bdco_10q.htm

Blue Dolphin Energy Company & Subsidiaries

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the risk factors, unaudited consolidated financial statements and notes included hereto, as well as the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “Annual Report”). In this document, the words “Blue Dolphin,” “we,” “us” and “our” refer to Blue Dolphin Energy Company and its subsidiaries.

Forward Looking Statements

As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, certain statements included throughout this Quarterly Report on Form 10-Q, and in particular under the sections entitled “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 1. Legal Proceedings” relating to matters that are not historical fact are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements.

Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.

Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

●	the potential reorganization of Blue Dolphin from a publicly traded “C” corporation to a publicly traded master limited partnership;

●	fluctuations of crude oil inventory costs and refined petroleum products inventory prices and their effect on our refining margins;

●	our dependence on Genesis Energy, LLC (“Genesis”) and its affiliates for financing, sources of crude oil inventory and marketing of our refined petroleum products;

●	the positive or negative effects of Genesis’ hedging of our refined petroleum products and crude oil inventory;

●	our dependence on Lazarus Energy Holdings, LLC ("LEH") for management of the Nixon Facility and our other operations;

●	dependence on a small number of customers for a large percentage of our revenues;

●	our ability to generate sufficient funds from operations or obtain financing from other sources;

●	declaration of an event of default related to our long-term indebtedness;

●	failure to comply with other forbearance agreements relating to our long-term indebtedness;

●	potential downtime of the Nixon refinery for maintenance and repairs;

●	access to less than desired levels of crude oil for processing at our crude oil and condensate processing facility located in Nixon, Texas;

●	operating hazards such as fires and explosions;

●	insurance coverage limitations;

●	environmental costs and liabilities associated with our operations;

●	retention of key personnel;

●	performance of third-party operators of our oil and gas properties;

●	costs of abandoning our pipelines and oil and gas properties;

●	local and regional events that may negatively affect our assets;

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

●	competition from larger companies;

●	acquisition expenses and integration difficulties; and

●	compliance with environmental and other regulations, including greenhouse gas emissions regulations, the effects of the Renewable Fuels Standard program and oxygenate blending requirements.

Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

Company Overview

Blue Dolphin Energy Company (www.blue-dolphin-energy.com), a Delaware corporation (referred to herein, with its predecessors and subsidiaries, as “Blue Dolphin,” “we,” “us” and “our”) was formed in 1986 as a holding company. We conduct substantially all of our operations through our wholly-owned subsidiaries. We are primarily an independent refiner and marketer of petroleum products. As part of our refining business segment we also conduct petroleum storage and terminaling operations. These operations involve the storage of petroleum under third-party lease agreements at the Nixon Facility. We also own and operate pipeline assets and have leasehold interests in oil and gas properties.

Refinery Operations

Our primary business is the refining of crude oil into marketable finished and refined products at the Nixon Facility, which is a crude oil and condensate processing facility with a current operating capacity of approximately 15,000 barrels (“bbls”) per day (“bpd”). The Nixon Facility is located on a 56-acre site in Nixon, Wilson County, Texas, and consists of a distillation unit, naphtha stabilizer, recovery facilities with approximately 120,000 bbls of crude oil storage capacity and 148,000 bbls of refined product storage capacity, as well as related loading and unloading facilities and utilities.

We purchase crude oil and condensate for the Nixon Facility under an exclusive supply agreement with GEL TEX Marketing, LLC (“GEL”), an affiliate of Genesis Energy, LLC (“Genesis”), and have the ability to produce refined products such as Non-Road Locomotive and Marine Diesel Fuel (“NRLM” or “off-road diesel”), kerosene, jet fuel and intermediate products, including liquefied petroleum gas, naphtha and atmospheric gas oil. The Nixon Facility is operated as a “topping unit,” processing light crude oil and condensate from south Texas, including the Eagle Ford Shale formation, into NRLM for sale into nearby markets and naphtha and atmospheric gas oil for sale to nearby refineries for further processing. Although we currently receive feedstock by truck, the Nixon Facility has the ability to receive crude oil and condensate via pipeline. Our refined products are currently sold and delivered by truck and barge.

Pipeline Transportation

Our pipeline operations involve the gathering and transportation of oil and natural gas for producers/shippers operating offshore in the vicinity of our pipelines in the U.S. Gulf of Mexico. Producers and shippers are charged a fee based on anticipated throughput volumes. For the three months ended March 31, 2013, our pipeline transportation business segment had no revenue.

Oil and Gas Exploration and Production

Our U.S. Gulf of Mexico oil and gas properties were uneconomic for the three months ended March 31, 2013 as a result of leases being relinquished and fields being shut-in by operators. On February 28, 2013 Blue Dolphin Exploration Company (‘BDEX”), a wholly owned subsidiary, completed the disposal of its 7% undivided working interest in the North Sumatra Basis – Langsa Field offshore Indonesia (“Indonesia”) pursuant to Sale and Purchase Agreement with Blue Sky Langsa Limited (“Blue Sky”) effective November 6, 2012. For the three months ended March 31, 2013, our oil and gas exploration and production business segment had no revenue.

Other Assets

We own a non-hazardous Class I salt water disposal well located near the town of Mermentau, Jefferson Davis Parish, Louisiana. The well is currently inactive.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

Key Operating Statistics

Key operational statistics for our core business segment, refinery operations, were as follows:

	Three Months Ended March 31,
	2013			2012

Nixon Facility

Operating days		85			60

Total refinery throughput(1)
bbls		978,805			391,509
bpd		11,515			6,525
Capacity utilization rate		77	%		44	%
Total refinery production
bbls		958,306			384,152
bpd		11,274			6,403
Capacity utilization rate		75	%		43	%

_______________

(1)	Total refinery throughput includes crude oil and other feedstocks.

Major Influences on Results of Operations

Earnings and cash flow from our refining operations are primarily affected by the difference between refined product prices and the prices for crude oil and other feedstocks. The cost to acquire crude oil and other feedstocks and the price of the refined petroleum products we ultimately sell depend on numerous factors beyond our control, including the supply of, and demand for, crude oil, gasoline and other refined petroleum products, which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and government regulation.

In order to measure our operating performance, we compare our per barrel refinery operating margins to certain industry benchmarks. We calculate the per barrel operating margin for the Nixon Facility by dividing the refinery’s gross margin by its throughput volumes. Gross margin is the difference between net sales and cost of sales (excluding any substantial unrealized hedge positions and certain inventory adjustments).

The Nixon Facility has the capability to process substantial volumes of low-sulfur crude oils (sweet crude) to produce a high percentage of light, high-value refined petroleum products. Sweet crude derived from the surrounding Eagle Ford Shale production currently comprises 100% of the Nixon Facility’s crude oil input.

Safety, reliability and the environmental performance of the Nixon Facility is critical to our financial performance. The financial impact of a maintenance turnaround or significant capital improvement project is mitigated through a diligent planning process that considers expectations for product availability, seasonality, margin environment and the availability of resources to perform the required work. Periodic maintenance and repairs are generally performed annually, depending on the processing units involved.

The nature of our business requires us to maintain substantial quantities of crude oil and refined product inventories. Crude oil and refined petroleum products are essentially commodities, and we have no control over the changing market value of these inventories. We utilize an inventory risk management policy in which derivative instruments may be used as economic hedges to reduce our crude oil and refined petroleum products inventory commodity price risk.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). In order to apply these principles, we must make judgments, assumptions, and estimates based on the best available information at the time. Actual results may differ based on the continuing development of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies could materially affect the amounts recorded in our financial statements. Our critical accounting policies, estimates, and recent accounting pronouncements that potentially impact us are discussed in detail under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.

Recent Accounting Pronouncements. From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on our accounting and reporting. We believe that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have a significant impact on our accounting or reporting or that such impact will not be material to our financial position, results of operations, and cash flows when implemented.

Relationship with Genesis

We continue to be dependent on our relationship with Genesis and its affiliates. Our relationship with Genesis is governed primarily by three agreements:

●	the Crude Oil Supply and Throughput Services Agreement by and between GEL and LE dated August 12, 2011 (the “Crude Supply Agreement”);

●	the Construction and Funding Contract by and between LE and Milam Services, Inc., an affiliate of Genesis (“Milam”), dated August 12, 2011 (the “Construction and Funding Agreement”); and

●	the Joint Marketing Agreement by and between GEL and LE dated August 12, 2011 (as subsequently amended, the “Joint Marketing Agreement”).

Below is a discussion of the material terms and conditions of each of our agreements with Genesis.

●

Crude Supply Agreement -- Pursuant to the Crude Supply Agreement, GEL is the exclusive supplier of crude oil to the Nixon Facility. We are not permitted to buy crude oil from any other source without GEL’s express written consent. GEL supplies crude oil to LE at cost plus freight expense and any costs associated with GEL’s hedging. All crude oil supplied to LE pursuant to the Crude Supply Agreement is paid for pursuant to the terms of the Joint Marketing Agreement as described below. In addition, GEL has a first right of refusal to use three storage tanks at the Nixon Facility during the term of the Crude Supply Agreement. Subject to certain termination rights, the Crude Supply Agreement has an initial term of three years, expiring on August 12, 2014. After the expiration of its initial term, the Crude Supply Agreement automatically renews for successive one year terms unless either party notifies the other party of its election to terminate the Crude Supply Agreement within 90 days of the expiration of the then current term.

●

Construction and Funding Agreement -- Pursuant to the Construction and Funding Agreement, LE engaged Milam to provide construction services on a turnkey basis in connection with the construction, installation and refurbishment of certain equipment at the Nixon Facility (the “Project”). Milam has continued to make advances in excess of their obligation, for certain construction and operating costs at the Nixon Facility. All amounts advanced to LE pursuant to the terms of the Construction and Funding Agreement bear interest at a rate of 6% per annum. In March 2012 (the month after initial operation of the Nixon Facility occurred), LE began paying Milam, in accordance with the provisions of the Joint Marketing Agreement, a minimum monthly payment of $150,000 (the “Base Construction Payment”) as repayment of interest and amounts advanced to LE under the Construction and Funding Agreement. If, however, the Gross Profits of LE (as defined below) in any given month (calculated as the revenue from the sale of products from the Nixon Facility minus the cost of crude oil) are insufficient to make this payment, then there is a deficit amount, which shall accrue interest (the “Deficit Amount”). If there is a Deficit Amount, then 100% of the gross profits in subsequent calendar months will be paid to Milam until the Deficit Amount has been satisfied in full and all previous $150,000 monthly payments have been made.

The Construction and Funding Agreement places restrictions on LE, which prohibit LE from: incurring any debt (except debt that is subordinated to amounts owed to Milam or GEL); selling, discounting or factoring its accounts receivable or its negotiable instruments outside the ordinary course of business while no default exists; suffering any change of control or merging with or into another entity; and certain other conditions listed therein. As of the date hereof, Milam can terminate the Construction and Funding Agreement for a breach or upon termination of the Refinery Loan Forbearance Agreement. If Milam terminates the Construction and Funding Agreement, then: (i) Milam and LE are required to execute a forbearance agreement, the form of which has been previously agreed to, pursuant to which LE will pay Milam a fee of $150,000 per month in order to maintain the forbearance (such amount shall be credited against the amount owed) for a period of six months (during which time Milam will agree not to foreclose pursuant to the Construction and Funding Agreement and, thus, LE has the right to find financing to pay off such amounts), (ii) Milam shall be entitled to receive payment in full for all obligations owed under the Construction and Funding Agreement, (iii) all liens in favor of Milam will remain in full force and effect until released in accordance with the terms of the Construction and Funding Agreement and (iv) upon repayment of all obligations owed to Milam pursuant to the terms of the forbearance agreement executed by Milam and LE, LE shall have no further obligations to Milam or its affiliates under the Construction and Funding Agreement;

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

●

Joint Marketing Agreement -- The Joint Marketing Agreement sets forth the terms of the agreement between LE and GEL pursuant to which the parties will market and sell the output produced at the Nixon Facility and share the Gross Profits (as defined below) from such sales. Pursuant to the Joint Marketing Agreement, GEL is responsible for all product transportation scheduling. LE is responsible for entering into contracts with customers for the purchase and sale of output produced at the Nixon Facility and handling all billing and invoicing relating to the same. However, all payments for the sale of output produced at the Nixon Facility will be made directly to GEL as collection agent and all customers must satisfy GEL’s customer credit approval process. Subject to certain amendments and clarifications (as described below), the Joint Marketing Agreement also provides for the sharing of “Gross Profits” (defined as the total revenue from the sale of output from the Nixon Facility minus the cost of crude oil pursuant to the Crude Supply Agreement) as follows:

(a)

First, prior to the date on which Milam has recouped all amounts advanced to LE under the Construction and Funding Agreement (the “Investment Threshold Date”), the Base Construction Payment of $150,000 shall be paid to GEL (for remittance to Milam) each calendar month to satisfy amounts owed under the Construction and Funding Agreement, with a catch-up in subsequent months if there is a Deficit Amount until such Deficit Amount has been satisfied in full.

(b)

Second, prior to and as of the Investment Threshold Date, LE is entitled to receive weekly payments to cover direct expenses in operating the Nixon Facility (the “Operations Payments”) in an amount not to exceed $750,000 per month plus the amount of any accounting fees. If Gross Profits are less than $900,000, then LE’s Operations Payments shall be reduced to equal to the difference between the Gross Profits for such monthly period and the proceeds discussed in (a) above; if Gross Profits are negative, then LE does not get an Operations Payment and the negative balance becomes a Deficit Amount which is added to the total due and owing under the Construction Funding Agreement and such Deficit Amount must be satisfied before any allocation of Gross Profit in the future may be made to LE.

(c)

Third, prior to the Investment Threshold Date and subject to the payment of the Base Construction Payment by LE and the Operations Payments by GEL, pursuant to (a) and (b) above, an amount shall be paid to GEL from Gross Profits equal to transportation costs, tank storage fees (if applicable), financial statement preparation fees (collectively, the “GEL Expense Items”), after which GEL shall be paid 80% of the remaining Gross Profits (any percentage of Gross Profits distributed to GEL, the “GEL Profit Share”) and LE shall be paid 20% of the remaining Gross Profits (any percentage of Gross Profits distributed to LE, the “LE Profit Share”); provided, however, that in the event that there is a forbearance payment of Gross Profits required by LE under a forbearance agreement with a bank, then 50% of the LE Profit Share shall be directly remitted by GEL to the bank on LE’s behalf until such forbearance amount is paid in full; and provided further that, if there is a Deficit Amount due under the Construction and Funding Agreement and a forbearance payment of Gross Profits that would otherwise be due and payable to the bank for such period, then GEL shall receive 80% of the Gross Profit and 10% shall be payable to the bank and LE shall not receive any of the LE Profit Share until such time as the Deficit Amount is reduced to zero.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

(d)

Fourth, after the Investment Threshold Date and after the payment to GEL of the GEL Expense Items, 30% of the remaining Gross Profit up to $600,000 (the “Threshold Amount”) shall be paid to GEL as the GEL Profit Share and LE shall be paid 70% of the remaining Gross Profit as the LE Profit Share. Any amount of remaining Gross Profit that exceeds the Threshold Amount for such calendar month shall be paid to GEL and LE in the following manner: (i) GEL shall be paid 20% of the remaining Gross Profits over the Threshold Amount as the GEL Profit Share and (ii) LE shall be paid 80% of the remaining Gross Profits over the Threshold Amount as the LE Profit Share.

(e)	After the Threshold Date, if GEL sustains losses, it can recoup those losses by a special allocation of 80% of Gross Profits until such losses are covered in full, after which the prevailing Gross Profits allocation shall be reinstated.

The Joint Marketing Agreement contains negative covenants that restrict LE’s actions under certain circumstances. For example, LE is prohibited from making any modification to the Nixon Facility or entering into any contracts with third-parties which would materially affect or impair GEL’s or its affiliates’ rights under the agreements set forth above. The Joint Marketing Agreement has an initial term of three years expiring on August 12, 2014. After the expiration of its initial term, the Joint Marketing Agreement shall be automatically renewed for successive one year terms unless either party notifies the other party of its election to terminate the Joint Marketing Agreement within 90 days of the expiration of the then current term. The Joint Marketing Agreement also provides that it may be terminated prior to the end of its then current term under certain circumstances.

●	Amendments and Clarifications to the Joint Marketing Agreement -- The Joint Marketing Agreement was amended and clarified to allow GEL to provide LE with Operations Payments during months in which LE incurred Deficit Amounts.

(a)

In July and August 2012, we entered into amendments to the Joint Marketing Agreement whereby GEL and Milam agreed that Deficit Amounts would be added to our obligation amount under the Construction and Funding Agreement. In addition, the parties agreed to amend the priority of payments to reflect that, to the extent that there are available funds in a particular month, AFNB shall be paid one-tenth of such funds, provided that we will not participate in available funds until Deficit Amounts added to the Construction and Funding Agreement are paid in full.

(b)

In December 2012, GEL made Operations Payments and other payments to or on behalf of LE in which the aggregate amount exceeded the amount payable to LE in the month of December 2012 under the Joint Marketing Agreement (the “Overpayment Amount”). In December 2012, we entered into an amendment to the Joint Marketing Agreement whereby GEL and Milam agreed that Gross Profits payable to LE would be redirected to GEL as payment for the Overpayment Amount until such Overpayment Amount has been satisfied in full. Such redistributions shall not reduce the distributions of Gross Profit that GEL or Milam are otherwise entitled to under the Joint Marketing Agreement.

(c)

In February 2013, Milam paid a vendor $64,357.50 (the “Settlement Payment”), which represented amounts outstanding by LE for services rendered at the Nixon Facility plus the vendor’s legal fees. In addition, Milam and GEL incurred legal fees and expenses related to settling the matter. In a letter agreement between LE, GEL and Milam dated February 21, 2013, the parties agreed to modify the Joint Marketing Agreement such that, from and after January 1, 2013, the Gross Profit shall be distributed first to GEL, prior to any other distributions or payments to the parties to the Joint Marketing Agreement until GEL has received aggregate distributions as provided in the December 2012 Letter Agreement plus the Settlement Payment and Milam and GEL incurred legal fees and expenses.

(d)

In February 2013, GEL agreed to advance to LE the funds necessary to pay for the actual costs incurred for the scheduled maintenance turnaround at the Nixon Facility and capital expenditures relating to an electronic product meter, lab equipment and certain piping in an amount equal to the actual costs of the refinery turnaround and capital expenditures, not to exceed $840,000 in the aggregate. In a letter agreement between LE, GEL and Milam dated February 21, 2013, the parties agreed that all amounts advanced by GEL or its affiliates to LE pursuant to the letter agreement shall constitute obligations under the Construction and Funding Agreement.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

As of March 31, 2013, total advances under the Construction and Funding Agreement, including Deficit Amounts, were $5,145,584. As of March 31, 2013, pursuant to amendments and clarifications to the Joint Marketing Agreement, the net Deficit Amount added to our obligation amount under the Construction and Funding Agreement was $851,296.

As of March 31, 2013, the principal balance outstanding on the Refinery Loan, which is currently in default, was $9,298,183. For the three months ended March 31, 2013, no payments were made to American First National Bank (“AFNB”) under the Refinery Loan in respect of LE’s ratable share of Gross Profits. Subsequent to the Current Quarter, we paid AFNB $178,646 in arrearages.

Results of Operations

Three Months Ended March 31, 2013 (the “Current Quarter”) Compared to Three Months Ended March 31, 2012 (the “Prior Quarter”)

During the Prior Quarter, the Nixon Facility, which was refurbished and began operations in February 2012, operated for a total of 60 days at 44% of operating capacity. During the Current Quarter, the Nixon Facility operated for 85days at 77% of operating capacity. During the Current Quarter, the Nixon Facility underwent a planned 7 day annual maintenance turnaround in which the processing units were shut-down.

Current Quarter Compared to Prior Quarter

Summary. For the Current Quarter we reported a loss from continuing operations, net of tax, of $763,311, or a loss of $0.07 per share, compared to a loss from continuing operations, net of tax, of $1,957,380, or a loss of $0.21 per share, for the Prior Quarter. We reported a loss from discontinued operations of $12,514 in the Prior Quarter compared to no loss from discontinued operations in the Current Quarter. The loss from continuing operations, net of tax, in the Current Quarter was primarily attributable to the planned maintenance turnaround and lower refining margins. We continue to take steps to more effectively operate the refinery and manage the spread between our cost to acquire crude oil and the price of the refined petroleum products that we ultimately sell. During the Current Quarter, we adopted a condition-based predictive maintenance turnaround policy and completed several smaller capital improvement projects at the Nixon Facility, such as installation of new laboratory equipment and a new caustic system, to enhance profitability of our existing assets.

Total Revenue from Operations. For the Current Quarter we had total revenue from operations of $109,244,655 compared to total revenue from operations of $45,846,929 for the Prior Quarter. Substantially all of our revenue in the Current Quarter came from refined product sales, which generated revenue of $109,171,507, or 99% of total revenue from operations, compared to $45,770,963, or 99% of total revenue from operations, in the Prior Quarter.

Cost of Refined Products Sold. Cost of refined petroleum products sold was $106,322,661 for the Current Quarter compared to $45,641,226 for the Prior Quarter.

Refinery Operating Expenses. We recorded refinery operating expenses of $2,745,209 in the Current Quarter, all of which were for services provided to us by LEH to manage and operate the Nixon Facility pursuant to the Management Agreement with LEH. For the Prior Quarter, we recorded refinery operating expenses of $1,062,751. See “Part I, Item 1. Financial Statements - Note (15), Accounts Payable, Related Party” of this report for additional disclosures related to the Management Agreement.

Pipeline Operating Expenses. We recorded pipeline operating expenses of $45,371 in the Current Quarter compared to $109,618 in the Prior Quarter.

Lease Operating Expenses. Lease operating expenses totaled $26,901 in the Current Quarter compared to $19,338 in the Prior Quarter.

General and Administrative Expenses. General and administrative expenses decreased from $525,587 in the Prior Quarter to $484,564 in the quarter. The expenses in the Current Quarter were primarily related to leased corporate personnel costs, as well as consulting, legal and audit expenses.

Depletion, Depreciation and Amortization. Depletion, depreciation, and amortization increased from $255,753 in the Prior Quarter to $328,788 in the Current Quarter.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

Abandonment Expense. We recognized $27,451 of abandonment expense in the Current Quarter related to plugging and abandonment costs associated with our High Island A-7 oil and gas property. The amount, which exceeded the asset retirement obligation liability, was recognized as a loss during the period. There was no comparable expense in the Prior Quarter.

Other Income. We recognized $278,350 in net tank rental revenue in the Current Quarter compared to $93,955 in the Prior Quarter.

Discontinued Operations, Net of Tax. We reported a loss from discontinued operations, net of tax, of $12,514 in the Prior Quarter compared to $0 in the Current Quarter.

Earnings Before Interest, Income Taxes and Depreciation (“EBITDA”)

Management uses EBITDA, 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 EBITDA is useful to our investors because it allows them to evaluate our operating performance using the same performance measure analyzed internally by management. EBITDA is 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 income (expense), depreciation and amortization. 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 EBITDA may not be comparable to measurements used by other companies. Additionally, EBITDA should be considered in conjunction with net income (loss) and other performance measures such as operating cash flows.

Following is a reconciliation of EBITDA by business segment for the three months ended March 31, 2013 (and at March 31, 2013) and the three months ended March 31, 2012 (and at March 31, 2012):

	Three Months Ended March 31, 2013
	Segment
							Oil and Gas
	Refinery			Pipeline			Exploration &			Corporate &
	Operations			Transportation			Production			Other(1)			Total
Revenues	$	109,171,507		$	73,148		$	-		$	-		$	109,244,655
Less: Operation cost(2)		(109,063,677	)		(96,835	)		(57,664	)		(459,146	)		(109,677,321	)
Other non-interest income		278,350			-			-			-			278,350
EBITDA	$	386,180		$	(23,686	)	$	(57,664	)	$	(459,146	)	$	(154,316	)

Depletion, depreciation and amortization														(328,788	)
Other income (expense), net														(280,228	)

Loss from continuing operations,
before income taxes													$	(763,331	)

Loss from discontinued operations													$	-

Capital expenditures	$	530,226		$	-		$	-		$	-		$	530,226

Identifiable assets(3)	$	50,131,322		$	1,628,612		$	33,773		$	967,906		$	52,761,612

_______________

(1)	Includes unallocated general and administrative costs associated with corporate maintenance costs (such as director fees and legal expenses).
(2)	General and administrative costs are allocated based on revenue. In addition, the effect of economic hedges on our refined petroleum products and crude oil inventory, which are executed by Genesis, is included within the operation cost of our Refinery Operations. Cost of refined products sold includes a realized loss of $36,440 and an unrealized gain of $52,050.
(3)	Identifiable assets contain related legal obligations of each segment including cash, accounts receivable and payable and recorded net assets.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

	Three Months Ended March 31, 2012
	Segment
							Oil and Gas
	Refinery			Pipeline			Exploration &			Corporate &
	Operations			Transportation			Production			Other(1)			Total
Revenues	$	45,770,963		$	69,910		$	6,056		$	-		$	45,846,929
Less: Operation cost(2)		(46,862,438	)		(195,717	)		(204,287	)		(117,639	)		(47,380,081	)
Other non-interest income		93,955			-			-			-			93,955
EBITDA	$	(997,520	)	$	(125,807	)	$	(198,231	)	$	(117,639	)	$	(1,439,197	)

Depletion, depreciation and amortization														(255,753	)
Other income (expense), net														(231,867	)

Loss from continuing operations,
before income taxes													$	(1,926,817	)

Loss from discontinued operations													$	(12,514	)

Capital expenditures	$	1,349,332		$	-		$	-		$	-		$	1,349,332

Identifiable assets(3)	$	56,220,025		$	12,567,746		$	5,605,448		$	1,123,919		$	75,517,138

___________________

(1)	Includes unallocated general and administrative costs associated with corporate maintenance costs (such as director fees and legal expenses).
(2)	General and administrative costs are allocated based on revenue.
(3)	Identifiable assets contain related legal obligations of each segment including cash, accounts receivable and payable and recorded net assets.

Liquidity and Capital Resources

Sources and Uses of Cash. At March 31, 2013, our available cash was $88,059. Pursuant to the Joint Marketing Agreement, 10% of gross profits was directly remitted by GEL to AFNB on LE’s behalf to repay all past due principal and interest. Subsequent to the Current Quarter, GEL paid AFNB in the amount of $178,646 to repay all arrearages. As a result, LE’s share of gross profits will increase to 20% with no required profit share payments to AFNB.

We are currently relying on our profit share, GEL and LEH for our capital requirements. GEL and LEH may, but are not required, to fund our capital requirements. During the Current Quarter, the Deficit Amount financed by GEL was $851,296 and the capital amount funded by LEH was $584,040. For months in which GEL finances Deficit Amounts, LE does not receive any of its profit share until the Deficit Amounts have been repaid. There can be no assurances that GEL and/or LEH will continue to fund our capital requirements. In the event capital requirements are not funded by our profit share, GEL or LEH, we may experience a significant and material adverse effect on our operations, liquidity and financial condition. See “Item 1A. Risk Factors” in our Annual Report for risk factors related to our capital needs.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

	For Three Months Ended March 31,
	2013			2012

Cash flow from operations
Adjusted loss from continuing operations	$	(261,965	)	$	(1,651,727	)
Adjusted loss from discontinued operations		-			11,909
Change in assets and current liabilities		515,670			61,459

Total cash flow from operations		253,705			(1,578,359	)

Cash inflows (outflows)
Proceeds from issuance of debt		15,031			2,364,012
Payments on long term debt		(60,876	)		(2,916	)
Cash acquired on Acquisition		-			1,674,594
Capital expenditures		(530,226	)		(1,349,332	)
Payments on note payble		(10,472	)		-

Total cash inflows (outflows)		(586,542	)		2,686,358

Total change in cash flows	$	(332,837	)	$	1,107,999

Our sources of liquidity are advances for funding under the Construction and Funding Agreement, revenue we receive under the Joint Marketing Agreement, tank rental income and cash on hand. We purchase our crude oil for the Nixon Facility through an exclusive supply agreement with GEL. Under this agreement, the purchases of the crude oil are completed by GEL. We believe that the aforementioned liquidity sources will be sufficient to satisfy anticipated cash requirements associated with our business during the next 12 to 18 months. Our ability to generate cash to fund our operations depends on several factors, including our future performance, levels of accounts receivable, inventories, accounts payable, capital expenditures, adequate access to credit and financial flexibility to attract long-term capital on satisfactory terms. These factors may be impacted by general economic, political, financial, competitive and other factors beyond our control.

For the Current Quarter, we experienced positive cash flow from operations of $253,705. For the Prior Quarter, we experienced negative cash flow from operations of $1,578,359. This represents an improvement in cash flow from operations of $1,832,064 for the Current Quarter compared to the Prior Quarter.

We have implemented an operational strategy that we believe will improve liquidity over time, as follows:

(a) Maintain Efficient Refinery Operations and Promote Operational Excellence and Reliability – In the Current Quarter we adopted a predictive maintenance turnaround policy to operate the refinery as reliably and efficiently as possible. Under this condition-based approach to maintenance, we assess whether equipment will fail during some future period and then take action to avoid the consequences of such a failure. Compared to a preventive maintenance approach where equipment is taken off-line, opened up and inspected on a predetermined, periodic basis, we believe the predictive maintenance approach will enable us to better control costs and manage production schedules more efficiently. During the Current Quarter, the Nixon Facility successfully completed a 7 day maintenance turnaround in which the facility was taken offline. GEL agreed to pay the actual costs associated with the maintenance turnaround. Such costs are being added to the obligation amount we owe under the Construction and Funding Agreement. For the three months ended March 31, 2013, the Nixon Facility had a utilization rate of 77%; and

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

(b) Enhance Profitability of our Existing Assets and Invest in Organic Growth – In the Current Quarter we completed several capital improvement projects at the Nixon Facility, including installation of: (i) new laboratory equipment, improving both the speed and spectrum of product samples, (ii) a new caustic system, aiding in the reduction of sulfur content of certain refined products and (iii) a new salt tower, increasing the drying effectiveness of the distillation tower. We also initiated a project to automate the metering system and refurbish the flare system at the Nixon Facility. GEL agreed to fund these capital expenditures under the Construction and Funding Agreement. Such costs are being added to the obligation amount we owe under the Construction and Funding Agreement.

We continue to work with our vendors to bring our outstanding accounts payable current as expeditiously as possible. In the event that our efforts are not successful, we will experience a significant and material adverse effect on our continuing operations, liquidity and financial condition. In the Current Quarter, Milam settled amounts owed by LE to a vendor for services rendered at the Nixon Facility. Such amounts were added to the obligation amount we owe under the Construction and Funding Agreement.

We recognized $27,451 of abandonment expense in the Current Quarter related to plugging and abandonment costs associated with our High Island A-7 oil and gas property. The amount, which exceeded the asset retirement obligation liability, was recognized as a loss during the period. We will record additional plugging and abandonment costs as information becomes available to substantiate actual and/or probable costs.

Capital expenditures in the Current Quarter totaled $530,226, all of which related to refurbishment of the Nixon Facility. We expect to fund additional capital expenditures at the Nixon Facility primarily through the Construction and Funding Agreement, cash from operations or other borrowings. The principal balance owed to Milam under the Construction and Funding Agreement was $5,145,584 and $5,206,175, including Deficit Amounts, at March 31, 2013 and December 31, 2012, respectively.

The principal balance outstanding on the Refinery Loan, which is currently in default, was $9,298,183 at March 31, 2013 and December 31, 2012. As of the date of the filing of this report, the Refinery Loan is subject to a forbearance agreement (the "Forbearance Agreement").

As of March 31, 2013, past due principal and interest (as well as costs, fees and taxes) on the Refinery Loan was $178,646. After all past due principal and interest has been paid AFNB has agreed to: (i) re-amortize the Refinery Loan to the original maturity date of October 1, 2028 and (ii) apply twelve consecutive additional monthly payments in the amount of $83,333.33 towards replenishing the $1.0 million payment reserve required under the Refinery Loan in accordance with the Forbearance Agreement.

The principal balance outstanding on the Notre Dame Debt note, which is currently in default, was $1,300,000 at March 31, 2013 and December 31, 2012. There are no financial covenants associated with this debt.

See “Part II, Item 8. Financial Statements and Supplementary Data - Note (16) Notes Payable and Note (19) Long-Term Debt” of this report for additional disclosures related to our debt obligations.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk. We are exposed to market price risk related to our refined petroleum products and crude oil inventory. The spread between crude oil and refined product prices is the primary factor affecting our operations, liquidity and financial condition. Our crude acquisition costs and refined petroleum products sales prices depend on numerous factors beyond our control. These factors include the supply of and demand for crude oil, gasoline, NRLM and other refined petroleum products. Supply and demand for these products depend, among other things, on changes in domestic and foreign economies; weather conditions; domestic and foreign political affairs; production levels; availability of imports and exports; marketing of competitive fuels; and government regulation.

We utilize an inventory risk management policy under which Genesis may, but is not required to, use derivative instruments as certain refined product inventories exceed maximum thresholds in an effort to reduce our refined petroleum products and crude oil inventory commodity price risk. However, Genesis’ execution of the inventory risk management plan is outside of our control. Accordingly, there could be situations in which Genesis fails to execute on the plan or executes on the plan in a manner that causes significant losses to us, all of which are beyond our control. In the event that our inventory risk management system fails and/or is implemented poorly or not at all, we could experience a material and negative adverse effect on our operations, liquidity and financial condition.

Interest Rate Risk. We are exposed to interest rate volatility with regard to existing variable rate debt tied to movements in the U.S. prime rate. At March 31, 2103, we had $9,298,183 of variable interest debt with a weighted average interest rate at year end of approximately 5.50%.

ITEM 4. CONTROLS AND PROCEDURES

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 Principal Executive Officer and Principal Financial 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 Securities Exchange Act of 1934 (the “Exchange Act”). We have inadequate personnel resources to handle complex accounting transactions and ensure complete segregation of duties within the accounting function. Additionally, we lack formally documented accounting policies and procedures. The combination of these control deficiencies resulted in a material weakness in our internal control over financial reporting.

Based on that evaluation, our management, including our Chief Executive Officer (principal executive officer) and interim Chief Financial Officer (principal financial officer), concluded that our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) were ineffective as of March 31, 2013 to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The effectiveness of any system of controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we are subject to various lawsuits, claims, mechanics liens and administrative proceedings that arise out of the normal course of business. Management does not believe that the liens will have a material adverse effect on our results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under Item 1A, “Risk Factors” and elsewhere in our Annual Report. These risks and uncertainties could materially and adversely affect our business, financial condition and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. Except for the addition below, there have been no material changes in our assessment of our risk factors from those set forth in our Annual Report.

We may incur significant liability under, or costs and capital expenditures to comply with, environmental regulations relating to the recommissioning of the Nixon Facility

The Nixon Facility returned to service in February 2012. We are currently undergoing a comprehensive review to determine our compliance with relevant federal, state and local environmental laws. During the course of our review, we may discover that we are not in compliance with existing environmental regulations. To the extent that we are out of compliance, we may incur significant liabilities, costs and capital expenditures to comply with such environmental regulations, which are complex and change frequently. Costs of compliance are often unpredictable, and there can be no assurance that the future costs will not be material. It is possible that we may identify additional cost in the future, which could result in additional obligations and expenses, including fines and penalties.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

See “Note (16) Notes Payable and Note (19), Long-Term Debt” in Part I. Financial Information, Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements (Unaudited) of this report for disclosures related to defaults on debt.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

Table of Contents

Blue Dolphin Energy Company & Subsidiaries

ITEM 6. EXHIBITS

(a)	Exhibits:
	The following exhibits are filed herewith:

	10.1	Letter Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam Services, Inc. dated February 21, 2013.

	10.2	Letter Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam Services, Inc. dated February 21, 2013.

	31.1	Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Tommy L. Byrd Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Tommy L. Byrd Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

	101.INS	XBRL Instance Document.

	101.SCH	XBRL Taxonomy Schema Document.

	101.CA	XBRL Calculation Linkbase Document.

	101.LAB	XBRL Label Linkbase Document.

	101.PRE	XBRL Presentation Linkbase Document.

	101.DEF	XBRL Definition Linkbase Document.

Table of Contents

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

Date: May 15, 2013	By:	/s/ JONATHAN P. CARROLL
		Jonathan P. Carroll Chief Executive Officer, President, Assistant Treasurer and Secretary (Principal Executive Officer)


Date: May 15, 2013	By:	/s/ TOMMY L. BYRD
		Tommy L. Byrd Interim Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer)

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

Large accelerated filer	o	Accelerated filer	o

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

	March 31, 2013			December 31, 2012
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	88,059		$	420,896
Restricted cash		27,348			89,593
Accounts receivable, net		10,510,790			15,398,755
Prepaid expenses and other current assets		208,959			228,314
Deposits		1,245,910			1,236,447
Inventory		3,789,792			2,300,692
Total current assets		15,870,858			19,674,697

Total property and equipment, net		36,063,523			35,862,085

Debt issue costs, net		523,885			532,335
Other assets		-			9,463
Trade name		303,346			303,346

TOTAL ASSETS	$	52,761,612		$	56,381,926

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	16,292,668		$	19,171,013
Accounts payable, related party		2,178,061			1,594,021
Note payable		9,348,518			43,941
Asset retirement obligations, current portion		90,601			-
Accrued expenses and other current liabilities		895,202			725,238
Interest payable, current portion		637,551			640,352
Long-term debt, current portion		1,485,000			1,816,960
Total current liabilities		30,927,601			23,991,525

Long-term liabilities:
Asset retirement obligations, net of current portion		855,823			921,260
Long-term debt, net of current portion		4,960,584			13,989,517
Long-term interest payable, net of current portion		910,071			858,784
Total long-term liabilities		6,726,478			15,769,561

TOTAL LIABILITIES		37,654,079			39,761,086

STOCKHOLDERS' EQUITY
Common stock ($0.01 par value, 20,000,000 shares authorized, 10,571,629 and 10,563,297		105,717			105,633
shares issued at March 31, 2013 and December 31, 2012, respectively)
Additional paid-in capital		36,574,059			36,524,142
Accumulated deficit		(20,772,243	)		(20,008,935	)
Treasury stock, 150,000 and 0 shares, respectively, at cost		(800,000	)		-
Total stockholders' equity		15,107,533			16,620,840

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	52,761,612		$	56,381,926

	Three Months Ended March 31,
	2013			2012
REVENUE FROM OPERATIONS
Refined product sales	$	109,171,507		$	45,770,963
Pipeline operations		73,148			69,910
Oil and gas sales		-			6,056

Total revenue from operations		109,244,655			45,846,929

COST OF OPERATIONS
Cost of refined products sold		106,322,661			45,641,226
Refinery operating expenses		2,745,209			1,062,751
Pipeline operating expenses		45,371			109,618
Lease operating expenses		26,901			19,338
General and administrative expenses		484,564			525,587
Depletion, depreciation and amortization		328,788			255,753
Abandonment expense		27,451			-
Accretion expense		25,164			21,561

Total cost of operations		110,006,109			47,635,834

Loss from operations		(761,454	)		(1,788,905	)

OTHER INCOME (EXPENSE)
Net tank rental revenue		278,350			93,955
Interest and other income		835			1,650
Interest expense		(281,063	)		(233,517	)
Total other expense		(1,878	)		(137,912	)

Loss from continuing operations before income taxes		(763,331	)		(1,926,817	)

Tax expense
Current		-			(30,563	)
Deferred		-			-
Income tax expense		-			(30,563	)
Loss from continuing operations, net of tax		(763,331	)		(1,957,380	)

Loss from discontinued operations, net of tax		-			(12,514	)

Net loss	$	(763,331	)	$	(1,969,894	)

Basic loss per common share
Continuing operations	$	(0.07	)	$	(0.21	)
Discontinued operations	$	-		$	-
Basic loss per common share	$	(0.07	)	$	(0.21	)

Diluted loss per common share
Continuing operations	$	(0.07	)	$	(0.21	)
Discontinued operations	$	-		$	-
Diluted loss per common share	$	(0.07	)	$	(0.21	)

Weighted average number of common shares outstanding:
Basic		10,510,334			9,476,748
Diluted		10,510,334			9,476,748

	Three Months Ended March 31,
	2013			2012
OPERATING ACTIVITIES
Net loss	$	(763,331	)	$	(1,969,894	)
Loss from discontinued operations		-			12,514
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depletion, depreciation and amortization		328,788			252,898
Unrealized loss on derivatives		52,050			-
Amortization of debt issue costs		8,450			8,449
Amortization of intangible assets		9,463			2,855
Accretion expense		25,164			21,561
Abandonment costs incurred		27,451			(110	)
Common stock issued for services		50,000			20,000
Changes in operating assets and liabilities (net of effects of acquisition in 2012)
Restricted cash		62,245			(151	)
Accounts receivable		4,087,965			(15,923,454	)
Prepaid expenses and other current assets		19,355			(57,513	)
Deposits		(9,463	)		(667,421	)
Inventory		(1,489,100	)		(554,441	)
Accounts payable, accrued expenses and other liabilities		(2,739,371	)		16,010,675
Accounts payable, related party		584,040			1,253,764
Net cash provided by (used in) operating activities - continuing operations		253,705			(1,590,268	)
Net cash provided by operating activities - discontinued operations		-			11,909
Net cash provided by (used in) operating activities		253,705			(1,578,359	)

INVESTING ACTIVITIES
Capital expenditures		(530,226	)		(1,349,332	)
Cash acquired on acquisition		-			1,674,594
Net cash provided by (used in) investing activities		(530,226	)		325,262

FINANCING ACTIVITIES
Proceeds from issuance of debt		-			2,364,012
Payments on long-term debt		(60,876	)		(2,916	)
Proceeds from notes payable		15,031			-
Payments on notes payable		(10,472	)		-
Net cash provided by (used in) financing activities		(56,316	)		2,361,096
Net increase (decrease) in cash and cash equivalents		(332,837	)		1,107,999

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		420,896			1,822
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	88,059		$	1,109,821

Supplemental Information:
Non-cash operating activities
Reduction in accounts receivable in exchange for treasury stock received	$	800,000		$	-
Non-cash investing and financing activities
Related party payable converted to equity	$	-		$	993,732
Acquisition of Blue Dolphin at fair value, inclusive
of cash acquired of $1,674,594	$	-		$	18,046,154
Shares issued for services	$	50,000		$	40,000

PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3

	Condensed Consolidated Balance Sheets (Unaudited)	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	31

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

ITEM 4.	CONTROLS AND PROCEDURES	42

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	43

ITEM 1A.	RISK FACTORS	43

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43

ITEM 4.	MINE SAFETY DISCLOSURES	43

ITEM 5.	OTHER INFORMATION	43

ITEM 6.	EXHIBITS	44

	SIGNATURES	45

	February 15, 2012 As Intially		Measurement Period			Purchase Price Allocation (As Adjusted)
	Reported		Adjustments			February 15, 2012

Current assets	$	2,466,901	$	-		$	2,466,901
Oil and gas properties		1,503,596		3,639,279			5,142,875
Pipelines		4,466,273		4,757,563			9,223,836
Onshore separation and handling facilities		325,435		-			325,435
Land		473,225		-			473,225
Other property and equipment		282,972		-			282,972
Other long term assets		9,463		-			9,463
Trade name		184,368		118,978			303,346
Goodwill		8,667,401		(7,221,681	)		1,445,720
Total assets acquired		18,379,634		1,294,139			19,673,773

Current liabilities		333,480		-			333,480
Asset retirement obligations		-		1,294,139			1,294,139
Total liabilities assumed		333,480		1,294,139			1,627,619

Net assets acquired	$	18,046,154	$	-		$	18,046,154

Level 1	Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.
Level 3	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable and cannot be corroborated by market data or other entity-specific inputs.

			Fair Value Measurement at March 31, 2013 Using
Financial liabilities:	Carrying Value as at March 31, 2013		'Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		'Significant Other Observable Inputs (Level 2)		'Significant Unobservable Inputs (Level 3)

Commodity contracts	$	188,150	$	188,150	$	-	$	-

	Notional Contract Volumes by Year of Maturity
Inventory positions (futures):	2013		2014		2015		2016

Refined petroleum products and crude oil - net short (long) positions		50,000		-		-		-

		Fair Value
Liabilities Derivatives	Balance Sheets Location	March 31, 2013		December 31, 2012

Commodity contracts	Accrued expenses and other current liabilities	$	188,150	$	136,100

		Gain (Loss) Recognized
Derivatives	Statements of Operations Location	March 31, 2013			March 31, 2012

Commodity contracts	Cost of refined products sold	$	(188,150	)	$	-

	March 31,			March 31,
	2013			2012

Low-sulfur diesel		51.7	%		86.3	%
Naphtha		26.2	%		7.3	%
Atmospheric gas oil		22.1	%		6.4	%

		100.0	%		100.0	%

	March 31,		December 31,
	2013		2012

Prepaid insurance	$	138,959	$	185,814
Prepaid restructuring fees		50,000		-
Employee advances		-		22,500
Prepaid loan closing fees		20,000		20,000
	$	208,959	$	228,314

Asset retirment obligations as of December 31, 2012	$	921,260
Accretion expense		25,164
		946,424

Less: current portion of asset retirement obligations		90,601

Asset retirement obligations, long-term balance
at March 31, 2013	$	855,823

	March 31,		December 31,
	2013		2012

Utility deposits	$	36,500	$	36,500
Equipment deposits		124,526		124,526
Tax bonds		792,000		792,000
Purchase option deposits		283,421		283,421
Rent deposits		9,463		-
Deposits	$	1,245,910	$	1,236,447

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value

Options outstanding at December 31, 2012		14,642	$	-

Options granted		-	$	-

Options exercised		-	$	-

Options exercised or cancelled		-	$	-

Options outstanding at March 31, 2013		14,642	$	19.67		0.6	$	-

Options exercisable at March 31, 2013		14,642	$	19.67		0.6	$	-