UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-15905

BLUE DOLPHIN ENERGY COMPANY

(Exact name of registrant as specified in its charter)

Delaware		73-1268729
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

801 Travis Street, Suite 2100, Houston, Texas 77002
(Address of principal executive offices)

(713) 568-4725
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 15, 2010, there were 2,070,462 shares of the registrant’s common stock, par value $0.01 per share (the “Common Stock”), issued and outstanding.

 

 

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations (Unaudited)			4
Condensed Consolidated Statements of Cash Flows (Unaudited)			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosure About Market Risk			18
Item 4. Controls and Procedures			18
PART II. OTHER INFORMATION			18
Item 1. Legal Proceedings			18
Item 1A. Risk Factors			19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 3. Defaults Upon Senior Securities			19
Item 4. (Removed and Reserved)			19
Item 5. Other Information			19
Item 6. Exhibits			19
SIGNATURES			21
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

Condensed Consolidated Balance Sheets

		September 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	366,403			$	1,016,483
Accounts receivable, net of allowance for doubtful accounts			490,481				428,124
Prepaid expenses and other current assets			188,155				359,850
Loan receivable, net of allowance for loan receivable			—				—
Total current assets			1,045,039				1,804,457
Property and equipment, at cost:
Oil and gas properties (full-cost method)			2,222,535				1,086,733
Pipelines			4,659,686				4,659,686
Onshore separation and handling facilities			1,919,402				1,919,402
Land			860,275				860,275
Other property and equipment			503,813				302,813
			10,165,711				8,828,909
Less: Accumulated depletion, depreciation and amortization			5,475,207				5,011,401
Total property and equipment, net			4,690,504				3,817,508
Loan receivable, net of allowance for loan receivable			—				—
Other assets			9,463				9,463
Total assets		$	5,745,006			$	5,631,428
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	379,306			$	372,275
Note payable — insurance			—				173,479
Asset retirement obligations, current portion			199,000				—
Accrued expenses and other current liabilities			38,406				8,136
Other long-term liabilities			—				25,996
Total current liabilities			616,712				579,886
Long-term liabilities:
Asset retirement obligations, net of current portion			2,504,069				2,262,018
Total long-term liabilities			2,504,069				2,262,018
Total liabilities			3,120,781				2,841,904
Commitments and contingencies
Stockholders’ equity:
Common stock ($.01 par value, 100,000,000 shares authorized, 2,070,462 and 1,696,710 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively)			20,705				16,967
Additional paid-in capital			33,675,944				32,880,208
Accumulated deficit			(31,072,424	)			(30,107,651	)
Total stockholders’ equity			2,624,225				2,789,524
Total liabilities and stockholders’ equity		$	5,745,006			$	5,631,428

See accompanying notes to the condensed consolidated financial statements.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue from operations:
Pipeline operations		$	502,369			$	442,249			$	1,393,848			$	1,505,644
Oil and gas sales			237,940				42,269				278,161				108,290
Total revenue from operations			740,309				484,518				1,672,009				1,613,934
Cost of operations:
Pipeline operating expenses			243,531				309,695				855,842				1,267,416
Lease operating expenses			221,019				29,731				250,031				78,436
Depletion, depreciation and amortizaton			217,105				133,362				463,806				396,502
Impairment of oil and gas properties			—				—				—				203,110
Recovery of allowance for doubtful loan receivable			(201,000	)			—				(201,000	)			—
General and administrative			306,288				372,159				1,144,537				1,625,107
Stock-based compensation			—				62,562				53,760				165,526
Accretion expense			30,563				27,586				88,678				83,423
Total cost of operations			817,506				935,095				2,655,654				3,819,520
Loss from operations			(77,197	)			(450,577	)			(983,645	)			(2,205,586	)
Other income:
Interest and other income			8,115				129,191				18,872				133,942
Loss before income taxes			(69,082	)			(321,386	)			(964,773	)			(2,071,644	)
Income taxes			—				—				—				—
Net loss		$	(69,082	)		$	(321,386	)		$	(964,773	)		$	(2,071,644	)
Loss per common share
Basic		$	(0.04	)		$	(0.19	)		$	(0.54	)		$	(1.23	)
Diluted		$	(0.04	)		$	(0.19	)		$	(0.54	)		$	(1.23	)
Weighted average number of common shares
outstanding
Basic			1,967,278				1,686,590				1,793,365				1,680,490
Diluted			1,967,278				1,686,590				1,793,365				1,680,490

See accompanying notes to the condensed consolidated financial statements.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

		Nine Months Ended
		September 30,
		2010				2009
Operating Activities:
Net loss		$	(964,773	)		$	(2,071,644	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depletion, depreciation and amortization			463,806				396,502
Recovery of previous allowance for doubtful loan receivable			(201,000	)			—
Accretion of asset retirement obligations			88,678				83,423
Common stock issued for services			60,000				60,000
Compensation from issuance of stock options			53,760				164,526
Impairment of oil and gas properties			—				203,110
Changes in operating assets and liabilities:
Accounts receivable			(62,357	)			(19,446	)
Loan receivable			—				(2,000,000	)
Prepaid expenses and other assets			171,695				372,625
Abandonment costs incurred			(38,996	)			(32,037	)
Accounts payable, accrued expenses, and other current liabilities			11,305				230,594
Net cash used in operating activities			(417,882	)			(2,612,347	)
Investing Activities:
Purchases of property and equipment			(58,719	)			(12,500	)
Exploration and development costs			—				(3,143	)
Net cash used in investing activities			(58,719	)			(15,643	)
Financing Activities:
Payments on insurance finance note			(173,479	)			(71,965	)
Net cash used in financing activities			(173,479	)			(71,965	)
Net decrease in cash and cash equivalents			(650,080	)			(2,699,955	)
Cash and Cash Equivalents at Beginning of Period			1,016,483				3,864,876
Cash and Cash Equivalents at End of Period		$	366,403			$	1,164,921
Supplemental Information:
Non-cash investing and financing activities
Purchase of property and equipment with company stock		$	685,714			$	—
Property and equipment acquired as partial settlement of loan receivable		$	201,000			$	—
Increase in asset retirement obligation and property and equipment		$	391,369			$	—

See accompanying notes to the condensed consolidated financial statements.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

1. Organization and Operation of the Company

Organization

Blue Dolphin Energy Company (referred to herein, with its predecessors and subsidiaries, as “Blue Dolphin,” “we,” “us” and “our”) was incorporated in Delaware in January 1986 to engage in oil and gas exploration, production and acquisition activities and oil and gas transportation and marketing. We were formed pursuant to a reorganization that was effective as of June 9, 1986. We conduct upstream activities in the Western Gulf of Mexico off the Texas coast and the Sumatra basin in offshore Indonesia.

The unaudited condensed consolidated financial statements of Blue Dolphin and its wholly-owned subsidiaries included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, reflect all adjustments necessary to present fair condensed consolidated statements of operations, financial position and cash flows. We believe that the disclosures are adequate and the information presented is not misleading. This report has been prepared in accordance with Form 10-Q instructions and therefore, certain information and footnote disclosures normally included in audited financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations.

Our accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our annual report on Form 10-K and Amendment No. 1 on Form 10-K/A for the fiscal year ended December 31, 2009. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2010.

2. Summary of Significant Accounting Policies

Accounting Estimates. We have made a number of estimates and assumptions related to the reporting of consolidated assets and liabilities and to the disclosure of contingent assets and liabilities to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. This includes the estimated useful life of pipeline assets, valuation of stock-based payments and reserve information, which affects the depletion calculation as well as the full-cost ceiling limitation. While we believe current estimates are reasonable and appropriate, actual results could differ from those estimated.

Going Concern. Our condensed consolidated financial statements, which have been prepared in accordance with GAAP, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. We incurred a net loss of $69,082 for the quarter ended September 30, 2010, and a net loss of $964,773 for the nine months ended September 30, 2010. At September 30, 2010, we had an accumulated deficit of $31,072,424, and at December 31, 2009, we had an accumulated deficit of $30,107,651. We anticipate that we will continue to incur substantial operating losses unless and until we are able to achieve or sustain profitability. Unless we are otherwise able to secure external financing, our cash flow deficiencies raise substantial doubt as to our ability to continue as a going concern. Existing and anticipated working capital needs, lower than anticipated revenues, increased expenses and the inability to collect on an outstanding loan receivable could all affect our ability to continue as a going concern.

We will seek to raise additional working capital through private placements, public offerings, bank financing and/or advances from related parties or shareholder loans, as well as to continue evaluating potential merger and/or acquisition opportunities.

The continuation of our business is dependent upon obtaining further financing. The issuance of additional equity securities could result in a significant dilution in the equity interests of current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase liabilities and future cash commitments. There are no assurances that we will be able to raise additional capital through private placements, public offerings and/or bank financings in amounts necessary to support our working capital requirements. We do not currently have any arrangements in place to raise any additional capital.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

Full-Cost Method of Accounting. We follow the full-cost method of accounting for oil and gas properties, wherein costs incurred in the acquisition, exploration and development of oil and gas reserves are capitalized. Under this method of accounting, we did not recognize any impairment to our oil and gas properties for the three and nine months ended September 30, 2010.

Earnings per Share. Basic earnings per share (“EPS”), which excludes the dilutive effect of securities or contracts to issue common stock, is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed by dividing net income (loss) available to common stockholders by the diluted weighted average number of shares of common stock outstanding, which includes the potential dilution that could occur if securities or other contracts to issue common stock were converted to common stock that then shared in the earnings of the entity.

Employee stock options outstanding at September 30, 2010 and 2009 were not included in the computation of diluted earnings per share because their assumed exercise and conversion would have an antidilutive effect on the computation of diluted loss per share.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Basic and Diluted
Net loss		$	(69,082	)		$	(321,386	)		$	(964,773	)		$	(2,071,644	)
Weighted average number of shares of common stock outstanding and potential dilutive shares of common stock (See Note 3)			1,967,278				1,686,590				1,793,365				1,680,490
Per share amount		$	(0.04	)		$	(0.19	)		$	(0.54	)		$	(1.23	)

Subsequent Events. We have evaluated all subsequent events through the issuance date of our condensed consolidated financial statements as of and for the nine month period ended September 30, 2010, and during this subsequent period no material subsequent events occurred that would require recognition or disclosure in these condensed consolidated financial statements, other than those disclosed elsewhere in the report.

Recent Accounting Developments

Fair Value Measurements. In January 2010, the Financial Accounting Standards Board (the “FASB”) issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. We adopted the new guidance effective January 1, 2010. The implementation of this standard did not have a material impact on our condensed consolidated financial position and results of operations.

3. Reverse Stock Split

On March 16, 2010, our Board of Directors (the “Board”) approved and authorized, subject to stockholder approval, implementation of a reverse stock split of our common stock at a ratio within a range from 1 for 5 (1:5) to 1 for 10 (1:10), at the discretion of the Board, at any time prior to September 1, 2010. The reverse stock split was approved by the stockholders on June 9, 2010. The Board set the reverse stock split ratio at 1 for 7 (1:7) on June 30, 2010. The effective date for the reverse stock split was July 16, 2010. No fractional shares were issued in connection with

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

the reverse stock split. Each holder of common stock who would otherwise be entitled to receive a fractional share of common stock was, in lieu of such fractional share, paid in cash at fair market value. We paid approximately $2,604 for the repurchase of fractional shares.

In addition, the Board elected not to alter the number of authorized shares or change the par value of the common stock, such number of authorized shares remaining at 100,000,000 shares and such par value remaining a $0.01 per share. EPS, common stock outstanding and weighted average common stock outstanding as referred to in these condensed consolidated financial statements have been restated, where applicable, to give retroactive effect of the reverse stock split.

4. Business Segment Information

Our operations are conducted in two principal business segments: (i) pipeline transportation services and (ii) oil and gas exploration and production. Our segments are managed jointly primarily due to the size of our employee base and the scope of our operations. Management uses earnings before interest expense and income taxes (“EBIT”), a non-GAAP financial measure, to assess the operating results and effectiveness of our business segments, which consist of our consolidated businesses and investments. We believe EBIT is useful to our investors because it allows them to evaluate our operating performance using the same performance measure analyzed internally by management. We define EBIT as net income (loss) adjusted for: (i) items that do not impact our income or loss from continuing operations, such as the impact of accounting changes, (ii) income taxes and (iii) interest expense (or income). We exclude interest expense (or income) and other expenses or income not pertaining to the operations of our segments from this measure so that investors may evaluate our current operating results without regard to our financing methods or capital structure. We understand that EBIT may not be comparable to measurements used by other companies. Additionally, EBIT should be considered in conjunction with net income and other performance measures such as operating cash flows.

Following is a reconciliation of our EBIT (by segment) for the three months ended September 30, 2010 and 2009, and at September 30, 2010 and 2009:

		Three Months Ended September 30, 2010
		Segment
						Oil and Gas
		Pipeline				Exploration &				Corporate &
		Transportation				Production				Other(1)				Total
Revenues		$	502,369			$	237,940			$	—			$	740,309
Operation cost(2)			333,715				335,987				131,699				801,401
Depletion, depreciation and amortization			105,043				110,881				1,181				217,105
EBIT		$	63,611			$	(208,928	)		$	(132,880	)		$	(278,197	)
Capital expenditures		$	—			$	1,135,802			$	201,000			$	1,336,802
Identifiable assets(3)		$	4,123,478			$	1,257,593			$	363,935			$	5,745,006

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

		Three Months Ended September 30, 2009
		Segment
						Oil and Gas
		Pipeline				Exploration &				Corporate &
		Transportation				Production				Other(1)				Total
Revenues		$	442,249			$	42,269			$	—			$	484,518
Operation cost(2)			651,504				63,487				86,742				801,733
Depletion, depreciation and amortization			105,043				26,381				1,938				133,362
EBIT		$	(314,298	)		$	(47,599	)		$	(88,680	)		$	(450,577	)
Capital expenditures		$	—			$	—			$	—			$	—
Identifiable assets(3)		$	4,694,321			$	273,739			$	2,886,345			$	7,854,405

Following is a reconciliation of our EBIT (by segment) for the nine months ended September 30, 2010 and 2009, and at September 30, 2010 and 2009:

		Nine Months Ended September 30, 2010
		Segment
						Oil and Gas
		Pipeline				Exploration &				Corporate &
		Transportation				Production				Other(1)				Total
Revenues		$	1,393,848			$	278,161			$	—			$	1,672,009
Operation cost(2)			1,657,109				395,032				340,707				2,392,848
Depletion, depreciation and amortization			315,128				144,729				3,949				463,806
EBIT		$	(578,389	)		$	(261,600	)		$	(344,656	)		$	(1,184,645	)
Capital expenditures		$	—			$	1,135,802			$	201,000			$	1,336,802
Identifiable assets(3)		$	4,123,478			$	1,257,593			$	363,935			$	5,745,006

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

		Nine Months Ended September 30, 2009
		Segment
						Oil and Gas
		Pipeline				Exploration &				Corporate &
		Transportation				Production				Other(1)				Total
Revenues		$	1,505,644			$	108,290			$	—			$	1,613,934
Operation cost(2)			2,750,353				181,197				288,358				3,219,908
Depletion, depreciation and amortization			315,128				278,670				5,814				599,612
EBIT		$	(1,559,837	)		$	(351,577	)		$	(294,172	)		$	(2,205,586	)
Capital expenditures		$	12,500			$	—			$	—			$	12,500
Identifiable assets(3)		$	4,694,321			$	273,739			$	2,886,345			$	7,854,405

5. Asset Retirement Obligations

We recorded the following activity related to our asset retirement obligations liability for the nine months ended September 30, 2010:

Asset retirement obligations as of December 31, 2009		$	2,262,018
Liabilities incurred			391,369
Liabilities settled			(38,996	)
Accretion expense			88,678
Asset retirement obligations as of September 30, 2010			2,703,069
Less: current portion of asset retirement obligations			199,000
Asset retirement obligations long-term balance as of September 30, 2010		$	2,504,069

6. Stock-Based Compensation

We adopted the 2000 Stock Incentive Plan effective April 14, 2000, following approval by our stockholders. An amendment to the plan was approved by our stockholders in 2007. Under the plan, as amended (the “2000 Plan”), we are able to make awards of stock-based compensation. The total number of shares of common stock reserved for grants of incentive stock options (“ISOs”) and other stock-based awards under the 2000 Plan is 1,200,000 shares. As of September 30, 2010, we had 1,105,863 shares of common stock remaining available for future grants. Options granted under the 2000 Plan have contractual terms from six to ten years. The exercise price of ISOs cannot be less than 100% of the fair market value of a share of our common stock determined on the grant date. Although the 2000 Plan provides for the granting of other incentive awards, only ISOs and non-statutory stock options have been issued under the 2000 Plan. The 2000 Plan is administered by the Compensation Committee of the Board.

Pursuant to FASB guidance on accounting for stock based compensation, we estimate the fair value of stock options granted on the date of grant using the Black-Scholes-Merton option-pricing model. There were no stock options granted in the nine months ended September 30, 2010, and the year ended December 31, 2009.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

Expected volatility used in the model is based on the historical volatility of our common stock and is weighted 50% for the historical volatility over a past period equal to the expected term and 50% for the historical volatility over the past two years prior to the grant date. This weighting method was chosen to account for the significant changes in our financial condition beginning approximately three years ago. These changes include changes in our working capital, changes in pipeline throughput and a reduction and ultimate elimination of our outstanding debt.

The expected term of options granted used in the model represents the period of time that options granted are expected to be outstanding. The method used to estimate the expected term is the “simplified” method as allowed under the provisions of the SEC’s Staff Accounting Bulletin No. 107. This number is calculated by taking the average of the sum of the vesting period and the original contract term. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the date of the grant. As we have not declared dividends on common stock since we became a public company, no dividend yield was used. No forfeiture rate was assumed due to the lack of forfeiture history for this type of award. Actual value realized, if any, is dependent on the future performance of our common stock and overall stock market conditions. There is no assurance that the value realized by an optionee will be at or near the value estimated by the Black-Scholes-Merton option-pricing model.

At September 30, 2010, there were a total of 30,390 shares of common stock reserved for issuance upon exercise of outstanding options under the 2000 Plan. A summary of the status of stock options granted to key employees, officers and directors, for the purchase of shares of common stock for the periods indicated, is as follows:

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares				Exercise Price				Contractual Life				Value
Options outstanding at December 31, 2009			60,645			$	17.69
Options granted			—			$	—
Options exercised			—			$	—
Options expired or cancelled			(30,255	)		$	22.10
Options outstanding at September 30, 2010			30,390			$	13.29				3.0			$	—
Options exercisable at September 30, 2010			30,390			$	13.29				3.0			$	—

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

The following table summarizes additional information about stock options outstanding at September 30, 2010:

		Options Outstanding												Options Exercisable
						Weighted Average												Weighted
						Remaining				Weighted								Average
		Number				Contractual Life				Average Exercise				Number				Exercise
Range of Exercise Prices		Outstanding				(Years)				Price				Exercisable				Price
$2.45 to $5.60			10,118				2.6			$	3.06				10,118			$	3.06
$10.85 to $13.30			3,346				1.4			$	11.95				3,346			$	11.95
$19.67			16,926				3.7			$	19.67				16,926			$	19.67
			30,390												30,390

The following summarizes the net change in non-vested stock options for the periods shown:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Non-vested at December 31, 2009			9,714			$	16.46
Granted			—			$	—
Canceled or expired			—			$	—
Vested			(9,714	)		$	16.46
Non-vested at September 30, 2010			—			$	—

For the three and nine months ended September 30, 2010, we recognized $0 and $53,760, respectively, of compensation expense for vested stock options. For the three and nine months ended September 30, 2009, we recognized $62,562 and $165,526, respectively, of compensation expense for vested stock options. As of September 30, 2010, there was $0 of unrecognized compensation cost related to non-vested stock options granted under the 2000 Plan.

For the three and nine months ended September 30, 2010 and 2009, we recognized $20,000 and $60,000, respectively, of expense for stock issued to the Board at fair value.

7. Loan Receivable

On July 31, 2009, we issued a $2.0 million non-interest bearing loan (the “Loan”) to Lazarus Louisiana Refinery II, LLC (“LLRII” or the “Borrower”). The Loan was due on January 3, 2010; however, we agreed to forbear the Loan until June 11, 2010, provided the Borrower satisfy certain conditions as set forth in a forbearance agreement. As those certain conditions were not met, on April 9, 2010, we called on the full value of the Loan to be paid by April 13, 2010. As of the date of this report, the Loan is in default and remains unpaid. Although management believes the Loan could be paid in full in the future, we reserved an allowance for the entire $2.0 million balance of the Loan as of December 31, 2009, and expensed $1.5 million (net of $500,000 for consulting fees pursuant to a consulting agreement between Blue Dolphin and LLRII).

The Loan is secured by (i) a first lien on property owned by Lazarus Environmental, LLC (“LEN”), (ii) a second lien on property owned by LLRII and (iii) a guarantee from Lazarus Energy Holdings, LLC (“LEH”). We foreclosed on the assets serving as collateral for the Loan, which includes a refinery and a Class I non-hazardous industrial salt water disposal well. The assets went up for auction at a sheriff’s sale in Jefferson Davis Parish,

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010

Louisiana on July 28, 2010. We placed a credit bid against the Loan for the salt water disposal well. Since there were no third-party bidders, we acquired the salt water well at the minimum bid amount of $134,000. The salt water disposal well, which is currently inactive, has an appraised value of $201,000. The refinery did not sell as there were no bidders.

8. Contingencies

From time to time we are involved in various claims and legal actions arising in the ordinary course of business. In our opinion, the ultimate disposition of these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.

9. Blue Sky Langsa Purchase

In June 2010, we signed a commitment letter with Blue Sky Langsa, Ltd. (“Blue Sky”) to acquire a 70% working interest in a Technical Assistance Contract for the Langsa area, offshore Indonesia (the “TAC Langsa”). Subsequent to June 30, 2010 quarter end, the parties amended the terms of the commitment letter in order to carry out the transaction in two phases. Under the first phase, we agreed to acquire a 7% working interest in the TAC Langsa in exchange for 342,857 shares of common stock on a post-split adjusted basis. On July 21, 2010, both parties signed the definitive sale and purchase agreement to acquire a 7% working interest. On July 26, 2010, Blue Dolphin issued 342,857 shares of common stock to Blue Sky as consideration. Under the second phase, which is subject to shareholder approval, Blue Dolphin, at its option, may acquire the remaining 63% working interest in the TAC Langsa for 3,085,714 shares of common stock on a post-split adjusted basis. The option to acquire the additional 63% working interest expired on September 30, 2010.

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

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

Cautionary Statements

Forward Looking Statements. Certain of the statements included in this quarterly report on Form 10-Q, including those regarding future financial performance or results or that are not historical facts, are “forward-looking” statements as that term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “expect,” “plan,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions are intended to identify forward-looking statements. Blue Dolphin (referred to herein, with its predecessors and subsidiaries, as “Blue Dolphin,” “we,” “us” and “our”) cautions readers that these statements are not guarantees of future performance or results and such statements involve risks and uncertainties that may cause actual results and outcomes to differ materially from those indicated in forward-looking statements. Some of the important factors, risks and uncertainties that could cause actual results to vary from forward-looking statements include:

	•		ability to continue as a going concern;
	•		collectability of a $2.0 million loan receivable;
	•		ability to maintain compliance under the stockholders’ equity requirement for continued listing on the NASDAQ;
	•		ability to complete a combination with one or more target businesses;
	•		ability to improve pipeline utilization levels;
	•		ability to secure additional working capital to fund operations;
	•		performance of third party operators for properties where we have an interest;
	•		production from oil and gas properties that we have interests in;
	•		volatility of oil and gas prices;
	•		uncertainties in the estimation of proved reserves, in the projection of future rates of production, the timing of development expenditures and the amount and timing of property abandonment;
	•		costly changes in environmental and other government regulations for which Blue Dolphin is subject; and
	•		adverse changes in the global financial markets.

Additional factors that could cause actual results to differ materially from those indicated in the forward-looking statements are discussed in Item 1A “Risk Factors” of Blue Dolphin’s annual report on Form 10-K and Amendment No. 1 on Form 10-K/A for the period ended December 31, 2009, as filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. We undertake no duty to update these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the additional factors which may affect our business, including the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report.

Executive Summary

We are engaged in two lines of business: (i) pipeline transportation services to producer/shippers, and (ii) oil and gas exploration and production.

Pipeline Transportation.

Our pipeline transportation assets are located both onshore and offshore in the Texas Gulf Coast area. We market our gathering and transportation services to producer/shippers operating in the vicinity of our pipeline systems offshore and charge them various fees for: (i) the transportation of their condensate and natural gas offshore to our onshore facilities, (ii) the separation, dehydration and storage of their condensate and natural gas at our onshore facilities and (iii) the subsequent sale of their condensate through our barge-loading terminal and/or their natural gas through our chemical plant complex and intrastate pipeline system tie-in. The following is a description of our pipeline transportation assets:

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

•

Blue Dolphin Pipeline System (“BDPS”) — The BDPS includes: the Blue Dolphin Pipeline, an offshore platform, the Buccaneer Pipeline, onshore facilities for condensate and gas separation and dehydration, 85,000 Bbls of above-ground tankage for storage of crude oil and condensate, a barge loading terminal on the Intracoastal Waterway and 360 acres of land in Brazoria County, Texas where the Blue Dolphin Pipeline comes ashore and where the pipeline system’s onshore facilities, pipeline easements and rights-of-way are located. We own an 83% undivided interest in the BDPS. The BDPS has an aggregate capacity of approximately 160 MMcf of gas and 7,000 Bbls of crude oil and condensate per day. The BDPS is currently transporting an aggregate of approximately 12 MMcf of gas per day from 7 shippers, which represents 8% of throughput capacity.

•

Galveston Area Block 350 Pipeline (“GA 350 Pipeline”) — The GA 350 Pipeline is an 8-inch, 13 mile offshore pipeline extending from Galveston Area Block 350 to an interconnect with a transmission pipeline in Galveston Area Block 391 located approximately 14 miles south of the Blue Dolphin Pipeline. We own an 83% undivided interest in the GA 350 Pipeline. Current system capacity is 65 MMcf of gas per day. The GA 350 Pipeline is currently transporting an aggregate of approximately 18 MMcf of gas per day from 5 shippers, which represents 28% of throughput capacity.

•

Omega Pipeline — The Omega Pipeline originates in the High Island Area, East Addition Block A-173 and extends to West Cameron Block 342, where it was previously connected to the High Island Offshore System. The pipeline is currently inactive. Reactivation is dependent upon successful drilling activity in the pipeline’s vicinity and contracting with those producer/shippers to transport their discovery through the system. We own an 83% undivided interest in the Omega Pipeline.

Oil and Gas Exploration and Production.

We focus our oil and gas exploration and production activities in the western Gulf of Mexico off the Texas coast and the Sumatra basin in offshore Indonesia. Although we sold substantially all of our producing oil and gas properties in 2002, we continue our oil and gas exploration and production activities, which include the exploration, acquisition, development, operation and, when appropriate, disposition of oil and gas properties. We also own seismic and other data that may be used to evaluate and develop prospects. The following is a description of our oil and gas exploration and production assets and activities (leasehold interests we hold in properties are subject to royalty, overriding royalty and interests of others):

•

Galveston Area Block 321 — Galveston Area Block 321 is located approximately 32 miles southeast of Galveston in an average water depth of approximately 66 feet. The lease is operated by Maritech Resources. We own a 0.5% overriding royalty interest in the well. The block contains one active well, the A-4 Well, which began production in March 2009. The A-4 Well is currently commingled in the 5,400’ and 5,300’ sands. Once this commingled completion depletes, there are two upper zones with booked reserves. Current production for the A-4 Well is approximately 3 MMcf of gas and 146 Bbls of condensate per day.

•

High Island Block 115 — High Island Block 115 is located approximately 30 miles southeast of Bolivar Peninsula in an average water depth of approximately 38 feet. The lease is operated by Rooster Petroleum, LLC. We own a 2.5% working interest in a single production zone in the well. The block contains one active well, the B-1 ST2 Well. The well was shut-in from August 2009 to July 2010 due to production handling problems on our downstream production handling platform, High Island Block 71. Current production for the B-1 ST2 Well is approximately 6 MMcf of gas and 1 Bbl of condensate per day.

•

High Island Block 37 — High Island Block 37 is located approximately 15 miles south of Sabine Pass, in an average water depth of approximately 36 feet. The lease is operated by Hilcorp Energy Company. We own an approximate 2.8% working interest in this lease that covers 5,760 acres. The block contains one active well, the A-2 Well, and one inactive well, the B-1 Well. The A-2 Well was shut-in from September 2008 to February 2009 as a result of Hurricane Ike. The B-1 has been shut-in since an unsuccessful workover in September 2009. Current production for the A-2 Well is approximately 2 MMcf of gas per day.

•

TAC Langsa — The Technical Assistance Contract for the Langsa area, offshore Indonesia covers approximately 77 square kilometers within the Sumatra basin and contains two oil fields in waters less than 325 feet deep. Four wells have been completed in the Malacca Formation of which one well is active and three

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

wells are idle. Production is gathered via a Floating Production Storage and Offloading (FPSO) vessel operated by Mitsui Ocean Development & Engineering Co., Ltd. We own a 7% working interest in the fields. Current production for the H-4 Well is approximately 585 Bbls of condensate per day.

We are continuing our efforts to increase the utilization of our pipeline assets and/or acquire additional assets that will improve our competitive position and be accretive to earnings. Unless we are able to replace production revenue with revenue from interests in other oil and gas properties, increase the level of utilization of our pipelines or acquire other revenue generating assets at an acceptable cost, our revenues and cash flow from operations will decrease and our financial condition will be materially adversely affected.

Results of Operations

For the three months ended September 30, 2010 (the “current quarter”), we reported a net loss of $69,082 compared to a net loss of $321,386 for the three months ended September 30, 2009 (the “previous quarter”). For the nine months ended September 30, 2010 (the “current period”), we reported a net loss of $964,773 compared to a net loss of $2,071,644 for the nine months ended September 30, 2009 (the “previous period”).

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenue from Pipeline Operations. Revenues from pipeline operations increased by $60,120, or 14%, in the current quarter to $502,369 primarily due to an increase in volumes transported on the BDPS. Revenues in the current quarter from the BDPS increased to approximately $415,800 compared to approximately $331,000 in the previous quarter. Daily gas volumes transported on the BDPS averaged 14.1 MMcf of gas per day in the current quarter compared to 13.1 MMcf of gas per day in the previous quarter. Revenues on the GA 350 Pipeline decreased to approximately $86,500 in the current quarter compared to approximately $111,000 in the previous quarter. Daily gas volumes transported on the GA 350 Pipeline averaged 17.6 MMcf of gas per day in the current quarter compared to 18.3 MMcf of gas per day in the previous quarter.

Revenue from Oil and Gas Sales. Revenues from oil and gas sales increased by $195,671, or 463%, to $237,940 in the current quarter primarily due to the acquisition of a 7% working interest in the TAC Langsa.

Pipeline Operating Expenses. Pipeline operating expenses in the current quarter decreased by $66,164, or 21%, to $243,531 primarily due to a decrease in insurance expense and repairs and maintenance expense. The decreases were partially offset by an increase in consulting expenses.

Lease Operating Expenses. Lease operating expenses increased in the current quarter by $191,288, or 643%, to $221,019, primarily due to the acquisition of a 7% working interest in the TAC Langsa.

Depletion, Depreciation and Amortization. Depletion, depreciation and amortization increased $83,743, or 63%, to $217,105 in the current quarter primarily due to the acquisition of a 7% working interest in the TAC Langsa.

General and Administrative Expenses and Stock Based Compensation. General and administrative expenses and stock based compensation expenses decreased by $128,433, or 30%, to $306,288 in the current quarter primarily due to decreases in officer salaries, employee related expenses, consulting fees, and office expenses. These decreases were partially offset by increases in legal fees and insurance expense.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenue from Pipeline Operations. Revenues from pipeline operations decreased by $111,796, or 7%, in the current period to $1,393,848 primarily due to decreases in volumes transported. Revenues in the current period from the BDPS decreased to approximately $1,140,000 compared to approximately $1,219,000 in the previous period. Daily gas volumes transported on the BDPS averaged 14.4 MMcf of gas per day in the current period compared to 16.5 MMcf of gas per day in the previous period. Revenues on the GA 350 Pipeline declined to approximately $253,000 compared to approximately $287,000 in the previous period due to a decrease in average daily gas volumes transported of 17.5 MMcf of gas per day in the current period from 19.9 MMcf of gas per day in the previous period.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

Revenue from Oil and Gas Sales. Revenues from oil and gas sales increased by $169,871, or 157%, to $278,161 in the current period primarily due to the acquisition of a 7% working interest in the TAC Langsa.

Pipeline Operating Expenses. Pipeline operating expenses in the current period decreased by $411,574, or 33%, to $855,842 primarily due to a decrease in other repairs and operating expenses, which mostly included repairs from Hurricane Ike, insurance expense, storage tank repairs, upkeep of the plant site, and crane repairs. The decreases were partially offset by an increase in consulting fees.

Lease Operating Expenses. Lease operating expenses increased in the current period by $171,595, or 219%, to $250,031 due to the acquisition of a 7% working interest in the TAC Langsa.

Depletion, Depreciation and Amortization. Depletion, depreciation and amortization increased $67,304, or 17%, to $463,806 in the current quarter primarily due to the acquisition of a 7% working interest in the TAC Langsa.

General and Administrative Expenses and Stock Based Compensation. General and administrative expenses and stock based compensation expenses decreased by $592,336, or 33%, to $1,198,297 in the current period primarily due decreases in officer salaries, employee related expenses, consulting fees, office expenses and dues and subscriptions. The decreases were partially offset by increases in audit expense, legal fees, insurance expense and stock maintenance fees.

Liquidity and Capital Resources

Sources and Uses of Cash. Our primary source of cash is cash flow from operations. During the current period, we had negative cash flow of approximately $650,000, mainly due to low utilization of our pipeline systems and decreased production at our producing properties. Our available cash resources decreased from $1,016,483 at December 31, 2009, to $366,403 at September 30, 2010.

We do not enter into any hedges or any type of derivatives to offset changes in commodity prices. We also do not have any outstanding debt or a credit facility with a bank or institution that may restrict us from issuing debt or common stock.

In the past three years, our cash flows from operations were not adequate to fund our working capital requirements and we have used a portion of our cash reserves to fund working capital requirements that were not funded from operations.

		For the Nine Months Ended September 30,
		2010				2009
Cash flow from operations
Loss from operations		$	(964,773	)		$	(2,071,644	)
Change in current assets and liabilities			546,891				(514,707	)
Total cash flow from operations			(417,882	)			(2,586,351	)
Cash outflows
Payments on note payable			(173,479	)			(97,961	)
Capital expenditures			(58,719	)			(15,643	)
Total cash outflows			(232,198	)			(113,604	)
Total change in cash		$	(650,080	)		$	(2,699,955	)

Going Concern. Our condensed consolidated financial statements, which have been prepared in accordance with GAAP, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. We incurred a net loss of $69,082 for the current quarter, and a net

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

loss of $964,773 for current period. At September 30, 2010, we had an accumulated deficit of $31,072,424, and at December 31, 2009, we had an accumulated deficit of $30,107,651. We anticipate that we will continue to incur substantial operating losses unless and until we are able to achieve or sustain profitability. Our cash flow deficiencies raise substantial doubt as to our ability to continue as a going concern. We project that our current cash reserves will be sufficient to meet our obligations through the second quarter of 2011. Existing and anticipated working capital needs, lower than anticipated revenues, increased expenses or the inability to collect on an outstanding loan receivable could all affect our ability to continue as a going concern.

The continuation of our business is dependent upon obtaining additional financing. We intend to raise additional working capital through private placements, public offerings, bank financings and/or advances from related parties or shareholder loans, as well as to continue evaluating potential merger and/or acquisition opportunities.

The issuance of additional equity securities could result in a significant dilution in the equity interests of current or future stockholders. Obtaining commercial loans, assuming those loans would be available, will increase liabilities and future cash commitments. There are no assurances that we will be able to raise additional capital through private placements, public offerings and/or bank financings necessary to support our working capital requirements. We do not currently have any agreements in place to raise any additional capital.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not Applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon this evaluation, as of September 30, 2010, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in various claims and legal actions arising in the ordinary course of business. In our opinion, the ultimate disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

Item 1A. Risk Factors

With the exception of risk factors set forth below, there have been no material changes from the risk factors disclosed in our annual report on Form 10-K and Amendment No. 1 on Form 10-K/A for the fiscal year ended December 31, 2009.

Recent Events in the Gulf of Mexico May Increase Risks, Costs and Delays in Our Offshore Operations. The explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico, as well as the resulting oil spill, may lead to increased governmental regulation of our operations and our industry in a number of areas, including, but not limited to, health and safety, environmental and licensing, any of which could result in increased costs or delays in current and future drilling operations along our pipelines and associated with our leasehold interests. We cannot predict with any certainty whether such regulation will be enacted or what form such regulation could take. Furthermore, this event may make it more difficult for us to obtain insurance coverage on economically manageable terms. Additional governmental regulation of our operations or tightening of the insurance markets could increase our costs, cause delays or have a material impact on our business, financial condition and results of operations.

Losses and liabilities from uninsured or underinsured drilling and operating activities could have a material adverse effect on our financial condition and results of operations. We maintain several types of insurance to cover our operations, including maritime employer’s liability insurance and comprehensive general liability insurance. Amounts over base coverages are provided by primary and excess umbrella liability policies. We also maintain operator’s extra expense coverage, which covers the control of drilled or producing wells as well as re-drilling expenses and pollution coverage for out of control wells. We may not be able to maintain adequate insurance in the future at rates we consider reasonable or losses may exceed the maximum coverage amounts under our insurance policies. We do not maintain property insurance coverage on our pipelines or other related facilities. If a significant event that is not fully insured or indemnified against occurs, it could materially and adversely affect our financial condition and results of operations.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

     (a) Exhibits:

          The following exhibits are filed herewith:

3.1(1)		Amended and Restated Certificate of Incorporation of Blue Dolphin Energy Company.
10.1(2)		Sale and Purchase Agreement by and among Blue Dolphin Exploration Company, Blue Sky Langsa Limited and Blue Sky Energy and Power Inc. dated July 21, 2010.

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

10.2(3)		Option Agreement by and among Blue Dolphin Exploration Company, Blue Sky Langsa Limited and Blue Sky Energy and Power Inc. dated July 21, 2010.
31.1		Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2		T. Scott Howard Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Ivar Siem Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		T. Scott Howard Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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.

By: BLUE DOLPHIN ENERGY COMPANY