increase (decrease) in accounts payable                                                 |       | 6,504,259                      |        | (935,989 | ) |
| Increase in accrued liabilities                                                         |       | 2,868,241                      |        | 3,095,253 |   |
| Increase in other liabilities                                                           |       | 210,094                        |        | 53,146 |   |
| Current income taxes payable                                                            |       | 148,179                        |        | 35,325 |   |
| Net cash provided by/(used by) operating  activities                                    |       | 2,260,716                      |        | (6,932,253 | ) |
|                                                                                    |       |                           |        |   |   |
| Cash flows from investing activities:                                                   |       |                           |        |   |   |
| Property and equipment additions                                                        |       | (38,533,691                    | )           | (24,469,653 | ) |
| Restricted cash                                                                         |       | (2,003,052                     | )           | (845,000 | ) |
| Net cash used by investing activities                                                   |       | (40,536,743                    | )           | (25,314,653 | ) |
|                                                                                    |       |                           |        |   |   |
| Cash flows from financing activities:                                                   |       |                           |        |   |   |
| Borrowings                                                                              |       | 2,819,080                      |        | — |   |
| Repayments of borrowings                                                                |       | (5,009,038                     | )           | (9,664 | ) |
| Proceeds from the exercise of stock  warrants                                           |       | 750,000                        |        | — |   |
| Proceeds from exercise of options, net                                                  |       | 931,412                        |        | 1,121,460 |   |
| Proceeds from sale of common stock, net                                                 |       | 41,091,840                     |        | 35,985,846 |   |
| Net cash provided by financing activities                                               |       | 40,583,294                     |        | 37,097,642 |   |
|                                                                                    |       |                           |        |   |   |
| Net increase in cash and cash equivalents                                               |       | 2,307,267                      |        | 4,850,736 |   |
| Cash and cash equivalents at beginning of  period                                       |       | 7,514,188                      |        | 25,324,233 |   |
| Cash and cash equivalents at end of period                                              |       | $                              | 9,821,455   |   | $ | 30,174,969 |   |
|                                                                                    |       |                           |        |   |   |
| Supplemental cash flow information:                                                     |       |                           |        |   |   |
| **Cash paid for:**                                                                      | ** ** | ** **                     | ** **  | ** ** | ** ** |
| Interest                                                                                |       | $                              | 2,467,786   |   | $ | 1,165 |   |
| Foreign income tax                                                                      |       | 92,401                         |        | 14,977 |   |
| **Non — cash items:**                                                              | ** ** | ** **                     | ** **  | ** ** | ** ** |
| Purchase and additions to equipment with  the issuance of a capital  lease obligation   |       | $                              | 9,480,372   |   | 6,180,679 | ** ** |
| Deferred interest capitalized to  construction in progress                              |       | 230,433                        |        | — |   |
| Issuance of common stock for subscription  receivable                                   |       | —                         |        | 942,300 |   |
| Depletion capitalized to production  inventory, net                                     |       | 143,769                        |        | — |   |
| Depreciation on support equipment  capitalized to property & equipment              |       | 413,412                        |        | 238,468 |   |
| Asset retirement obligation capitalized to  property and equipment                      |       | 134,287                        |        | — |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**BPZ Resources, Inc. and Subsidiaries**

**Notes ToConsolidated Financial Statements**

**(Unaudited)**

 

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

** **

**Organization**

 

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

 

The Company maintains a Peruvian subsidiary throughits wholly owned subsidiary BPZ Energy, Inc., a Texas corporation (“BPZ –Texas”).  Currently, it has exclusiverights and license agreements for oil and gas exploration and productioncovering a total of approximately 2.4 million acres, in four blocks, innorthwest Peru.  The license contractscover 100% ownership of Block Z-1 (739,205 acres), Block XIX (472,860 acres),Block XXII (948,000 acres) and Block XXIII (248,000 acres).  The Block Z-1 contract was signed in November 2001,the Block XIX contract was signed in December 2003 and Blocks XXII andXXIII contracts were both signed in November 2007.  The Company’slicense contracts provide for an initial exploration period of seven tothirteen years for Block Z-1 and seven to ten years for Blocks XIX, XXII andXXIII.  In addition, the contracts require that the Company conductspecified activities on the properties 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.

 

Additionally, through the Company’s whollyowned subsidiary, SMC Ecuador Inc., a Delaware corporation, and itsregistered branch in Ecuador, it owns a 10% non-operated working interest in anoil and gas producing property, Block 2, located in the southwest region ofEcuador (the “Santa Elena Property”). The license agreement covering the property extends through May 2016.

 

The Company is in theinitial stages of developing and producing its oil and natural gasreserves.  To date, its activities in Peru have been primarily limited toanalysis and evaluation of technical data on its properties, preparation of thedevelopment plans for the properties, including detailed engineering and designof the power plant and gas processing facilities, refurbishment of two of itsoffshore platforms, procuring machinery and equipment for an extended drillingcampaign, obtaining all necessary environmental and operating permits, bringingproduction on-line and securing the required capital and financing to conductthe current plan of operation.

 

**CorvinaField**

 

***OilDevelopment***

 

The Company started producing oil from its recent discoveries at theCX-11 platform, located in the Corvina Field in its offshore Block Z-1, under anextended well testing program which began on November 1, 2007.  Theoil is delivered to the refinery in Talara by barge, approximately 100 milessouth of the platform.  The remainder is kept in production inventoryuntil such time it is delivered to Talara.

 

The Company’s primary marine transportation contractor entered into twoshort term agreements with the commercial division of the Peruvian Navy tolease two tankers to transport oil to market. However, on January 30, 2008, one of the tankers, the Supe, sankafter catching fire.  At the time of theincident the tanker contained approximately 1,300 barrels of oil, most of whichis believed to have been burned in the fire. Environment impact assessments show that environmental issues have beenadequately controlled.  No Companyemployees were injured.  Consequently,the contract with the commercial branch of the Peruvian Navy was allowed toexpire in March 2008.  The Companyhas not entered into any new contracts with the Peruvian Navy.  As a result of the incident, the Company’soperations were voluntarily suspended at the CX-11 platform.

 

On March 14, 2008, the Company was notified by OSINERGMIN, thegovernment regulatory agency in Peru responsible for monitoring industrialsafety, that it could resume operations at the CX-11 platform.  As a result, the Company began testing theCX11-18XD well.  Three drill stem testswere conducted in the Upper Zorritos formation. The first two drill stem tests targeted the lower sands in zones thathad not previously been tested.  Thethird drill stem test targeted sands that had tested oil in the Company’sCX11-21XD well. The Company began producing from the 18XD well in May of2008.

 

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The Company also spudded the CX11-20XD wellin May 2008.  The CX11-20XD well ispositioned up dip from the CX11-21XD well. The well has been positioned to further develop the top gas sands foundin the previously drilled 21XD well, the oils sands currently producing in the21XD and 18XD wells, as well as the oil sands encountered and briefly tested inthe 18XD well during the initial drill-stem test number one.  Furthermore, according to the Company’sgeologic model of the Corvina field, the 20XD well should also reach deeperuntested sands that will allow the Company to further delineate the field’soil-in-place potential.

 

As previously mentioned, the 20XD well willcross gas sands that the Company expects to test, and thus this well is plannedto be dual completed as both an oil and gas producer.  The company plans to drill to a total depthof approximately 11,800 feet (measured depth) and anticipates reaching totaldepth in late August 2008.

 

On June 9, 2008, the Company received the clearance needed totransport oil from the CX-11 platform to the nearby Talara refinery by thecorresponding Peruvian environmental agency. In addition, its Floating-Production-Storage-and-Offloading (“FPSO”) vesselwas placed in position near the CX-11 platform and is receiving production fromthe platform.  By utilizing the currentproduction equipment in place, the production levels are anticipated toincrease during the third quarter of 2008.

 

The Company plans to spud the CX11-15D well shortly after completion ofthe 20XD.  The Company expects this wellto take approximately 90 days to reach total depth, and to be completed andtested late in 2008.

 

***Gas-to-PowerProject***

 

The Corvina Gas-to-Powerproject entails the installation of a 10-mile gas pipeline from the CX-11platform to shore, construction of gas processing facilities and anapproximately 160 megawatt (“MW”) simple-cycle electric generating plant.  The proposed power plant site is locatedadjacent to an existing substation and power transmission lines which, withcertain upgrades, are expected to be capable of handling up to 360 MW of power.In order to support the Company’s proposed electric generation project, itcommissioned an independent power market analysis for the region. The Peruvianelectricity market is deregulated and power is transported through aninterconnected national grid managed by the Committee for Economic Dispatchingof Electricity (known as COES). Based on this study, the Company believes itwill be able to sell economic quantities of electricity from the initial 160 MWpower plant. The market study also indicates that there may be futureopportunities for the Company to generate and sell significantly greatervolumes of power into the Peruvian and Ecuadorian power markets.  The Company plans to own 100% of the powerplant. Accordingly, its revenues from the natural gas delivered to the powerplant will be derived from the sale of electricity, which is currentlyprojected for early 2010, though this schedule is subject to many factorsoutside its control, including obtaining all necessary financing, equipment andno assurance can be given that the Company can meet this schedule.

 

The Company is currentlyworking on securing and finalizing funding for its gas to power initiativescomprised of approximately $120 million of senior debt to be syndicated by IFC,which is expected to close by the end of 2008. This financing will be subjectto identification of the lending syndicate members and subsequent negotiationand approval of the necessary loan documentation.

 

**Albacora Field**

 

Once drilling is completed on the wells in the Corvina Field aspreviously discussed, the Company then plans to move the drilling rig from theCX-11 platform to the Albacora A-1 platform which is currently beingrefurbished.  The Company plans to drilla twin well to Albacora’s discovery well, the 8-X-2, as an exploratory wellaimed at testing the prospective Lower Zorritos formation sands.  The 8-X-2 discovery well drilled 35 years ago,tested oil at quantities the Company believes to be commercially producible.

 

**Basis of Presentation and Principles ofConsolidation**

 

The Company’s unaudited consolidated financial statements includedherein have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission as they pertain to Form 10-Q.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations.

 

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The unauditedfinancial statements reflect all adjustments which are, in the opinion ofmanagement, necessary for a fair presentation of the financial position andresults of operations for the interim periods presented on a basis consistentwith the annual audited financial statements. All such adjustments are of a normal recurring nature.  The Company believes that the disclosurescontained herein are adequate to make the information presented notmisleading.  The consolidated balancesheet at December 31, 2007, as presented herein, is derived from the December 31,2007 audited consolidated financial statements. These interim financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.  The results of operations for interim periodsare not necessarily indicative of the results to be expected for the full year.

 

***Reclassifications***

 

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

 

**Summary of Significant Accounting Policies**

 

TheCompany has provided a summary discussion of significant accounting policies,estimates and judgments in Note 1 to the Notes to the Consolidated FinancialStatements included in its Annual Report on Form 10-K for the year ended December 31,2007.

 

***Principlesof Consolidation***

*** ***

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

 

**Recent Accounting Pronouncements**

 

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

 

In September 2006, the FASB issued SFAS No. 157 — *Fair Value Measurement* (“SFAS No. 157”).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally accepted accountingprinciples, and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financialstatements issued for periods beginning after November 15, 2007.  SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements, theFASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair valuemeasurements.  However, for some entities,the application of this SFAS No. 157 will change current practice.  The definition of fair value focuses on theprice that would be received to sell the asset or paid to transfer theliability (an exit price), not the price that would be paid to acquire theasset or received to assume the liability (an entry price).  SFAS No. 157 emphasizes that fair valueis a market-based measurement, not an entity-specific measurement.  In February 2008, the FASB issued FASBStaff Position (FSP) SFAS 157-2 (“SFAS 157-2”) which defers the effective dateof SFAS No. 157 for non-financial assets and liabilities that are notrecorded at fair value on a recurring basis until periods beginning after November 15,2008.  The Company adopted SFAS No. 157effective January 1, 2008, except for those provisions permitted to bedelayed by SFAS 157-2.  Accordingly, theCompany has not applied the provisions of SFAS No. 157 to non-financialassets and liabilities initially measured at fair value.  In general, fair value measurements anddisclosures are made in accordance with the provisions of SFAS No. 157.  The adoption of SFAS No. 157 had noimpact on our consolidated financial position, results of operations or cashflows.

 

In February 2007, FASBissued 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 to choose tomeasure many financial instruments and certain other items at fair value.  Most of the provisions in SFAS No. 159are elective; however, the amendment to FASB Statement No. 115, Accountingfor Certain Investments in Debt and Equity Securities, applies to all entitieswith available-for-sale and trading securities. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  On January 1, 2008, theCompany adopted SFAS No. 159 and elected not to measure any of its currentlyeligible assets and liabilities at fair value.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial*

 

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

 

***On December 21, 2007, the SEC released Staff AccountingBulletin, (“SAB 110”) “Share-Based Payment” which will no longer allow the useof the “simplified” method to estimate the expected terms as on the variablesto determine the fair value of share-based payments.  With a limited number of exceptions,companies can continue to use the simplified method.  However, doing so requires the types of grantsfor which the simplified method is used if not for all grants, and the periodsfor which the simplified method is being used. The adoption of this Staff Accounting Bulletin had no material impact onour consolidated financial position, results of operations, or cash flows.***

*** ***

**Note 2 — Value Added Tax Receivable**

 

Value-addedtax (referred to as “IGV” in Peru) is generally imposed on goods and servicesat a rate of 19%.  Peru currently has anIGV early recovery program for companies during the exploration phase.  Under this program, IGV paid on theacquisition of certain goods and services used directly in hydrocarbonexploration activities can be recovered prior to a commercial discovery takingplace or production and revenue billings beginning.  Because the Company has oil sales, it is nolonger eligible for the IGV early recovery program on IGV receivables generatedafter November 2007.

 

The Company’s value added tax receivablebalance as of June 30, 2008 was approximately $10.8 million compared toapproximately $7.5 million at December 31, 2007.  Approximately $2.4 million and $3.1 millionhave been collected during the three and six months ended June 30, 2008,respectively, under the IGV early recovery program and approximately $0.7million and $1.5 million was offset by IGV payables generated by oil salesduring the three and six months ended June 30, 2008.  Of the ending balance on June 30, 2008,the Company has filed claims with the Peruvian tax authority to recoverapproximately $1.0 million under the IGV early recovery program generated byaccounts payable for payments made prior to November 2007.  Of the $10.8 million IGV Receivables referredto above, the Company has approximately $9.8 million at June 30, 2008which is not eligible for early recovery due to the initial generation of oilrevenue.  However, the $9.8 million willbe recoverable against IGV payables associated with future oil sales under thenormal IGV recovery process.

 

Asof June 30, 2008, the Company had short-term loans outstanding to PeruvianBanks of approximately $0.5 million collateralized by IGV receivables eligiblefor early recovery.  See Note 9 “Debt”, includedherein, for further discussion.

 

**Note 3 — Inventories**

 

Inventories consist primarily of tubular goods, accessories and spareparts for production equipment, stated at the lower of average cost ormarket.  The balance in inventory at June 30,2008 and December 31, 2007 was $5,086,636 and $2,824,492,respectively.  The increase is due toadditional production and drilling activity primarily related to the Corvinafield.

 

The Company also maintainscrude oil inventories in storage barges. These inventories are stated at the lower of average cost or marketvalue.  Cost is determined on a weighted averagebasis based on production costs.  Therewas approximately $705,327 of production inventory on hand at June 30,2008, consisting of 22,627 barrels of oil at an estimated cost of $31.17 perbarrel.  This is up from December 31,2007 which consisted of approximately 12,248 barrels of crude oil at anestimated cost of $548,391 or $44.77 per barrel due to production coming backon line in June 2008.

 

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

 

Below is a summary of prepaid and other current assets as of June 30,2008 and December 31, 2007:

 

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| ** **                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|                       |       |              |       |                  |       |
| Prepaid expenses and other |       | $                 | 347,094    |                  | $          | 590,784 |   |
| Deposits                   |       | 76,943            |       | 51,964                |       |
| Prepaid insurance          |       | 1,793,041         |       | 1,015,676             |       |
| Insurance receivable       |       | 612,031           |       | 612,033               |       |
| Interest receivable        |       | 699               |       | 825                   |       |
|                       |       |              |       |                  |       |
|                       |       | $                 | 2,829,808  |                  | $          | 2,271,282 |   |

 

Prepaid expenses and other are primarilyrelated to prepayments for drilling services, equipment rental and materialprocurement.  Deposits are primarily rentdeposits in connection with the Company’s offices in Houston and Peru.  Prepaid insurance consists of premiumsrelated to the Company’s operations as well as general liability and directorsand officer’s insurance policies.

 

Insurance receivable is related to a navigation incident which causedthe BPZ-01 barge to be grounded on a sand bank in Talara Bay in northwest Peruduring the second mobilization trip to the Corvina platform in early August 2006.  As of June 30, 2008, the Company expectsto file a claim of approximately $712,000 for repairs with the insurancecarrier.  A deductible of $100,000 willbe applied to this insurance claim when reimbursed.  As of August 11, 2008 the Company has notpresented a final claim to its insurance carrier for the barge repairs.  A dry-dock originally scheduled for thesecond quarter 2008, has been postponed to the fourth quarter 2008.  As a result, the Company allowed theCertificate of Inspection from the U.S. Coast Guard to expire which, by doingso, prohibits the BPZ-01 from transporting hazardous cargo within U.S. federalwaters.  Because the Company does notintend to take the BPZ-01 out of Peruvian waters, it has re-flagged the BPZ-01and it is no longer subject to U.S. jurisdiction. See Note 15 “Commitments andContingencies”, included herein, for further discussion.

 

**Note 5 — Property, Equipment and Constructionin Progress**

 

Below is a summary of property, equipment and construction in progress as of June 30, 2008 and December 31, 2007:

 
| ** **                                              | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                              | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| Construction in progress:                               |       |              |        |                  |       |
| Power plant and related equipment                       |       | $                 | 4,828,256   |                  | $          | 3,486,309 |   |
| Platforms and wells                                     |       | 43,161,752        |        | 25,220,425            |       |
| Pipelines and processing facilities                     |       | 4,595,775         |        | 4,412,677             |       |
| Producing properties                                    |       | 75,030,505        |        | 56,159,488            |       |
| Barge and related equipment                             |       | 22,159,209        |        | 11,970,171            |       |
| Office equipment, leasehold improvements,  and vehicles |       | 1,313,368         |        | 1,040,613             |       |
| Accumulated depreciation, depletion and  amortization   |       | (4,745,462        | )           | (1,923,592            | )          |
|                                                    |       |              |        |                  |       |
| Net property, equipment and construction in  process    |       | $                 | 146,343,403 |                  | $          | 100,366,091 |   |

 

During the six months ended June 30, 2008, the Company incurredcosts of approximately $48.8 million associated with its developmentinitiatives for the exploration and production of oil and natural gas reservesand the complementary development of proprietary gas-fired power generation ofelectricity for sale in Peru.

 

Of the incurred costs mentioned above, the Company incurred capitalexpenditures related to the drilling and testing of the CX11-18XD ofapproximately $14.2 million during the six months ended June 30,2008.  The Company performed three drillstem tests of the CX11-18XD.  The three drill stem tests were conducted inthe Upper Zorritos formation.  The firsttwo drill stem tests targeted the lower sands in zones that had not previouslybeen tested.  The third drill stem testtargeted sands that had tested oil in the Company’s CX11-21XD well.  The Company began producing from the 18XDwell in May of 2008.

 

The Company also spudded the CX11-20XD wellin May 2008.  The CX11-20XD well ispositioned up dip from the CX11-21XD well. The well has been positioned to further develop the top gas sands foundin the previously drilled 21XD well, the oils sands currently producing in the21XD and 18XD wells, as well as the oil sands encountered and briefly tested inthe 18XD well during the initial drill-stem test number one.  Furthermore, according to the Company’sgeologic 

 

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model of the Corvina field, the 20XD well should also reach deeperuntested sands that will allow the Company to further delineate the field’soil-in-place potential.

 

As previously mentioned, the 20XD well willcross gas sands that the Company expects to test, thus this well is planned tobe dual completed as both an oil and gas producer.  The company plans to drill to a total depthof approximately 11,800 feet (measured depth) and anticipates reaching totaldepth in late August 2008.  Totalcapital expenditures incurred on this well for the six months ended June 30,2008 is approximately $10.9 million. The Company has not drilled any other wells or recognizedsignificant revenues from operations, and it does not anticipate generatingsignificant revenues from its properties prior to third quarter 2008.

 

In addition, the Company incurred costs ofapproximately $7.6 million during the six months ended June 30, 2008 forthe installation of sea-bed pipelines, a new mooring system and the initiationof the capital lease regarding the FPSO equipment on board the FPSO inconnection with its new production facilities that are now currently inoperation.  This new program shouldenable the Company to initiate production in a more efficient manner, allowingfor a better understanding of the behavior and characteristics of the Corvinaoil field.

 

In preparation forthe Company’s drilling campaign in Albacora, the Company performed well controlon the existing well heads located at the platform.  The Company incurred approximately $1.3million in well control costs to provide a safe environment to begin therefurbishment of the A-1 platform.

 

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

 

In addition, the Company entered into a capital lease agreement for theproduction equipment on board the FPSO. The FPSO, the Namoku, as well as the storage barge, the Nu’uanu areunder a separate capital lease agreement. The capital lease for the production equipment commenced in June 2008,the date the equipment was put into service. The lease terms are variable and bear an interest rate of 18% based onthe Company’s incremental borrowing rate for similar equipment.  In accordance with the terms of the lease, abargain purchase option exists at the end of the lease.  As a result, depreciation will be calculatedover the economic life of the asset.  TheCompany recorded the capital lease at $2.6 million which represents the presentvalue of the minimum lease payments at the Company’s incremental borrowing rateover the term of the lease, or the fair market value of the asset.

 

The Company continues to work on thedevelopment of a Company owned gas-fired power generation facility.  The Company incurred approximately $1.5million related to the drafting of certain design specifications for the powerplant.

 

The Company also incurred costs for office equipment and leaseholdimprovements for its offices in Houston, Peru and Ecuador of approximately $0.1million and for the purchase of machinery and equipment used in operations inPeru of approximately $0.6 million.

 

In accordance with “successful efforts” method of accounting, theCompany capitalized approximately $274,928 and $413,412 of depreciation expenserelated to the tender assist barges serving as support equipment, toconstruction in progress for the three and six month period ended June 30,2008.  In addition, the Companycapitalized interest expense for the three and six months ended June 30,2008 of approximately $1,086,701 and $2,009,255, respectively, to constructionin progress.

 

**Note 6 — Asset Retirement Obligation**

 

An obligation was recorded for the plug and abandonment of theproducing oil wells, the 21XD and the 14D, in accordance with the provisions ofSFAS No 143 “Accounting for Asset Retirement Obligations”.  The Company incurred 

 

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additions to itsasset retirement obligations (“ARO”) as a result of the successful completionof the CX11-18XD well during the six months ended June 30, 2008.

 

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

*** ***
| ** **                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|                                  |       |              |       |                  |       |
| ARO as of the beginning of the period |       | $                 | 273,048    |                  | $          | — |   |
| Liabilities incurred during period    |       | 134,287           |       | 268,572               |       |
| Liabilities settled during period     |       | —            |       | —                |       |
| Accretion expense                     |       | 15,666            |       | 4,476                 |       |
|                                  |       |              |       |                  |       |
| ARO as of the end of the period       |       | $                 | 423,001    |                  | $          | 273,048 |   |

 

**Note 7 — Investment in Ecuador Property**

 

The Company has an investment in an oil and gas property in Ecuador(the “Santa Elena Property”) totaling $1,476,228 and $1,570,020 as of June 30,2008 and December 31, 2007, respectively. The Company accounts for this investment under the cost method andrecords its share of cash received or paid as other income or expense.  Since the Company’s investment representsownership of an oil and gas property, which is a depleting asset, the Companyis amortizing the cost of the investment on a straight-line basis over theremaining term of the license agreement which expires in May 2016.  Accordingly, the Company recordedamortization expense of $46,896 and $93,792 for the three and six months ended June 30,2008, respectively, as well as for the three and six months ended June 30,2007, respectively.

 

**Note 8 — Restricted Cash and PerformanceBonds**

 

Inconnection with its properties in Peru, the Company has obtained fiveperformance bonds totaling $6.9 million to insure certain obligations andcommitments, of which one relates to the guarantee of import duties related tothe FPSO and transport tanker and four relate to performance obligations underthe license contracts for Blocks Z-1, XIX, XXII and XXIII.  As of June 30, 2008, the Company had restricted cashdeposits of $4.8 million, which partially collateralizes the performance bonds.

 

During the six months ended June 30, 2008 the Company was refunded$0.3 million related to the performance bond for the second exploration phaseunder the Block XIX license contract and approximately $1.0 million related toa performance commitment under a drilling services contract.  The Company posted a $0.6 million performancebond that was required in connection with the third phase of exploration underthe Block XIX license contract.  TheCompany also posted a $1.7 million bond to guarantee import duties for the FPSObarge and transport tanker.

 

All of the performance bonds are issued by Peruvian banks and theirterms are governed by the corresponding license contract.

 

**Note 9 — Long-term debt and capital lease obligations**

** **

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

 

The discovery ofoil reserves in the Corvina field prompted the Company to direct its attentiontowards accelerating the development of oil production in the Corvinafield.  Accordingly, on June 13,2007 the Company entered into a capital lease agreement, with an option topurchase, for two barges to assist in the development of the Corvina oil.  The capital lease for the two barges began inAugust 2007 and expires in November 2009.  The lease contains a purchase option whichthe Company anticipates, for accounting purposes, it will exercise on the 15thmonth of the lease term.  Lease paymentsare variable, based on the working status of the barges, with a purchase optionof $5,000,000 after the first year of the lease and $4,000,000 after thematurity date of the lease.  The capitallease obligation was recorded at the present value of the minimum leasepayments at an imputed discount rate of 18%, which reflects the Company’sincremental borrowing rate for

 

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this transaction.  The capitallease obligation was recorded at approximately $6.2 million which representsthe present value of the minimum lease payments, or the fair market value ofthe debt obligation.

 

The FPSO equipmenton-board the Namoku, which is also under a capital lease along with the storagebarge, the Nu’uanu, was financed through a separate capital lease thatcommenced when the Company began utilizing the production equipment on boardthe FPSO in June 2008.  The leaseterms are variable and bear an interest rate of 18% based on the Company’sincremental borrowing rate for similar equipment.  In accordance with the terms of the lease, abargain purchase option exists at the end of the lease.  As a result, depreciation will be calculatedover the economic life of the asset.  TheCompany recorded the capital lease at $2.6 million which represents the presentvalue of the minimum lease payment at the Company’s incremental borrowing rateover the term of the lease, or the fair market value of the asset.

 

Asof June 30, 2008 and December 31, 2007, the Company had long-termdebt outstanding of $27,565 and $15,537,293. The decrease in long-term debt and capital lease obligations outstandingis primarily related to convertible debt. On November 19, 2007, a convertible debt agreement between IFC andthe Company was entered into for approximately $15.5 million.  The termsof the loan agreement stipulated a conversion price of $10.39 per share andincluded a forced conversion exercisable at the Company’s option if the closingprice of the Company’s common stock exceeded a price of $18.19 per share, basedon the average closing price over twenty consecutive business days.  In May 2008, the Company converted itslong-term debt into 1,491,819 shares of BPZ common stock.

 

Long-termdebt and capital lease obligations as of June 30, 2008 and December 31,2007 also includes two secured loans for the purchase of office furniture.  Both loans have a term of 60 months, bearinginterest at 5.94% and 9.44%, with principal and interest payments due on amonthly basis.

 

During the sixmonths ended June 30, 2008, the Company entered into two loan agreementswith Peruvian banks to borrow approximately $2.8 million.  During the second quarter ended June 30,2008, it paid down the debt by approximately $2.3 million.  As of June 30, 2008, the Company’soutstanding balance related to these loans was $0.5 million.  The amounts are included in currentmaturities of long-term debt and capital lease obligations as they arecollateralized by IGV receivables and mature upon receipt of the IGVpayment.  The loans are fixed and bearinterest rates of approximately 8% each.

 

Maturities of debtand capital lease obligations as of June 30, 2008 are as follows:

 
| Less than one year   |   | $      | 13,488,810 |   |
|----------------------|--------|--------|------------|--------|
| One to three years   |   | 20,445 |       |
| Three to five years  |   | 7,120  |       |
| More than five years |   | — |       |
| Total                |   | $      | 13,516,375 |   |

 

**Note10 — Stockholders’ Equity**

 

The Company has 25,000,000 shares of preferred stock, no par value and250,000,000 shares of common stock, no par value, authorized for issuance.

 

**Public Offering of Common Stock**

 

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

 

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

 

**Potentially Dilutive Securities**

 

In addition to its shares issued and outstanding, the Company has the following potentially dilutive securities as of June 30, 2008 and December 31, 2007.  None of these potentially dilutive shares have been included in the calculation of earnings per share as the effect would be anti-dilutive.

 

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The potentially dilutive shares are as follows:

 
| ** **                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Stock options outstanding                                           |       | 4,305,848         |       | 4,175,448             |       |
| Warrants outstanding                                                |       | —            |       | 250,000               |       |
| Shares issuable under IFC convertible debt  agreement               |       | —            |       | 1,491,819             |       |
| Total potentially dilutive securities  issued                       |       | 4,305,848         |       | 5,917,267             |       |
|                                                                |       |              |       |                  |       |
| Shares available pursuant to Long-Term  Incentive Compensation Plan |       | 2,626,450         |       | 3,152,450             |       |

 

On January 1,2006, the Company adopted SFAS No. 123 — Revised 2004,*Share—BasedPayment* (“SFAS No. 123(R)”), which establishes accounting forstock-based payment transactions for employee services and goods and servicesreceived from non-employees.  SFAS No. 123(R) isa revision of SFAS No. 123, *Accounting for Stock-BasedCompensation*, and supersedes APB No. 25, *Accountingfor Stock Issued to Employees*. Under the provisions of SFAS No. 123(R), stock-based compensationcost is measured at the date of grant, based on the calculated fair value ofthe award, and is recognized as expense over the employee’s or non-employee’sservice period, which is generally the vesting period of the equity grant.

 

The Company adopted SFAS No. 123(R) using the modified prospectiveapplication method and, accordingly, no prior periods have been restated as aresult of the adoption of this pronouncement. Under this method, compensation cost recognized during the year ended December 31,2006 included: (a) compensation cost for all stock-based payments grantedprior to, but not yet vested as of January 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofSFAS No. 123; and (b) compensation cost for all stock-based paymentsgranted on or after January 1, 2006, based on the grant-date fair valueestimated in accordance with SFAS No. 123(R).  SFAS No. 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods to reflect actual forfeitures.

 

The following table summarizes stock-based compensation costsrecognized under SFAS 123(R) for the three and six months ended June 30,2008 and June 30, 2007, respectively and is included in general andadministrative expenses on the consolidated operating statement:

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| Employee stock—based compensation costs |       | $                                               | 3,897,534  |                                          | $          | 964,954 |   | $ | 8,459,764 |   | $ | 1,907,413 |   |
| Non-employee stock-based compensation        |       | —                                          |       | (22,991                                       | )          | — |   | (5,891 | ) |
|                                         |       | $                                               | 3,897,534  |                                          | $          | 941,963 |   | $ | 8,459,764 |   | $ | 1,901,522 |   |

 

See below for a detailed discussion regarding the Company’s employeelong-term incentive compensation plan and stock-based payments tonon-employees.

 

**Restricted Stock Awards and PerformanceShares**

 

The Company determines the fair value of restricted stock awards andperformance shares based on the market price of the Company’s common stock onthe date of grant.  Compensation cost forsuch awards is recognized ratably over the vesting or service period, net offorfeitures; however, compensation cost related to performance shares will notbe recorded or will be reversed if the Company does not believe it is probablethat such performance criteria will be met or if the service provider (employeeor otherwise) fails to meet such criteria.

 

A summary of the Company’s restricted stock award activity and relatedinformation is presented below:

 

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| ** **                                    | ** ** | ** **         | ** ** | **Weighted—**  | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                                    | ** ** | **Restricted**     | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **Shares**         | ** ** | **Per Share**  | ** ** |
| Non-vested balance at December 31,  2007 |       | 1,284,850          |       | $                   | 8.82       |   |
| Granted                                       |       | —             |       | $                   | —     |   |
| Vested                                        |       | (245,000           | )          | $                   | 4.15       |   |
| Forfeited                                     |       | (11,000            | )          | $                   | 4.10       |   |
| Non-vested balance at June 30, 2008      |       | 1,028,850          |       | $                   | 9.98       |   |

 

As of June 30, 2008, there was approximately $8.5 million of totalunrecognized compensation cost related to non-vested restricted stock awards,which is expected to be recognized over a weighted-average period ofapproximately 1.55 years.

 

**Stock Options**

 

Incentive and non-qualified stock optionsissued to directors, officers, employees and consultants are issued at anexercise price equal to the fair market value of the stock at the date ofgrant.  The majority of the Company’sstock options vest pro-rata over three years from the grant date and generallyexpire ten years from the date of grant. Compensation cost related to stock options is recognized on a straight-linebasis over the vesting or service period and is net of forfeitures.

 

The fair value of each stock option grantedis estimated on the date of grant using a Black-Scholes option pricingmodel.  The following table presents theweighted-average assumptions used in the option pricing model for optionsgranted during the three months ended June 30, 2008.  During the three months ended June 30,2008, 547,000 options were granted by the Company under the 2007 Long-TermIncentive Plan.  The expected life of theoptions represents the period of time the options are expected to beoutstanding.  For the six months ended June 30,2008, the expected term was derived using the facts and circumstances relevantto the Company, from the analysis of other companies of a similar size andoperational life cycle as well as the limited Company history of stockexercises.  For the six months ended June 30,2007, the expected term of options granted was derived based on a weightingbetween (a) the Company’s historical exercise and forfeiture activity and (b) theaverage midpoint between vesting and the contractual term.  For the six months ended June 30, 2008and June 30, 2007, our expected volatility is based on the historicalvolatility of our stock for a period approximating the expected life.  The risk-free interest rate is based on theobserved U.S.  Treasury yield curve ineffect at the time the options were granted. The dividend yield is based on the fact the Company does not anticipatepaying any dividends.

 
| ** **                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected life (years)                                |       | 4.5      |       | 6        |       |
| Risk-free interest rate                              |       | 3.6      | %          | 4.6      | %          |
| Volatility                                           |       | 80.32    | %          | 85.33    | %          |
| Dividend yield                                       |       | 0        | %          | 0        | %          |
| Weighted-average fair value per share at  grant date |       | $        | 15.99      |     | $          | — |   |
|                                                      |            |          |            |          |            |  |  |

 

A summary of our stock option activity and related information ispresented below:

 

During the six months ended June 30, 2008 a total of 406,600options were exercised.  As of June 30,2008, there was approximately $16.8 million of total unrecognized compensationcost related to non-vested stock options which is expected to be recognizedover a weighted-average period of approximately 1.61 years.

 

The following tables summarize information about stock optionsoutstanding as of June 30, 2008:

 

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| ** **                                  | ** ** | ** **     | ** ** | **Outstanding**     | ** ** | **Exercisable**     | ** ** |
|---------------------------------------------|------------|----------------|------------|---------------------|------------|---------------------|------------|
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Weighted-**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Average**         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Remaining**       | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | ** **          | ** ** | **Contractual**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | ** **     | ** ** | **Number of**  | ** ** | **Life**            | ** ** | **Weighted** | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| **Range of Exercise Prices** | ** ** | **Options(1)** | ** ** | **(In years)** | ** ** | **Exercise  Price** | ** ** | **Options** | ** ** | **Per Option** | ** ** |
| Below                                       | to         | $2.00          |       | 199,248             |       | 5.7                 |       | $ | 1.30 |   | 199,248 |   | $ | 1.30 |   |
| $2.01                                       | to         | $5.00          |       | 1,422,500           |       | 7.5                 |       | $ | 3.49 |   | 1,307,500 |   | $ | 3.42 |   |
| $5.01                                       | to         | $7.00          |       | 655,900             |       | 8.6                 |       | $ | 5.31 |   | 37,905 |   | $ | 6.50 |   |
| $7.01                                       | to         | $10.50         |       | 211,200             |       | 8.8                 |       | $ | 10.43 |   | — |   | $ | — |   |
| $10.51                                      | to         | $15.00         |       | 1,320,000           |       | 9.0                 |       | $ | 11.88 |   | — |   | $ | — |   |
| $15.10                                      | to         | $25.53         |       | 497,000             |       | 7.5                 |       | $ | 25.16 |   | — |   | $ | — |   |
| Total                                       |       |           |       | 4,305,848           |       | 8.1                 |       | $ | 9.08 |   | 1,544,653 |   | $ | 3.22 |   |

 
| ** **                                            | ** ** | ** **         | ** ** | **Weighted—**      | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                                            | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                                            | ** ** | **Options**        | ** ** | **Per Option**     | ** ** |
| Options outstanding at December 31,  2007        |       | 4,175,448          |       | $                       | 8.14       |   |
| Granted                                               |       | 547,000            |       | $                       | 23.45      |   |
| Exercised                                             |       | (406,600           | )          | $                       | 2.29       |   |
| Forfeited                                             |       | (10,000            | )          | $                       | 4.23       |   |
| Options outstanding at June 30, 2008             |       | 4,305,848          |       | $                       | 9.08       |   |
|                                                  |       |               |       |                    |       |
| Options vested and exercisable at  June 30, 2008 |       | 1,544,653          |       | $                       | 3.22       |   |

 

The aggregate intrinsic value of stock options outstanding at June 30,2008 was approximately $87.5 million, of which approximately $40.4 millionrelates to awards vested and exercisable and approximately $47.1 millionrelates to awards expected to vest.  Theintrinsic value for stock options outstanding is calculated as the amount bywhich the quoted price of our common stock as of June 30, 2008 exceeds theexercise price of the option.

 

**Warrants**

 

No warrants were granted during the six months ended June 30, 2008or June 30, 2007.  As of June 30,2008, the Company had no warrants outstanding.

 

For their role as placement agent, in connection with the privateplacement of 11,466,000 shares of common stock in July 2005, Morgan Keegan &Company, Inc. received fully vested warrants to purchase 100,000 shares ofthe Company’s common stock at an exercise price of $3.00 per share.  These warrants were set to expire on July 19,2010 and were valued at $325,000 using the Black-Scholes model, which amountwas treated as additional non-cash stock offering costs. Additionally, fortheir financial advisory services, in connection with the private placement of4,482,000 shares of common stock in June 2006, Morgan Keegan &Company, Inc. received fully vested warrants to purchase 150,000 shares ofthe Company’s common stock at an exercise price of $3.00 per share.  These warrants were set to expire on June 30,2011 and were valued at $248,645 using the Black-Scholes model, which amountwas treated as additional non-cash stock offering costs.  During the six months ended June 30,2008, Morgan Keegan exercised warrants to purchase 250,000 shares of theCompany’s common stock at an exercise price of $3.00.  As a result, the Company received proceeds of$750,000.

 

**Note11**—**Revenue**

 

**The Company began producing oil ona limited basis in November 2007**from the CX11-21XD and 14D wells in the CorvinaField under an extended well testing program. During the second quarter 2008, it added production from the 18XD wellunder an extended well testing program as well. The oil is delivered to the refinery in Talara by barge approximately100 miles south of the platform.  Theremainder is kept in production inventory until the Company begins production,increasing the inventory quantities to a sufficient level that the refinery in Talarawill accept delivery.  The Company’scurrent sales contract with Petroperu is based on Northwest Oil Basket pricingwhich is comprised of Oman, Fortes and Suez Blend pricing.  The unadjusted sales price is based on thepast five day average before the crude oil delivery date.  The price is then discounted for the qualityof the oil delivered.  The determinationof quality is based on the gravity of the oil expressed in degrees, asdetermined under standards established by the American Petroleum Institute (“API”).  The price is

 

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**discounted at a rate of 0.53% ofthe basket price per one degree API lower than the benchmark of 33 degrees APIas stipulated in the contract.  In addition,a fixed premium of $0.75 per barrel is added to the price as a result of thehigh diesel content of the crude oil.**

** **

Royalties are calculated byPerupetro as stipulated in the Block Z-1 license agreement, based on the sameNorthwest Oil Basket.  However, theircalculation is based on the first or second two weeks of each month, as opposedto being based on the past five day average before the crude oil delivery date.

 

During the three and sixmonths period ended June 30, 2008, the Company produced approximately81,766 barrels and 126,942 barrels, respectively.  It sold approximately 59,186 barrels and116,372 barrels during the three and six months ended June 30, 2008 at anaverage price, net of royalties, of approximately $118.87 per barrel and $97.99,respectively.  In January 2008,BPZ incurred production and transportation delays due to the incident involvingone of the Peruvian Navy tankers being used to transport oil to market. SeeNote 1, “Basis of Presentation and Significant Accounting Policies – Corvina”above for a more detailed discussion of the incident. ** **Approximately 1,300 barrels of oil were lost in the fire aboard thetanker.  The cost of the crude oil lostwas approximately $62,000 and was expensed through lease operating expense and depreciation,depletion and amortization.

 

On June 9, 2008, the Company received the clearance needed totransport oil from the CX-11 platform to the nearby Talara refinery by thecorresponding Peruvian environmental agency. In addition, its FPSO vessel was placed in position near the CX-11platform and is receiving production from the platform.  By utilizing the current production equipmentin place, the production levels are anticipated to increase during the thirdquarter of 2008.

 

The Company had no oil salesduring the three and six months ended June 30, 2007.

 

**Note 12 — Foreign Currency**

** **

The U.S. Dollar is the functional currency for our operations in bothPeru and Ecuador.  Ecuador has adoptedthe U.S. Dollar as its official currency. Peru, however, still uses its local currency, Nuevo Soles, in additionto the U.S. Dollar, and therefore, our financial results are subject tofavorable or unfavorable fluctuations in the exchange rate and inflation ofthat country.  Transaction differenceshave been nominal to date but are expected to increase as our activities inPeru continue to escalate.  During thethree and six months ended June 30, 2008, we incurred an exchange rategain of approximately $316,000 and $220,000, respectively primarily related tothe early recovery of IGV or Value Added Taxes in Peru.  IGV under the early recovery program isdenominated in the Peruvian Nuevo Sol currency. Foreign currency gain was realized due to the strengthening of the NuevoSol against the US Dollar.

 

**Note 13 — Income Tax**

** **

***As of June 30,2008, t***heCompany had a valuation allowance for the full amount of the deferred tax assetresulting from the income tax benefit generated from net losses, as itbelieves, based on the weight of available evidence, that it is more likelythan not that the deferred tax asset will not be realized prior to theexpiration of net operating loss carryforwards in various amounts through2027.  However, the Company paid aminimum foreign income tax in Peru of $148,179 and $240,580 for the three andsix months period ended June 30, 2008, respectively, as a result of itsoil revenues.

*** ***

Estimatedinterest and penalties related to potential underpayment on unrecognized taxbenefits, if any, are classified as a component of tax expense in the ConsolidatedStatement of Operations. As of the date of adoption of FIN 48, the Company didnot have any accrued interest or penalties associated with any unrecognized taxbenefits, nor was any interest expense recognized during the quarter.

 

**Note 14 — Affiliate and Related Party Transactions**

 

As of June 30, 2008 and December 31, 2007, theCompany had no outstanding balances with affiliates or related parties.

 

**Note 15 — Commitments and Contingencies**

 

*Charter of Navy Tankers*

* *

On October 24, 2007, the Company’s primary marine transportationcontractor entered into two short term agreements with the commercial divisionof the Peruvian Navy to lease two tankers to transport oil to market.  However, on January 30, 2008, one of thetankers, the Supe, sank after catching fire.  At the time of the incidentthe tanker contained

 

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approximately1,300 barrels of oil.  Environmental impact assessments show thatenvironmental issues were adequately controlled.  No Company employees were injured.  Although both the Harbor Master withjurisdiction over the Company’s marine operations and the local prosecutor havedetermined that nothing the Company did contributed to the fire and subsequentsinking, the matter remains in litigation in Peru.  As the time charterer of the Supe, theCompany’s marine contractor, has limited exposure to civil liability resultingfrom the operation of the Supe.

 

*Barge Incident*

 

In early August 2006, the Companyincurred an operational delay resulting from a navigation incident which causedthe BPZ-01 barge to be grounded on a sand bank in Talara Bay in northwestPeru.  As of June 30, 2008, theCompany had recorded approximately $612,000 in insurance receivable pending thesubmission of an insurance claim.  As of August 11,2008, it has not presented a final claim to the Company’s insurance carrier forthe barge repairs.  A mandatory dry-dockoriginally scheduled for the second quarter 2008, has been postponed to thefourth quarter 2008.  As a result, theCompany allowed the Certificate of Inspection from the U.S. Coast Guard toexpire which, by doing so, prohibits the BPZ-01 from transporting hazardouscargo within U.S. federal waters. Because the Company does not intend to takethe BPZ-01 out of Peruvian waters, it has re-flagged the BPZ-01 and it is nolonger subject to U.S. Jurisdiction.

 

The Company believes that the majority of thecosts associated with the grounding incident will be reimbursed throughinsurance or through a third party.  Noassurances can be given, however, that any such recoveries will be sufficientto cover all costs associated with the incident or to the timing of any suchrecoveries.  The Company intends to filean insurance claim with our underwriters by the end of the fourth quarter 2008as well as finalize the reimbursement agreement with the third party.

 

*PeruProperties*

 

Inconnection with its properties in Peru, the Company has obtained fiveperformance bonds totaling $6.9 million to insure certain obligations andcommitments, of which one relates to the guarantee of import duties related tothe FPSO and transport tanker and four relate to performance obligations underthe license contracts for Blocks Z-1, XIX, XXII and XXIII.  As of June 30, 2008, the Company had restricted cashdeposits of $4.8 million, which partially collateralizes the performance bonds.

 

During the six months ended June 30,2008 the Company was refunded $0.3 million related to performance bond for thesecond exploration phase under the Block XIX license contract and approximately$1.0 million related to a performance commitment under a drilling servicescontract.  The Company posted a $0.6million performance bond that was required in connection with the third phaseof exploration under the Block XIX license contract.  The Company also posted a $1.7 million bondto guarantee import duties for the FPSO barge and transport tanker.

 

*Capital Lease of barge and FPSOequipment*

 

In February 2008, the Company entered into a lease-purchaseagreement to acquire a deck barge (“BPZ-02”) to assist in the platformrefurbishment and drilling activities in the Albacora field as well as toassist in future offshore drilling and development activities.  In thenear term, the BPZ-02 will be used to act as a tender assist for the Petrexdrilling rig as it is moved to the Albacora field in fourth quarter 2008. During that time, the BPZ-01 will be placed in dry-dock to repair damages sustainedwhen it ran aground in late 2006.  The acquisition of the BPZ-02 allowsthe Company better asset maintenance scheduling and will aid in the support ofincreased offshore exploration and development activities.  The terms ofthe lease-purchase stipulate a 19% rate of interest (33% effective rate ofinterest) over a one year term at which point, title to the BPZ-02 willtransfer to the Company upon final payment of the lease.  The Company hasaccounted for the transaction as a capital lease in accordance to SFAS No. 13,“Accounting For Leases (As Amended)” under the criteria the barge will transfertitle at the end of the lease period and, as a result, depreciation will becalculated over the economic life of the asset.

 

The FPSO equipmentwas financed through a separate capital lease that commenced when the Companybegan utilizing the production equipment on board the FPSO in June 2008.  The lease terms are variable and bear aninterest rate of 18% based on our incremental borrowing rate for similar equipment.  In accordance with the terms of the lease, abargain purchase option exists at the end of the lease.  As a result, depreciation will be calculatedover the economic life of the asset.  TheCompany recorded the capital lease at $2.6 million which represents the presentvalue of the minimum lease payments at the Company’s incremental borrowing rateover the term of the lease, or the fair market value of the asset.

 

See Note 5 “Property,Equipment and Construction in Progress” included here in, for furtherdiscussion of both leases referred to above.

 

*Financing Activities*

 

The Company is actively negotiating with IFC to increase the total debtpackage to an estimated $355 million for further development of its assets, ofwhich $120 million of the total financing package was approved by the Credit

 

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Committeeof the IFC on November 29, 2006. Please see Note 14 “Commitments and Contingencies” – *Financing Activities* in the Notes to the ConsolidatedFinancial Statements included in the Company’s Form 10-K for the yearended December 31, 2007 for further discussion.  The financing package includes an investmentof $19.5 million by IFC in the Company’s common stock which took place on December 18,2006, with the remaining portion to be financed through debt issuance.  Part of the debt issuance was fundedthrough a “C” Loan, which was comprised of $15.5 million of convertible debtand was closed in early November 2007. The terms of the “C” Loan agreement stipulate a conversion price of$10.39 per share and include a forced conversion exercisable at the Company’soption if the average closing price of the Company’s common stock exceeds aprice of $18.19 per share based on the average closing price over twentyconsecutive business days.  The Companyexercised its conversion option during the second quarter 2008.  This brought IFC’s total ownership in theCompany’s common stock to approximately 10%. The Company anticipates the remaining debt issuance balance to be fundedthrough the following two facilities:

 

·                  Up to a $215 million credit agreementto fund the Company’s exploration and development activities.  The company is currently negotiating the termsheet with IFC on the credit facility. The facility will be subject to a borrowing base calculation that willbe a function of semi-annual oil reserve reports.  Of the $215 million, the Company anticipatesthe IFC will finance $15 million directly and the remaining $200 million willbe financed through a syndicate of other lending institutions. The Companyexpects to close on the $15 million portion by third quarter 2008 and theremaining $200 million syndicated portion by early fourth quarter 2008.

 

·                  The Company is negotiating anadditional $120 million debt facility to fund the development of itsgas-to-power project.  The final amountwill be a function of the type of generation equipment ultimately selected.  The Company is currently negotiating theengineering, procurement and construction contracts that will be conditionsprecedent to this credit facility.  TheCompany anticipates closing this loan by the end of 2008.

 

As of August 11, 2008, the final loan documents for the $215million and $120 million loans have not been completed.

 

**Note 16 — Legal Proceedings**

 

See Note 15 “Legal Proceedings” in the Company’sConsolidated Financial Statements included in its Form 10-K for the year ended December 31, 2007, for detailed discussion.

 

In addition, on October 24, 2007, theCompany’s primary marine transportation contractor entered into two short termagreements with the commercial division of the Peruvian Navy to lease twotankers to transport oil to market.  On January 30,2008, one of the tankers, the Supe, sank after catching fire.  At the time of the incident, the tankercontained approximately 1,300 barrels of oil. No Company employees wereinjured. Official environmental impact assessments concluded that environmentalissues have been adequately controlled. Both the Harbor Master withjurisdiction over BPZ’s marine operations and the local prosecutor havedetermined that no acts of BPZ contributed to the fire and subsequent sinking.However, the matter remains in litigation in Peru.  The Company has assessed that its third partymarine contractor, as the time charterer of the Supe, and the Company, as acontracting party may have limited exposure to civil liability resulting from theoperation of the Supe.  However, the Companyconsiders any such action to be remote and that such limited exposure, whileunknown at this time, will not have a material effect on its financialstatements.

 

**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Overview**

 

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

 

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

 

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We maintain a Peruvian subsidiary through our whollyowned subsidiary BPZ Energy, Inc., a Texas corporation (“BPZ — Texas”).  Currently, we have exclusive rights andlicense agreements for oil and gas exploration and production covering a totalof approximately 2.4 million acres, in four blocks, in northwest Peru.  The license contracts cover 100% ownership ofBlock Z-1 (739,205 acres), Block XIX (472,860 acres), Block XXII (948,000acres) and Block XXIII (248,000 acres). The Block Z-1 contract was signed in November 2001, the Block XIXcontract was signed in December 2003 and Blocks XXII and XXIII contractswere both signed in November 2007.  Our license contracts provide foran initial exploration period of seven to thirteen years for Block Z-1and sevento ten years for Blocks XIX, XXII and XXIII.  In addition, the contractsrequire that we conduct specified activities on the properties during thisperiod.  If the exploration activities aresuccessful, the total contract term can extend up to 30 years for oilexploration and production and up to 40 years for gas exploration andproduction.

 

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

 

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

 

**CorvinaField**

 

***OilDevelopment***

 

We started producing oil from our recent discoveries at the CX-11platform, located in the Corvina Field in its offshore Block Z-1, under anextended well testing program which began on November 1, 2007.  Theoil is delivered to the refinery in Talara by barge, approximately 100 milessouth of the platform.  The remainder is kept in production inventoryuntil such time it is delivered to Talara.

 

Our primary marine transportation contractor entered into two shortterm agreements with the commercial division of the Peruvian Navy to lease twotankers to transport oil to market.  On January 30,2008, one of the tankers, the Supe, sank after catching fire.  At the time of the incident the tankercontained approximately 1,300 barrels of oil, most of which is believed to havebeen burned in the fire.  Environmentimpact assessments show that environmental issues have been adequatelycontrolled.  No Company employees wereinjured.  Consequently, the contract withthe commercial branch of the Peruvian Navy was allowed to expire in March 2008.  We have not entered into any new contractswith the Peruvian Navy.  As a result ofthe incident, our operations were voluntarily suspended at the CX-11 platform.

 

On March 14, 2008, we were notified by OSINERGMIN, the governmentregulatory agency in Peru responsible for monitoring industrial safety, that itcould resume operations at the CX-11 platform. As a result, we began testing the CX11-18XD well.  Three drill stem tests were conducted in theUpper Zorritos formation.  The first twodrill stem tests targeted the lower sands in zones that had not previously beentested.  The third drill stem testtargeted sands that had tested oil in our CX11-21XD well. We began producingfrom the 18XD in May of 2008.

 

We also spudded the CX11-20XD well in May 2008.  The CX11-20XD well is positioned up dip fromthe CX11-21XD well.  The well has beenpositioned to further develop the top gas sands found in the previously drilled21XD well, the oils sands currently producing in the 21XD and 18XD wells, aswell as the oil sands encountered and briefly tested in the 18XD well duringthe initial drill-stem test number one. Furthermore, according to our geologic model of the Corvina field, the20XD well should also reach deeper untested sands that will allow us to furtherdelineate the field’s oil-in-place potential.

 

As previously mentioned, the 20XD well willcross gas sands that we expect to test, and thus this well is planned to bedual completed as both an oil and gas producer. We plan to drill to a total depth of approximately 11,800 feet (measureddepth) and anticipates reaching total depth in late August 2008.

 

On June 9, 2008, we received the clearance needed to transport oilfrom the CX-11 platform to the nearby Talara refinery by the correspondingPeruvian environmental agency.  Inaddition, our Floating-Production-Storage-and-Offloading (“FPSO”) vessel wasplaced in position near the CX-11 platform and is receiving production from theplatform.  By utilizing the currentproduction equipment in place, the production levels are anticipated toincrease during the third quarter of 2008.

 

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We plan to spud the CX11-15D well shortly after completion of the20XD.  We expect this well to takeapproximately 90 days to reach total depth, and to be completed and tested latein 2008.  We then plan to move thedrilling rig from the CX-11 platform to the Albacora platform.

 

***Gas-to-PowerProject***

 

The Corvina Gas-to-Powerproject entails the installation of a 10-mile gas pipeline from the CX-11platform to shore, construction of gas processing facilities and anapproximately 160 megawatt (“MW”) simple-cycle electric generating plant.  The proposed power plant site is locatedadjacent to an existing substation and power transmission lines which, withcertain upgrades, are expected to be capable of handling up to 360 MW of power.In order to support our proposed electric generation project, we commissionedan independent power market analysis for the region. The Peruvian electricitymarket is deregulated and power is transported through an interconnectednational grid managed by the Committee for Economic Dispatching of Electricity(known as COES). Based on this study, we believe we will be able to selleconomic quantities of electricity from the initial 160 MW power plant. Themarket study also indicates that there may be future opportunities for us togenerate and sell significantly greater volumes of power into the Peruvian andEcuadorian power markets.  Our plan is toown 100% of the power plant. Accordingly, our revenues from the natural gasdelivered to the power plant will be derived from the sale of electricity,which is currently projected for early 2010, though this schedule is subject tomany factors outside our control, including obtaining all necessary financing,equipment and no assurance can be given that we can meet this schedule.

 

We are currently workingon securing and finalizing funding for our gas to power initiatives comprisedof approximately $120 million of senior debt to be syndicated by IFC, which isexpected to close by the end of 2008. This financing will be subject toidentification of the lending syndicate members and subsequent negotiation andapproval of the necessary loan documentation.

 

**Albacora Field**

 

Once drilling is completed on the wells in the Corvina Field aspreviously discussed, we then plan to move the drilling rig from the CX-11platform to the Albacora A-1 platform which is currently being refurbished.  We plan to drill a twin well to Albacora’sdiscovery well, the 8-X-2, as an exploratory well aimed at testing theprospective Lower Zorritos formation sands. The 8-X-2 discovery well drilled 35 years ago, tested oil atquantities we believe to be commercially producible.

 

**Memorandum of Understanding With Shell Exploration Company (West) B.V.**

 

On June 26, 2008, weentered into a Memorandum of Understanding (“MOU”) with Shell ExplorationCompany (West) B.V. (“Shell”). This non-binding MOU allows both parties to moveforward with negotiations on a possible assignment agreement with the ultimategoal of jointly developing Blocks Z-1, XIX and XXIII in Northwest Peru intolarge-scale oil and gas ventures, including regional power generation, gassupply for local and regional industry, and liquefied natural gas (“LNG”). Theintent of forming a joint venture is to complement BPZ’s assets, localknowledge and experience, stakeholder relationships, and vision with Shell’stechnology, equipment, manpower and leadership, especially in gas marketing.

 

This relationship isintended to accelerate the exploration of these three blocks.  In addition, we both will work towards anagreement that includes, but is not limited to, the following fundamentalpoints:

 

·                  Anunincorporated joint venture in Blocks Z-1, XIX and XXIII.

 

·                  BPZwill be the operator of record in the three blocks mentioned above.

 

·                  BPZwill initially retain 100% of the oil and gas assets in the Corvina, Delfin andMero fields as well as 100% of the oil assets in the Albacora field, (the “Carved-outareas”) to enable BPZ to appraise the Carved-out areas. Shell will have theoption to buy a 50% interest in any one of these four Carved-out areas,beginning in July 2012 and ending in January 2015, at prevailingmarket prices. Additionally, Shell will join with BPZ to refurbish the platformand drill the first well in Albacora. BPZ will retain 100% of the potential oil assets and 50% of thepotential gas assets discovered in Albacora until such time Shell elects toexercise its option to buy the remaining 50% interest in the potential gasassets.

 

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·                  BPZwill remain as 100% ownership of its planned gas-to-power project, subject toShell’s option to buy a 50% interest in the project at a later date.

 

·                  Shellwill commit to a three phase exploration and appraisal program for up toapproximately $300 million. Shell has the option to exit at the end of eachphase. If Shell exercises its option to exit at the end of any phase, therespective participation would revert back to BPZ at no cost. The work programis focused on appraising the Mancora gas formation found in Blocks Z-1, XXIIIand XIX and the deepwater prospects in Block Z-1, as well as otherprospects.  As a result, this will enableBPZ to fulfill its commitments mandated by the license contracts coveringBlocks Z-1, XIX and XXIII. This program would primarily consist of 2-D and 3-Dseismic surveys in Blocks XXIII and Z-1, respectively, and the drilling ofapproximately 12 new wells. Shell and BPZ will share costs equally after theinitial $300 million program.

 

·                  Anyfuture oil and/or prospective gas production, excluding that acquired from theCarved-out areas, will be shared by both parties.

 

·                  Incase sufficient gas is discovered to warrant a LNG project, BPZ and Shell willform a joint venture to develop the project, with Shell serving as theoperator.

 

Furthermore, both partieshave agreed that under no circumstance will an agreement be finalized for theacquisition of the Company’s rights in the three blocks until all necessaryboard of director, management and government approvals have been obtained and fullydefined agreements have been executed by both parties, or their respectiveaffiliated companies. Negotiations on the agreement with Shell are underway andare expected to conclude towards the end of the year.  However, no assurances can be made that suchan agreement will be finalized and consummated.

 

**Resultsof Operations**

 

**Revenue**

 
| ** ** | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **June 30,**                                  | ** ** | **June 30,**                                | ** ** |
| ** ** | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue    |       | $                                                  | 7,035,454  |                                             | $          | — |   | $ | 11,402,716 |   | $ | — |   |
|            |            |                                                    |            |                                                  |            |  |  |  |  |  |  |  |  |

 

**We began producing oil on a limitedbasis in November 2007**from the CX11-21XD and 14D wells in the Corina Fieldunder an extended well testing program. During the second quarter 2008, we added production from the 18XD wellunder an extended well testing program as well. The oil is delivered to the refinery in Talara by barge approximately100 miles south of the platform.  Theremainder is kept in production inventory until we begin production, increasingthe inventory quantities to a sufficient level that the refinery in Talara willaccept delivery.  Our current salescontract with Petroperu is based on Northwest Oil Basket pricing which iscomprised of Oman, Fortes and Suez Blend pricing.  The unadjusted sales price is based on thepast five day average before the crude oil delivery date.  The price is then discounted for the qualityof the oil delivered.  The determinationof quality is based on the gravity of the oil expressed in degrees, asdetermined under standards established by the American Petroleum Institute (“API”).  The price is discounted at a rate of 0.53% ofthe basket price per one degree API lower than the benchmark of 33 degrees APIas stipulated in the contract.  Inaddition a fixed premium of $0.75 per barrel is added to the price as a resultof the high diesel content of the crude oil.

** **

Royalties are calculated byPerupetro as stipulated in the Block Z-1 license agreement based on the sameNorthwest Oil Basket.  However, theircalculation is based on the first or second two weeks of each month, as opposedto being based on the past five day average before the crude oil delivery date.

 

During the three and sixmonth period ended June 30, 2008, we produced approximately 81,766 barrelsand 126,942 barrels, respectively.  Wesold approximately 59,186 barrels and 116,372 barrels during the three and sixmonths ended June 30, 2008 at an average price, net of royalties, ofapproximately $118.87 per barrel and $97.99, respectively.  In January 2008, we incurredproduction and transportation delays due to the incident involving one of thePeruvian Navy tankers being used to transport oil to market.  See Note 1, “Basis of Presentation andSignificant Accounting Policies – Corvina” for a more detail discussion of the incident. ** **Approximately 1,300 barrels of oil were lost in the fire aboard thetanker.  The cost of the crude oil lostwas approximately $62,000 and was expensed through lease operating expense anddepreciation, depletion and amortization.

 

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On June 9, 2008, the Company received the clearance needed totransport oil from the CX-11 platform to the nearby Talara refinery by thecorresponding Peruvian environmental agency. In addition, its Floating-Production-Storage-and-Offloading (“FPSO”)vessel, the first in service in the Peruvian market, was placed in positionnear the CX-11 platform and is receiving production from the platform.  By utilizing the current production equipmentin place, the production levels are anticipated to increase during the thirdquarter of 2008.

 

We had no oil sales duringthe three and six months ended June 30, 2007.

 

**Operating Expenses**

 
| ** **                               | ** ** | **For the three months ended  June 30,** | ** ** | **For the six months ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                          | ** ** | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| General and administrative               |       | $                                                                 | 9,922,652  |                                                            | $          | 3,766,736 |   | $ | 18,237,568 |   | $ | 6,862,531 |   |
| Lease operating expense                  |       | 1,140,331                                                         | ** ** | **—**                                                      |       | 3,359,622 |   | — |   |
| Geological, geophysical and engineering  |       | 115,914                                                           |       | 1,868,663                                                       |       | 296,611 |   | 1,970,251 |   |
| Depreciation, depletion and amortization |       | 1,081,970                                                         |       | 52,289                                                          |       | 2,273,368 |   | 106,786 |   |
| Total operating expenses                 |       | $                                                                 | 12,260,867 |                                                            | $          | 5,687,688 |   | $ | 24,167,169 |   | $ | 8,939,568 |   |

 

Our operating expenses consist principally of general andadministrative costs including stock based compensation as well as geological,geophysical and engineering costs and lease operating costs.

 

General and administrative costs have increased from $3,766,736 and$6,862,531 during the three and six month period ended June 30, 2007 to$9,922,652 and $18,237,568, during the three and six month period ended June 30,2008.  Included in general andadministrative expenses is stock-based compensation expense.  Stock-based compensation expense for thethree and six months ended June 30, 2008 was approximately $3,897,534 and$8,459,764 compared to $941,963 and $1,901,522 during the same period ended June 30,2007.  Stock based compensation expenseis primarily related to our restricted stock grants, and accrued stock-basedcompensation under our 2007 Long-Term Incentive Plan and 2007 DirectorsCompensation Incentive Plan.  We useequity incentives to attract and retain key personnel.  In addition, the remaining increase in general andadministrative is a result of the addition of necessary personnel to supportour increased activity levels.

 

We incurred lease operating expense during the three and six monthsended June 30, 2008 of $1,140,331 and $3,359,622, respectively due to thecommencement of oil production.  Thisamount includes approximately $38,000 related to the cost of the approximately1,300 barrels of oil that was lost as a result of the tanker incident.

 

Geological, geophysical and engineering cost for the three months endedJune 30, 2008 as compared to the same period ended June 30, 2007decreased from $1,868,663 to $115,914, respectively, and from $1,970,251 to$296,611 and for the six month period ended June 30, 2007 and June 30,2008, respectively.  The decrease isprimarily due to performing 200 kilometers of 2-D seismic in Block XIX duringthe second quarter ended June 30, 2007 in accordance with the Block XIXLicense Contract.

 

Depreciation, depletion and amortization increased significantly from$52,289 and $106,786 during the three and six months ended June 30, 2007to $1,081,970 and $2,273,368 during the three and six months ended June 30,2008, primarily due to depletion expense generated by oil production in theCorvina Field.  This amount includesapproximately $24,000 related to the cost of the approximately 1,300 barrels ofoil that was lost as a result of the tanker incident.

 

We received net cash distributions from our investment in Ecuadorproperty of approximately $300,000 and $600,000 during the three and six monthsended June 30, 2008, compared to net cash distributions of approximately $160,000duringthe three and six months ended June 30, 2007.  Since our investment consists of an interestin a producing oil and gas property, we are amortizing the investment on astraight-line basis over the remaining term of the license agreement coveringthe property.  Accordingly, we recorded$46,896 and $93,792 of amortization expense during the three and six monthsended June 30, 2008, respectively, and the same amounts during the threeand six months ended June 30, 2007.

 

We capitalized interest expense of $1,086,700 and $2,009,255 during thethree and six months ended June 30, 2008, primarily related to our capitallease obligations and the IFC convertible debt. We incurred interest expense of approximately $1,165 during the sixmonths ended June 30, 2007. We did not incur net interest expense duringthe three months ended June 30, 2007.

 

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We received interest income of approximately $147,014 and $196,494during the three and six months ended June 30, 2008, as compared to$257,453 and $497,747 during the three and six months ended June 30, 2007,respectively, as a result of the increased cash balance from the privateplacements of 2.2 million shares of our common stock during the second quarterended June 30, 2008.

 

Other income and expense increased from$38,128 and $44,789 during the three and six months ended June 30, 2007 to$317,330 and $223,993 for the three and six months period ended June 30,2008.  The increase for the six monthsended June 30, 2008, is mostly due to realized foreign exchange gainsprimarily related to the collection of the IGV (Peruvian Value Added Tax) underthe IGV early recovery program.  IGVunder the early recovery program is denominated in the Peruvian Nuevo Solcurrency.  Due to the strengthening ofthe Nuevo Sol against the US Dollar during the three and six months ended June 30,2008, we realized an exchange rate gain of approximately $316,000 and $220,000,respectively.  See Item 3.Quantitative and Qualitative Disclosures About Market Risk, “*Foreign Currency Exchange Rate Risk”* for a more detaileddiscussion.

 

We realized foreign tax expense of $148,179 and $240,580 during thethree and six months ended June 30, 2008 compared to tax expense of$43,928 and $50,302 for the same periods ended June 30, 2007.  Tax expense during the three and six monthsended June 30, 2008 is primarily related to the minimum Peruvian federalincome taxes payable under the Block Z-1 license contract as a result of oilsales under an extended well test program. The tax expense in 2007 is related to the revenues from our 10%non-operated working interest in the Santa Elena Property in southwesternEcuador and its affect on our US non-consolidated returns.  We were unable to offset the operating lossesgenerated from our Peruvian branch with the revenues from our Ecuador branch.

 

We realized a net loss of $4,656,143 or $(0.06) per share and$12,078,337 or $(0.16) per share during the three and six months ended June 30,2008, respectively, compared to a net loss of $5,482,931 or $(0.08) per shareand $8,688,323 or $(0.13) per share for the same periods in 2007.  The decrease in net loss was due to oilrevenues in 2008 as well as an increase weighted average share count at June 30,2008 compared with June 30, 2007. This was partially offset by higherexpenses associated with increased operational activity levels.

 

**2008 Project Capital Budget**

 
| ** **                                       | ** ** | **($ in millions)** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| Corvina oil & gas development  program  |       | $                             | 52.0       |   |
| Albacora oil & gas development  program |       | 29.0                          |       |
| Other prospects                                  |       | 14.0                          |       |
| Contingencies                                    |       | 5.0                           |       |
| Total exploration and production (1)             |       | 100.0                         |       |
| Power plant and related equipment                |       | 69.0                          |       |
| Pipelines and processing facilities              |       | 41.0                          |       |
| Contingencies                                    |       | 5.0                           |       |
| Total Gas-to-Power (2)                           |       | 115.0                         |       |
| Total estimated capital budget                   |       | $                             | 215.0      |   |

 

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(1)  Financing provided by Corvina oil sales and anticipated IFC creditfacility.

 

(2)  Anticipated financing provided by International FinanceCommittee — capital budget covers entire construction period which will extendinto 2009.

 

**Liquidity,Capital Resources and Capital Expenditures**

 

*Production*

 

**We began producing oil on a limitedbasis in November 2007**from the CX11-21XD and 14D wells in the Corina Fieldunder an extended well testing program. During second quarter 2008, we added production from the 18XD well.  The oil is delivered to the refinery by bargeapproximately 100 miles south of the platform. The remainder is kept in production inventory until we begin production,increasing the inventory quantities to a sufficient level that the refinery in Talarawill accept delivery.  Our current salescontract with Petroperu is based on Northwest Oil Basket pricing which iscomprised of Oman, Fortes and Suez Blend pricing.  The unadjusted sales price is based on thepast five day average before the crude oil delivery date.  The price is then discounted for the qualityof the oil delivered.  The determinationof quality is based on the gravity of the oil expressed in degrees, asdetermined under standards established by the American Petroleum Institute(“API”).  

 

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**The price is discounted at a rateof 0.53% of the basket price per one degree API lower than the benchmark of 33degrees API as stipulated in the contract. In addition a fixed premium of $0.75 per barrel is added to the price asa result of the high diesel content of the crude oil.**

 

Royalties are calculated byPerupetro as stipulated in the Block Z-1 license agreement based on the sameNorthwest Oil Basket.  However, theircalculation is based on the first or second two weeks of each month, as opposedto being based on the past five day average before the crude oil delivery date.

 

During the three and sixmonth period ended June 30, 2008, we produced approximately 81,766 barrelsand 126,942 barrels, respectively.  Wesold approximately 59,186 barrels and 116,372 barrels during the three and sixmonths ended June 30, 2008 at an average price, net of royalties, ofapproximately $118.87 per barrel and $97.99, respectively.  In January 2008, we incurredproduction and transportation delays due to the incident involving on of thePeruvian Navy tankers being used to transport oil to market.  See Note 1, “Basis of Presentation andSignificant Accounting Policies – Corvina” above for a more detail discussionof the incident.****Approximately 1,300 barrels of oil were lost in the fire aboard thetanker.  The cost of the crude oil lostwas approximately $62,000 and was expensed through lease operating expense anddepreciation, depletion and amortization.

 

On June 9, 2008, the Company received the clearance needed totransport oil from the CX-11 platform to the nearby Talara refinery by thecorresponding Peruvian environmental agency. In addition, its Floating-Production-Storage-and-Offloading (“FPSO”)vessel, the first in service in the Peruvian market, was placed in positionnear the CX-11 platform and is receiving production from the platform.  By utilizing the current production equipmentin place, the production levels are anticipated to increase during the thirdquarter of 2008.

 

We had no oil sales duringthe three and six months ended June 30, 2007.

 

Weare currently using two tank barges under a capital lease agreement as afloating production and storage facility (“FPSO”) and a transport barge.  The two barges under a capital lease, theNamoku and the Nu’uanu, each have a capacity of approximately 40,000barrels.  The Namoku is being used as aFPSO, moored adjacent to the CX-11 platform, while the Nu’uanu is being used totransport oil between the Corvina field off shore in northwest Peru in the Z-1block and the refinery in Talara approximately 100 miles south of ouroperations.

 

In June 2008,we began producing using the production equipment on-board the FPSO.  The FPSO equipment on-board the Namoku, wasfinanced through a separate capital lease that commenced when the Company beganutilizing the production equipment on board the FPSO in June 2008.  The lease terms are variable and bear aninterest rate of 18% based on our incremental borrowing rate for similarequipment.  In accordance with the termsof the lease, a bargain purchase option exists at the end of the lease.  As a result, depreciation will be calculatedover the economic life of the asset.  TheCompany recorded the capital lease at $2.6 million which represents the presentvalue of the minimum lease payment at the Company’s incremental borrowing rateover the term of the lease, or the fair market value of the asset.

 

*Capital Raises and Debt Activity*

 

Apart from our limited revenue from oilsales, our primary source of cash flow has been cash proceeds from private andpublic placements of our common stock. As of August 1, 2008, our cash balance was approximately$7.5 million.

 

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

 

We intend to use the proceeds from theoffering for general corporate purposes, including: the reduction ofoutstanding indebtedness, or other corporate obligations, capital expendituresand general working capital requirements, including testing and drillingoperations and commencement of development of our Albacora Field property.

 

As of June 30, 2008 we had long-term debt andcapital lease obligations outstanding of $27,565.  On November 19, 2007, we entered into aconvertible debt agreement between IFC for approximately $15.5 million. The terms of the loan agreement stipulated a conversion price of $10.39 pershare and included a forced conversion exercisable at our option if the closingprice of the our common stock exceeded a price of $18.19 per share, based onthe average closing price over twenty consecutive business

 

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days.  In May 2008 we converted this long-termdebt into 1,491,819 shares of our common stock and settled approximately $15.5million in long-term debt.

 

We are actively negotiating with IFC to increase the debt package to anestimated $335 million for further development of its assets, of which $120million of the total financing package was approved by the Credit Committee ofthe IFC on November 29, 2006.  Please seeNote 14 “Commitments and Contingencies” – *Financing Package*in the Company’s form 10-K for the period ended December 31, 2007 forfurther discussion.  The financingpackage includes an investment of $19.5 million by IFC in the Company’scommon stock which took place on December 18, 2006, with the remainingportion to be financed through debt issuance. Part of the debt issuance was funded through a “C” Loan, asdescribed above.  We anticipate theremaining debt issuance balance to be funded through the following two debtfacilities:

 

·                  Up to a $215 million credit agreementto fund our exploration and development activities.  We are currently negotiating the term sheetwith IFC on the credit facility.  Thefacility will be subject to a borrowing base calculation that will be a functionof semi-annual oil reserve reports. Of the $215 million, the Companyanticipates the IFC will finance $15 million directly and the remaining $200million will be financed through a syndicate of other lendinginstitutions.  The Company expects toclose on the $15 million portion by third quarter 2008 and the remaining $200million syndicated portion by early fourth quarter 2008.

 

·                  We are negotiating an additional $120million debt facility to fund the development of its gas-to-power project.  The final number will be a function the typeof generation equipment ultimately selected. We are currently negotiating the engineering, procurement andconstruction contracts that will be conditions precedent to this creditfacility.  We anticipate closing thisloan by the end of 2008.

 

As of August 11, 2008, the final loan documents for the $215million and $120 million loans have not been completed.

 

During the sixmonths ended June 30, 2008, we entered into two loan agreements withPeruvian banks to borrow approximately $2.8 million.  During the second quarter ended June 30,2008, we paid down the debt by approximately $2.3 million.  As of June 30, 2008, our outstandingbalance related to these loans was $.5 million. The amounts are included in current maturities of long-term debt andcapital lease obligations as they are collateralized by IGV receivables andmature upon receipt of the IGV payment. The loans are fixed and bear interest rates of approximately 8% each.

 

*Equipment Activity*

 

During the six months ended June 30,2008, we incurred capital expenditures of approximately $48.8 millionprimarily related to drilling, completion and testing activity on the threeCorvina wells as well as approximately $7.0 million related to thelease-purchase of a deck barge (“BPZ-02”). In February 2008, we entered into a lease-purchase agreementto acquire the BPZ-02.  The BPZ-02 is adeck barge approximately 330 feet in length. It will assist in the platform refurbishment and drilling activities inthe Albacora field as well as to assist in future offshore drilling anddevelopment activities.  In the near term, the BPZ-02 will be used to actas a tender assist for the Petrex drilling rig as it is moved to the Albacorafield in fourth quarter 2008.  During that time, as mentioned in Note 15 “Commitmentand Contingencies”, the BPZ-01 will be placed in dry-dock to repair damagessustained when it ran aground in late 2006.  The acquisition of the BPZ-02allows us better asset maintenance scheduling and will aid in the support ofincreased offshore exploration and development activities.  The terms ofthe lease-purchase stipulate a 19% rate of interest (33% effective rate ofinterest) over a one year term at which point, title to the BPZ-02 willtransfer to us upon final payment of the lease.  We are accounting for thetransaction as a Capital Lease in accordance to SFAS 13, “Accounting For Leases(As Amended)” under the criteria the barge will transfer title at the end ofthe lease period and, as a result, depreciation will be calculated over theeconomic life of the asset.

 

In addition, we entered into a capital lease agreement for theproduction equipment on board the FPSO. The FPSO, the Namoku, as well as the storage barge, the Nu’uanu areunder a separate capital lease agreement. The capital lease for the production equipment commenced in June 2008,the date the equipment was put into service. The lease terms are variable and bear an interest rate of 18% based onour incremental borrowing rate for similar equipment.  In accordance with the terms of the lease, abargain purchase option exists at the end of the lease.  As a result, depreciation will be calculatedover the economic life of the asset.  Werecorded the capital lease at $2.6 million which represents the present valueof the minimum lease payments at our incremental borrowing rate over the termof the lease, or the fair market value of the asset.

 

We continue to work on the development of aCompany owned gas-fired power generation facility.  We incurred approximately $1.3 millionrelated to the drafting of certain design specifications for the power plant.

 

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We also incurred costs for office equipment and leasehold improvementsfor its offices in Houston, Peru and Ecuador of approximately $0.1 million andfor the purchase of machinery and equipment used in operations in Peru ofapproximately $0.6 million.

 

*Performance Bonds*

 

Inconnection with its properties in Peru, we have obtained five performance bondstotaling $6.9 million to insure certain obligations and commitments, of whichone relates to the guarantee of import duties related to the FPSO and transporttanker and four relate to performance obligations under the license contractsfor Blocks Z-1, XIX, XXII and XXIII.  As of June 30, 2008, wehad restricted cash deposits of $4.8 million, which partially collateralizesthe performance bonds.

 

During the six months ended June 30,2008 we were refunded $0.3 million related to the second exploration phaseunder the Block XIX license contract and approximately $1.0 million related toa performance commitment under a drilling services contract.  We were required to post a $0.6 millionperformance bond in connection with the third phase of exploration under theBlock XIX license contract.  We alsoposted a $1.7 million bond to guarantee import duties for the FPSO barge andtransport tanker.

 

All of the performance bonds are issued by Peruvian banks and theirterms are governed by the corresponding license contract.

 

*ExplorationActivity*

 

In connection with the Block XIX licensecontract, during the second quarter 2007 we began shooting 200 kilometers of2-D seismic. The work was completed during the third quarter 2007.  The cost to acquire this seismic data wasapproximately $3.6 million.  Based on theresults of the 2-D seismic surveys and in order to comply with the requirementsunder the next phase of the related license contract, we plan to drill a wellin Block XIX in early 2009 at an estimated cost of $8.0 million.

 

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

 

**Off-BalanceSheet Arrangements**

 

As of June 30, 2008, we had no transactions, agreements or othercontractual arrangements with unconsolidated entities or financialpartnerships, often referred to as special purpose entities, which generallyare established for the purpose of facilitating off-balance sheet arrangements.

 

**ContractualObligations**

 
| ** **                    | ** ** | **Payments Due by Period at June 30, 2008** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | ** **                                                                     | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| ** **                    | ** ** | **Total**                                                                      | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| **Contractual Obligations:**  |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Operating lease obligation(1) |       | $                                                                              | 457,240    |   | $ | 226,598 |   | $ | 230,642 |   | $ | — |   | $ | — |   |
| Debt obligation(2)            |       | 14,881,372                                                                     |       | 14,852,495 |   | 28,877 |   | — |   | — |   |
| Total                         |       | $                                                                              | 15,338,612 |   | $ | 15,079,093 |   | $ | 259,519 |   | $ | — |   | $ | — |   |

 

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| (1)    | Operating leases  for our executive office in Houston, Texas, our branch office in Quito,  Ecuador, and our branch office and corporate apartments in Lima, Peru.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (2)    | Includes capital lease for two production  and storage barges which began in August 2007 and is set to expire in  November 2009. Lease payments are variable based on the working status  of the barges, with a purchase option of $5,000,000 after the first year of  the lease and $4,000,000 after the maturity date of the lease. Also, includes  lease-purchase of the BPZ-02 which stipulates a 19% rate of interest (33%  effective rate of interest) over a one year term at a fixed rate of payment  of $694,167. At the end of the term, title to the BPZ-02 will transfer to us  upon final payment of the lease. In addition, includes the $2.6 million  capital lease of the production equipment onboard the Floating Production  Storage and Offload Facility, the Namoku. The lease terms are variable  and bear an interest |

 

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rate of 18% based on our incrementalborrowing rate for similar equipment.  Inaccordance with the terms of the lease, a bargain purchase option exists at theend of the lease.  Lastly,includes the capital lease for office furniture in our executive office inHouston, Texas expiring in 2010 as well as short-term loans of approximately $.5million collateralized by IGV receivables. Interest rates on the IGV collateralized short-term loans are at fixedrates of approximately 8% each.

 

**CriticalAccounting Policies and Recent Accounting Pronouncements**

 

The discussion and analysis of our financial condition and results ofoperations is based on our consolidated financial statements, which have beenprepared in accordance with U.S. generally accepted accounting principles (“GAAP”).Management uses estimates and assumptions in preparing the consolidatedfinancial statements in accordance with GAAP. Those estimates and assumptionsaffect the reported amounts of assets, liabilities, revenues and expenses inthe consolidated financial statements, and the disclosure of contingent assetsand liabilities.

 

In Item 7 “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of our Annual Report on Form 10-Kfor the year ended December 31, 2007, we identified our most criticalaccounting policies upon which our financial condition depends as thoserelating to oil reserves, successful efforts method of accounting, revenuerecognition, impairment of long-lived assets, future dismantlement,restoration, and abandonment costs, as well as stock-based compensation.

 

**DisclosureRegarding Forward-Looking Statements**

 

We cautionthat this document contains forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995, Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  All statements, other thanstatements of historical facts, included in or incorporated by reference intothis Form 10-Q which address activities, events or developments which weexpect, believe or anticipate will or may occur in the future areforward-looking statements.  The words “believes,”“intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” “plans”and similar expressions, or the negative thereof, are also intended to identifyforward-looking statements.  Inparticular, statements, expressed or implied, concerning future operatingresults, the ability to replace or increase reserves, or to increaseproduction, or the ability to generate income or cash flows are by nature,forward-looking statements.  Thesestatements are based on certain assumptions and analyses made by the managementof BPZ in light of its experience and its perception of historical trends,current conditions and expected future developments as well as other factors itbelieves are appropriate in the circumstances. However, forward-looking statements are not guarantees of performance andno assurance can be given that these expectations will be achieved.

 

Importantfactors that could cause actual results to differ materially from theexpectations reflected in the forward-looking statements include, but are notlimited to any of the following in the jurisdictions in which BPZ or itssubsidiaries are doing business:  thetiming and extent of changes in commodity prices for crude oil, natural gas andrelated products, currency exchange rates, interest rates, inflation, theavailability of goods and services, drilling and other operational risks,availability of capital resources, timing of syndication of and disbursementsunder the anticipated IFC debt facility, resumption of transportation of ouroil production, legislative or regulatory changes, political developments, actsof war and terrorism.  A more detaileddiscussion on risks relating to the oil and natural gas industry and to us isincluded in our Annual Report on Form 10-K for the year ended December 31,2007.

 

In light ofthese risks, uncertainties and assumptions, we caution the reader that theseforward-looking statements are subject to risks and uncertainties, many ofwhich are beyond our control, which could cause actual events or results todiffer materially from those expressed or implied by the statements.  All subsequent written and oralforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by the cautionary statements.  We undertake no obligations to update or reviseits forward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

The primary objective of the following information is to provideforward-looking quantitative and qualitative information about our potentialexposure to market risks.  The term “marketrisk” refers to the risk of loss arising from adverse changes in interestrates, oil and natural gas prices and foreign currency exchange rates.  The disclosures are not meant to be precise indicatorsof expected future losses, but rather indicators of reasonable possiblelosses.  This forward-looking informationprovides indicators of how we view and manage our ongoing market riskexposures.  All of our market risksensitive instruments were entered into for purposes other than speculativetrading.

 

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*InterestRate Risk.*

 

As of June 30, 2008, we had long-term debt and capital leaseobligations of approximately $27,565 and current maturities of long-term debtand capital lease obligations of approximately $13.5 million, consisting ofthree capital lease obligations for three barges and production equipment, twoloans for office furniture and equipment and one loan with Peruvian bankscollateralized by IGV receivables.  Thefirst capital lease obligation for the floating storage and production facilityhas an imputed interest rate of 18.0% over a lease term of 27 months andincludes a purchase option which we anticipate, for accounting purposes we will exercise on the 15th month of thelease term.  The second capital leasecontains a lease-purchase optionand stipulates a 19% rate of interest (33% effective rate of interest) over aone year term, at which point title to the BPZ-02 will transfer to us uponfinal payment of the lease.  Theproduction equipment on the FPSO contains a purchase option at the end oftwelve months and stipulates an interest rate of 18.0%.  The other two loans have a term of 60 months and bearinterest at fixed rates of 5.94% and 9.44%, with principal and interestpayments due on a monthly basis.  Lastly,the IGV collateralized short-term loan mature upon our receipt of the IGV paymentfrom Peru and bear fixed interest rates of approximately 8% each.  We do not expect a significant change in themarket interest rate to impact 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.

 

*CommodityPrice Risk.*

 

With respect to our oil and gas business, any revenues, cash flow,profitability and future rate of growth we achieve will be greatly dependentupon prevailing prices for oil and gas. Our ability to maintain or increase our borrowing capacity and to obtainadditional capital on attractive terms is also expected to be dependent on oiland gas prices.  Historically, oil andgas prices and markets have been volatile and are likely to continue to bevolatile in the future.  Prices for oiland gas are subject to potentially wide fluctuations in response to relativelyminor changes in supply of and demand for oil and gas, market uncertainty, anda variety of additional factors that are beyond our control.

 

Lower oil and natural gas prices may not only decrease our revenues ona per unit basis, but may also reduce the amount of oil and natural gas we canproduce economically, if any.  Asubstantial or extended decline in oil and natural gas prices may materiallyaffect our future business, financial condition, results of operations,liquidity and borrowing capacity, and we may require a reduction in thecarrying value of our oil and gas properties. While our revenues may increase if prevailing oil and gas pricesincrease significantly, exploration and production costs and acquisition costsfor additional properties and reserves may also increase.

 

With respect to our planned electricity generation business, the pricewe can obtain for the sale of power may not rise at the same rate, or may notrise at all, to match a rise in the Company’s cost to produce and transport gasreserves to our initial 160MW power plant in Caleta Cruz.  Prices for both electricity and natural gashave been very volatile in the past year and have increased significantly overthe past two years.  The profitability ofthis business depends in large part on the difference between the price of powerand the price of fuel used to generate power, or “spark spread.”

 

*ForeignCurrency Exchange Rate Risk.*

 

The U.S. Dollar is the functional currency for our operations in bothPeru and Ecuador.  Ecuador has adoptedthe U.S. Dollar as its official currency. Peru, however, still uses its local currency, Nuevo Soles, in additionto the U.S. Dollar, and therefore, our financial results are subject tofavorable or unfavorable fluctuations in the exchange rate and inflation ofthat country.  Transaction differenceshave been nominal to-date but are expected to increase as our activities inPeru continue to escalate.  During thethree and six months ended June 30, 2008, we realized an exchange rategain of approximately $316,000 and $220,000, respectively primarily related tothe early recovery of IGV or Value Added Taxes in Peru.

 

**Item 4. Controls and Procedures**

 

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

 

As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) ofthe Exchange Act.  Based upon thatevaluation our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures as defined in Rule 13a-15(e) ofthe Exchange Act were effective as of the end of the period covered by thisreport to ensure that information required to be disclosed by the Company inthe reports that the Company files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.  Our disclosure controls and proceduresinclude controls and procedures designed to ensure that information required tobe disclosed in reports filed or submitted under the Exchange Act isaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate, to allowtimely decisions regarding required disclosure.

 

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

 

During the quarter ended June 30, 2008,there was no change in internal control over financial reporting thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II**

 

**Item 1. Legal Proceedings**

 

See Note 15, “Commitments andContingencies”, of the Notes to Consolidated Financial Statementsincluded in Part I, Item I, of the December 31, 2007 Form 10Kwhich is incorporated herein by reference.

 

In addition, on October 24, 2007, ourprimary marine transportation contractor entered into two short term agreementswith the commercial division of the Peruvian Navy to lease two tankers totransport oil to market.  On January 30,2008, one of the tankers, the Supe, sank after catching fire.  At the time of the incident, the tankercontained approximately 1,300 barrels of oil. No Company employees wereinjured. Official environmental impact assessments concluded that environmentalissues have been adequately controlled. Both the Harbor Master withjurisdiction over our marine operations and the local prosecutor havedetermined that no acts of BPZ contributed to the fire and subsequent sinking.However, the matter remains in litigation in Peru.  We have assessed that we, as a contractingparty and our third party marine contractor, as the time charterer of the Supe,may have limited exposure to civil liability resulting from the operation ofthe Supe.  However, we consider any suchaction to be remote and that such limited exposure, while unknown at this time,will not have a material effect on our financial statements.

 

**Item 1A. Risk Factors**

 

Item 1A, “Risk Factors” of our Annual Reporton Form 10-K for the year ended December 31, 2007, includes adetailed discussion of our risk factors. Except as set forth below, there are no material changes in our riskfactors as previously described in our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

***Construction andoperation of power generation and gas processing facilities and pipelines involvesignificant risks and delays that cannot always be covered by insurance orcontractual protections.***The construction of power generation and gas processing facilities andpipelines involve many risks, including:

 

·              supply interruptions,

 

·              work stoppages,

 

·              labor disputes,

 

·              social unrest,

 

·              inability to negotiate acceptableconstruction, supply or other contracts,

 

·              inability to obtain required governmentalpermits and approvals,

 

·              weather interferences,

 

·              unforeseen engineering, environmental andgeological problems,

 

·              unanticipated cost overruns,

 

·              possible delays in the acquisition of thenecessary gas turbines,

 

·              possible delays in connection with powerplant construction,

 

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

 

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

 

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

 

***Our successdepends in part on the existence and growth of markets for natural gas andelectricity in Peru and Ecuador.***Peru has a relatively well-developed and stable market for electricity,while the power market in Ecuador is not as well-developed or stable. Bothcountries rely on hydro-electric generating capacity for a significant portionof their power demand. Hydro plants are much less expensive to operate thanplants that utilize natural gas, but they are subject to variable output basedon rainfall and reservoir levels. The majority of the non-hydro, or thermal,power capacity in both countries consists of generating plants that utilizediesel or fuel oil, which are significantly more costly than natural gas atthis time. Both countries have natural gas reserves and production, but neitherhas a well-developed natural gas infrastructure. Our immediate business planrelies on the continued stability of the power market in Peru (and Ecuador forthe purpose of gas sales to third-party power producers in Ecuador), and ourlonger-term plans depend on the further development of the electricity marketin Ecuador. We currently do not expect to complete our power plant until2010.  Our assessment of the future power market and demand in Peru andEcuador could be inaccurate.  We are subject to the risks that:

 

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

 

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

 

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

 

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

 

·              We will also be subject to the generalcommercial issues related to being in the power business, including thecredit-worthiness of, and collections from future customers and the ability toprofitably operate our future power plants.

 

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

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

The2008 annual meeting of shareholders was held on June 20, 2008. At thismeeting, the following two Class I directors were re-elected by thefollowing vote:

 
| **Director**                | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-----------------------------|------------|--------------------|------------|-------------------------|------------|
| Gordon Gray                 |       | 51,289,137         |       | 1,160,450               |       |
| E. Barger  miller, III |       | 51,423,721         |       | 1,025,866               |       |

 

Class IDirectors will serve until the 2011 annual meeting of shareholders or theirsuccessors are elected and qualified.

 

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| **Proposal**                                                                                                       | ** ** | **Votes For** | ** ** | **Votes  Against** | ** ** | **Abstentions** | ** ** | **Broker  Non-votes** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------|------------|-----------------------|------------|
| Ratification  of Johnson Miller & Co.,CPA’s PC as the Company’s independent public  accountants |       | 52,438,565         |       | 7,628              |       | 3,394           |       | —                |       |

 

**Item 5. Other Information**

 

None.

 

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**Item 6. Exhibits**

 
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of  2002. (Filed herewith)                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of  2002. (Filed herewith)                                                    |
|   |   |                                                                                                                                                                             |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith) |
|   |   |                                                                                                                                                                             |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith) |

 

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**SIGNATURES**

 

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

 
| Date: August 11, 2008 |     |                                              |
|----------------------------|----------|---------------------------------------------------|
|                       |     |                                              |
|                       |     | BPZ RESOURCES, INC.                               |
|                       |     |                                              |
| * *                   | * * | */s/ Manuel Pablo Zúñiga-Pflücker* |
|                       |     | Manuel Pablo  Zúñiga-Pflücker      |
|                       |     | President and Chief  Executive Officer            |

 

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