Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to______

Commission File No. 0-15905

  Blue Dolphin Energy Company (Exact name of registrant as specified in its charter)

Delaware	73-1268729
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
801 Travis Street, Suite 2100, Houston, Texas	77002
(Address of principal executive offices)	(Zip Code)

713-568-4725

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None 

Indicate by check mark whether the registrant: (1) has 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

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

Number of shares of common stock, par value $0.01 per share, outstanding as of November 14, 2024: 14,921,968

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	8
	Consolidated Balance Sheets (Unaudited)	8
	Consolidated Statements of Operations (Unaudited)	9
	Consolidated Statements of Stockholders’ Equity (Unaudited)	10
	Consolidated Statements of Cash Flows (Unaudited)	11
	Notes to Consolidated Financial Statements	12
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51
ITEM 4.	CONTROLS AND PROCEDURES	51
PART II - OTHER INFORMATION		52
ITEM 1.	LEGAL PROCEEDINGS	52
ITEM 1A.	RISK FACTORS	53
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	54
ITEM 4.	MINE SAFETY DISCLOSURES	54
ITEM 5.	OTHER INFORMATION	54
ITEM 6.	EXHIBITS	55
SIGNATURES		56

Blue Dolphin Energy Company

September 30, 2024 | Page 2

Glossary of Terms

Throughout this Quarterly Report on Form 10-Q, we have used the following terms:

Adjusted Refinery operations segment margin (deficit).  Calculated as refinery operations segment margin (deficit) plus segment depreciation and amortization; reflected as a dollar ($) amount.   Adjusted Refining segment margin (deficit) per MBbls.  Calculated as adjusted refinery operations segment margin (deficit) divided by the volume, in barrels, of refined products sold during the period; reflected as a dollar ($) amount per barrel.   Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including Ingleside and Lazarus Capital) and/or LEH and its affiliates (including LMT and LTRI). Together, Jonathan Carroll and LEH owned 83% of the Common Stock as of the filing date of this report.   AMT. Alternative Minimum Tax.   ARO.  Asset retirement obligations.   ASU.  Accounting Standards Update.   AGO.  Atmospheric gas oil (also known as atmospheric tower bottoms) is the heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock.   Barrel.  A unit of volume equal to 42 U.S. gallons.   BDEX. Blue Dolphin Exploration Company, a wholly owned subsidiary of Blue Dolphin.   BDPC.  Blue Dolphin Petroleum Company, a wholly owned subsidiary of Blue Dolphin.   BDPL.  Blue Dolphin Pipe Line Company, a wholly owned subsidiary of Blue Dolphin.   BDSC.  Blue Dolphin Services Co., a wholly owned subsidiary of Blue Dolphin.   Blue Dolphin.  Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.   Board. Board of Directors of Blue Dolphin.   BOEM.  Bureau of Ocean Energy Management.   BSEE.  Bureau of Safety and Environmental Enforcement.   CAA. Clean Air Act.   Capacity utilization rate. A percentage measure that indicates the amount of available capacity used in the Nixon refinery.  With respect to the crude distillation tower, the rate is calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total capacity of the crude distillation tower (currently 15,000 bpd).   CDC.  Centers for Disease Control and Prevention.   CERLA.  Comprehensive Environmental Response, Compensation, and Liability Act of 1980.   CIP.  Construction in progress.   COVID-19.  An infectious disease caused by a coronavirus called SARS-CoV-2; first identified in 2019 in Wuhan, the capital of China's Hubei province; the disease spread globally, resulting in a pandemic.   Common Stock.  Blue Dolphin common stock, par value $0.01 per share.  Blue Dolphin had 20,000,000 shares of Common Stock authorized and 14,921,968 shares of Common Stock issued and outstanding as of the filing date of this report.   Complexity.  A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0.   Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Although condensate is sometimes like crude oil, it is usually lighter.   Cost of goods sold.  Reflects the cost of crude oil and condensate, fuel use, and chemicals.   Crude distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components are distilled by means of distillation trays. This process refines crude oil and other inputs into intermediate and finished petroleum products; commonly referred to as a crude distillation unit or an atmospheric distillation unit.   Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before use as fuels or conversion to other products.

Blue Dolphin Energy Company

September 30, 2024 | Page 3

Glossary of Terms (Continued)

CWA.  Clean Water Act.   Depropanizer unit. A distillation column that isolates propane from a mixture containing butane and other heavy components.   Distillates.  The result of crude distillation and therefore any refined oil product.  Distillate is more commonly used as an abbreviated form of middle distillate.  There are mainly four (4) types of distillates: (i) very light oils or light distillates (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel), (iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and HOBM, reduced crude, and AGO).   Distillation. The first step in the refining process whereby crude oil and condensate are heated at atmospheric pressure in the base of a distillation tower. As the temperature increases, the various compounds vaporize in succession at their various boiling points and then rise to prescribed levels within the tower based on their densities (from lightest to heaviest). They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at other points in the refining process to remove impurities.   DLA.  Defense Logistics Agency.   Downtime. Scheduled and/or unscheduled periods in which the crude distillation tower is not operating. Shutdowns may occur for a variety of reasons, including severe weather, power failures, preventive maintenance, and margin preservation in a weak margin environment.   EIA.  Energy Information Administration.   EIDL.  Economic Injury Disaster Loan; provides economic relief to businesses that experienced a temporary loss of revenue due to COVID-19.   EPA.  Environmental Protection Agency.   Eagle Ford Shale. A hydrocarbon-producing geological formation extending across South Texas from the Mexican border into East Texas.   Exchange Act.  Securities Exchange Act of 1934, as amended.   FASB.  Financial Accounting Standards Board.   FDIC. Federal Deposit Insurance Corporation.   Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, used as basic input materials in a refining process.  Feedstocks are transformed into one or more finished products.   Finished petroleum products.  Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use.     Freeport facility.  Consists of processing units for: (i) crude oil and natural gas separation and dehydration, (ii) natural gas processing, treating, and redelivery, and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of land in Freeport, Texas; facility is currently inactive.   GNCU.  Greater Nevada Credit Union.   Greenhouse gases.  Molecules in the Earth’s atmosphere, such as carbon dioxide, methane, and chlorofluorocarbons, that warm the atmosphere because they absorb some of the thermal radiation emitted from the Earth’s surface.   HOBM.  Heavy oil-based mud blendstock; see also “distillates.”   HUBZone.  Historically Underutilized Business Zones program established by the SBA to help small businesses in both urban and rural communities.   IBLA.  Interior Board of Land Appeals.   INC.  Incident of Noncompliance issued by BOEM and/or BSEE.   Ingleside.  Ingleside Crude, LLC, an affiliate of Jonathan Carroll.   Intercompany processing fees. Fees associated with an intercompany tolling agreement related to naphtha volumes.   Intermediate petroleum products.  A petroleum product that might require further processing before being saleable to the ultimate consumer; further processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company to process it further.   IRC Section 382.  Title 26, Internal Revenue Code, Subtitle A – Income Taxes, Subchapter C – Corporate Distributions and Adjustments, Part V Carryovers, § 382. Limits NOL carryforwards and certain built-in losses following ownership change.   IRS.  Internal Revenue Service.   Jet fuel. A high-quality kerosene product primarily used in aviation.  Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule.   Kissick Noteholder.  John H. Kissick.   Lazarus Capital.  Lazarus Capital, LLC, an affiliate of Jonathan Carroll.      

Blue Dolphin Energy Company

September 30, 2024 | Page 4

Glossary of Terms (Continued)

LE.  Lazarus Energy, LLC, a wholly owned subsidiary of Blue Dolphin.   LEH.  Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and controlling shareholder of Blue Dolphin as of the date of this report.   Leasehold interest. The interest of a lessee under an oil and gas lease.   Light crude. A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high American Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions.   LMT.  Lazarus Marine Terminal I, LLC, an affiliate of LEH.   LRM.  Lazarus Refining & Marketing, LLC, a wholly owned subsidiary of Blue Dolphin.   LTRI.  Lazarus Texas Refinery I, an affiliate of LEH.   MBbls. One thousand barrels of oil.   MBbls/d.  One thousand barrels of oil per day; a measure of the barrels of daily output produced in a refinery or transported through a pipeline.   MVP.  MV Purchasing, LLC.    Naphtha. A refined or partly refined light distillate fraction of crude oil. Blended further or mixed with other materials, it can make high-grade motor gasoline or jet fuel. It is also a generic term for the lightest and most volatile petroleum fractions.   Natural gas. A naturally occurring hydrocarbon gas mixture consisting primarily of methane but commonly including varying amounts of other higher alkanes and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide, or helium.   Nixon facility.  Encompasses the Nixon refinery, petroleum storage tanks, loading and unloading facilities, and 56 acres of land in Nixon, Texas.   Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units in Nixon, Texas.   NOL.  Net operating losses.   NPS.  Nixon Product Storage, LLC, a wholly owned subsidiary of Blue Dolphin.   Operating days. Represents the number of days in a period in which the crude distillation tower operated. Operating days are calculated by subtracting downtime in a period from calendar days in the same period.     OSHA.  Occupational Safety and Health Administration.   Other conversion costs.  Represents the combination of direct labor costs and manufacturing overhead costs.  These are the costs that are necessary to convert our raw materials into refined products.   Other operating expenses. Represents costs associated with our natural gas processing, treating, and redelivery facility, as well as our pipeline assets and leasehold interests in oil and gas properties.   PADD. Petroleum Administration for Defense Districts; PADD regions enable regional analysis of petroleum product supply and movements by the EIA.   Petroleum. A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds. The name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil.   PHMSA.  Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation.   Pilot.  Pilot Travel Centers LLC, a Delaware limited liability company.   Preferred Stock.  Blue Dolphin preferred stock, par value $0.10 per share.  Blue Dolphin had 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding as of the filing date of this report.   Product slate.  Represents type and quality of products produced.   Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene, and mixtures thereof.   Refined products. Hydrocarbon compounds, such as jet fuel and residual fuel, produced by a refinery.   Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products.   Refinery operations segment margin (deficit).  Calculated as refinery operations revenue less cost of goods sold during the period; reflected as a dollar ($) amount.   Refining segment margin (deficit) per MBbls.  Calculated as refinery operations segment margin (deficit) divided by the volume, in barrels, of refined products sold during the period; reflected as a dollar ($) amount per barrel.   ROU.  Right-of-use.

Blue Dolphin Energy Company

September 30, 2024 | Page 5

Glossary of Terms (Continued)

SBA.  Small Business Administration.   SEC. Securities and Exchange Commission.   Securities Act.  The Securities Act of 1933, as amended.   Segment margin (deficit). For the refinery operations segment, represents refined product sales minus intercompany processing fees minus refinery operations costs and expenses. For the tolling and terminaling segment, represents storage tank rental and ancillary services fees plus intercompany processing fees minus tolling and terminaling costs and expenses. Intercompany processing fees are associated with an intercompany tolling agreement related to naphtha volumes.   Significant customer. A customer who represents more than 10% of our total revenue from operations.   Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane, from a product.   Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also, produced as a by-product of removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized based on their sulfur content, with lower sulfur fuels selling at a higher, premium price and higher sulfur fuels selling at a lower, discounted price.   Sweet crude. Crude oil containing sulfur content less than 0.5%.   Tartan.  Tartan Oil LLC, an affiliate of Pilot.   TCEQ.  Texas Commission on Environmental Quality.   Texas First.  Texas First Rentals, LLC.   Throughput.  The volume processed through a unit or a refinery or transported through a pipeline.   Tolling and terminaling segment margin (deficit).  Calculated as tolling and terminaling revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount.   Topping unit. A type of petroleum refinery that engages in only the first step of the refining process  crude distillation.  A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0.   Total refinery production. Refers to the volume processed as output through the crude distillation tower. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, HOBM and AGO.   Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit, and sometimes the entire plant, is taken offline for a week or more for comprehensive revamp and renewal.   USACOE.  U.S. Army Corps of Engineers.   USDA.  U.S. Department of Agriculture.   U.S. GAAP.  Accounting principles generally accepted in the United States of America.   Veritex. Veritex Community Bank, successor in interest to Sovereign Bank by merger.   WHO.  World Health Organization.   WSJ Prime rate.  The base rate on corporate loans posted by at least 70% of the ten largest U.S. banks as published by the Wall Street Journal.  Effective September 19, 2024, the WSJ Prime rate decreased to 8.00%.   XBRL.  eXtensible Business Reporting Language.   Yield.  The percentage of refined products that is produced from crude oil and other feedstocks.

Blue Dolphin Energy Company

September 30, 2024 | Page 6

Important Information Regarding Forward Looking Statements

This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, but not limited to, those under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including without limitation statements regarding expectations regarding revenue, cash flows, capital expenditures, and other financial items, our business strategy, goals, and expectations concerning our market position, future operations, and profitability, are forward-looking statements.  Forward-looking statements may be identified by use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. Although we believe our assumptions concerning future events are reasonable, several risks, uncertainties, and other factors could cause actual results and trends to differ materially from those projected, including but not limited to:

Business and Industry   •  Significant debt in current liabilities, certain of which is in default. •  Restrictive covenants in our debt instruments that limit our ability to undertake certain types of transactions.  •  Inability to meet financial covenants under certain loan agreements.  •  Increased costs of capital or a reduction in the availability of credit.  •  Affiliate Common Stock ownership and transactions that could cause conflicts of interest. •  Operational hazards inherent in transporting, processing, and storing crude oil and condensate and refined products.  •  Geographical concentration of our assets and customers in West Texas. •  Competition from companies with more significant financial and other resources. •  Market changes in insurance that impact premium costs and available coverages. •  Industry technological developments that outpace our ability to keep up. •  Variable interest rates on debt.   Downstream and Midstream Operations •  Commodity price and refined product demand volatility, which can adversely affect our refining margins. •  Crude oil, other feedstocks, and fuel and utility services price volatility. •  Effects of geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and any spread or expansion thereof, including with respect to impacts to commodity prices and other markets. •  Availability and cost of crude oil and other feedstocks to operate the Nixon facility. •  Equipment failure and maintenance, which lead to operational downtime. •  Potential impairment in the carrying value of long-lived assets, which could negatively affect our operating results. •  Adverse changes in operational cash flow and working capital, shortfalls for which Affiliates may not fund. •  Critical personnel loss, labor actions, and workplace safety issues. •  Market share loss, an unfavorable financial condition shift, or the bankruptcy or insolvency of a significant customer. •  Increases in the cost or availability of third-party vessels, pipelines, trucks, and other means of delivering and transporting our crude oil and condensate, feedstocks, and refined products. •  Sourcing of a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. •  Geographical concentration of our refining operations and customers within the Eagle Ford Shale. •  Severe weather or other climate-related events that affect our facilities or those of our vendors, suppliers, or customers. •  Our ability to implement a new business strategy, such as renewable fuels, may be materially and adversely affected by many known and unknown factors. •  Our ability to effect and integrate potential acquisitions. Legal, Government, and Regulatory   •  Environmental laws and regulations that may require us to make substantial capital improvements to remain compliant or remediate current or future contamination that could lead to material liabilities. •  Strict laws and regulations regarding personnel and process safety. •  Uncertainty regarding the impact of current and future sanctions imposed by governments, including the U.S., and other authorities in response to military conflicts. •  General economic, political, or regulatory developments, including recession, inflation, interest rates, or changes in governmental policies relating to refined petroleum products, crude oil, or taxation. •  Assessment of penalties by regulatory agencies, such as BOEM, BSEE, OSHA and the TCEQ for violations. •  Our estimates of future AROs related to our pipeline and facilities assets, which may increase. •  Regulatory changes and other measures related to greenhouse gas emissions, climate change, and an ongoing desire to transition to greater renewable energy solutions.   Security •  A terrorist attack or armed conflict. •  Increased activism against oil and gas companies. •  Actual or potential cybersecurity threats or loss of data privacy.   Common Stock •  Fluctuations in our stock price that may result in a substantial investment loss. •  Increasing attention to environmental, social, and governance (ESG) matters. •  Declines in our stock price due to share sales. •  Dilution of the equity of current stockholders and the potential decline of our stock price due to the issuance of new Common Stock or Preferred Stock from the large pool of authorized shares that we have available to issue. •  The potential sale of shares in accordance with Rule 144, which may adversely affect the market. •  The lack of dividend payments. •  Failing to maintain adequate internal controls under Section 404(a) of the Sarbanes-Oxley Act.

See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC and elsewhere in our subsequent quarterly and periodic reports, including this report.  All forward-looking statements included in this report are based on information available to us on the date of this report.  We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.

Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours” refer to Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.

Blue Dolphin Energy Company

September 30, 2024 | Page 7

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Consolidated Balance Sheets (Unaudited)

	September 30,			December 31,
	2024			2023
	(in thousands except share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	683		$	18,713
Restricted cash, current		1,000			-
Accounts receivable, net		619			116
Accounts receivable, related party		6,680			4,184
Prepaid expenses and other current assets		2,118			1,591
Deposits		225			110
Inventory		33,993			24,576
Total current assets		45,318			49,290
LONG-TERM ASSETS
Total property and equipment, net		53,030			54,958
Operating lease right-of-use assets, net		-			158
Restricted cash, noncurrent		-			5
Surety bonds		1,255			230
Deferred tax assets, net		2,680			1,436
Total long-term assets		56,965			56,787
TOTAL ASSETS	$	102,283		$	106,077
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt less unamortized debt issue costs, current portion (in default)	$	13,895		$	39,440
Line of credit, related party		2,500			-
Long-term debt, related party, current portion		404			-
Interest payable		253			2,596
Interest payable, related party		1,308			-
Accounts payable		8,607			1,814
Accounts payable, related party		397			889
Current portion of lease liabilities		-			147
Income taxes payable		16			951
Asset retirement obligations, current portion		2,999			4,504
Accrued expenses and other current liabilities		5,028			5,084
Total current liabilities		35,407			55,425
LONG-TERM LIABILITIES
Long-term debt, net of current portion		26,407			3,745
Long-term debt, related party, net of current portion		3,596			4,000
Long-term interest payable, related party, net of current portion		-			1,308
Total long-term liabilities		30,003			9,053
TOTAL LIABILITIES		65,410			64,478
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY
Common stock ($0.01 par value, 20,000,000 shares authorized; 14,921,968 shares issued and outstanding at September 30, 2024 and December 31, 2023)(1)		149			149
Additional paid-in capital		39,758			39,758
Retained earnings (deficit)		(3,034	)		1,692
TOTAL STOCKHOLDERS' EQUITY		36,873			41,599
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	102,283		$	106,077

⁽¹⁾ Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At September 30, 2024 and December 31, 2023, there were no shares of preferred stock issued and outstanding.

The accompanying notes are an integral part of these consolidated financial statements. 

Blue Dolphin Energy Company

September 30, 2024 | Page 8

Financial Statements (Continued)

Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
	(in thousands, except share and per-share amounts)
REVENUE FROM OPERATIONS
Refinery operations	$	81,280		$	101,598		$	239,743		$	283,505
Tolling and terminaling		829			956			3,047			4,588
Total revenue from operations		82,109			102,554			242,790			288,093
COSTS AND EXPENSES
Crude oil, fuel use, and chemicals		80,244			87,795			222,176			244,927
Other conversion costs		4,138			3,190			14,293			8,390
Tolling and terminaling costs		400			403			1,220			1,216
Depreciation and amortization		644			645			1,930			1,937
Total cost of goods sold		85,426			92,033			239,619			256,470
Other Operating costs
LEH operating fee, related party		202			149			628			396
Other operating expenses		177			(65	)		457			95
General and administrative expenses		1,041			1,112			3,495			3,230
Depreciation and amortization		61			54			184			157
Impairment of fixed assets		-			324			-			324
Accretion of asset retirement obligations		-			-			-			59
Total cost of operations		86,907			93,607			244,383			260,731
Income (loss) from operations		(4,798	)		8,947			(1,593	)		27,362
OTHER INCOME (EXPENSE)
Interest and other income		13			30			204			82
Interest and other expense		(1,561	)		(1,573	)		(4,558	)		(4,574	)
Total other expense		(1,548	)		(1,543	)		(4,354	)		(4,492	)
Income (loss) before income taxes		(6,346	)		7,404			(5,947	)		22,870
Income tax benefit (expense)		1,346			(339	)		1,221			(612	)
Net Income (loss)	$	(5,000	)	$	7,065		$	(4,726	)	$	22,258
Income (loss) per common share:
Basic	$	(0.34	)	$	0.47		$	(0.32	)	$	1.49
Diluted	$	(0.34	)	$	0.47		$	(0.32	)	$	1.49
Weighted average number of common shares outstanding:
Basic		14,921,968			14,921,968			14,921,968			14,921,968
Diluted		14,921,968			14,921,968			14,921,968			14,921,968

The accompanying notes are an integral part of these consolidated financial statements.

Blue Dolphin Energy Company

September 30, 2024 | Page 9

Financial Statements (Continued)

Consolidated Statements of Stockholders’ Equity (Unaudited)

	Common Stock
	Shares Issued				Additional		Retained			Total
	and				Paid-In		Earnings			Stockholders'
	Outstanding		Par Value		Capital		(Deficit)			Equity
			(in thousands except share amounts)
Balance at December 31, 2023		14,921,968	$	149	$	39,758	$	1,692		$	41,599
Net loss		-		-		-		(4,726	)		(4,726	)
Balance at September 30, 2024		14,921,968	$	149	$	39,758	$	(3,034	)	$	36,873

	Common Stock									Total
					Additional					Stockholders'
					Paid-In		Accumulated			Equity
	Shares Issued		Par Value		Capital		Deficit			(Deficit)
			(in thousands except share amounts)
Balance at December 31, 2022		14,921,968	$	149	$	39,758	$	(29,319	)	$	10,588
Net income		-		-		-		22,258			22,258
Balance at September 30, 2023		14,921,968	$	149	$	39,758	$	(7,061	)	$	32,846

The accompanying notes are an integral part of these consolidated financial statements.

Blue Dolphin Energy Company

September 30, 2024 | Page 10

Financial Statements (Continued)

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2024			2023
	(in thousands)
OPERATING ACTIVITIES
Net income (loss)	$	(4,726	)	$	22,258
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		2,114			2,094
Accretion of asset retirement obligations		-			59
Deferred income tax		(1,244	)		-
Amortization of debt issue costs		152			153
Deferred revenues and expenses		-			(305	)
Impairment of fixed assets		-			324
Changes in operating assets and liabilities
Accounts receivable		(503	)		925
Accounts receivable, related party		(2,496	)		(1,963	)
Prepaid expenses and other current assets		(642	)		595
Inventory		(9,417	)		(8,515	)
Surety bonds		(1,025	)		-
Asset retirement obligations		(1,505	)		-
Accounts payable, accrued expenses and other liabilities		3,284			(2,758	)
Accounts payable, related party		(492	)		445
Net cash provided by (used in) operating activities		(16,500	)		13,312
INVESTING ACTIVITIES
Capital expenditures		-			(102	)
Net cash used in investing activities		-			(102	)
FINANCING ACTIVITIES
Proceeds from related-party debt		2,500			-
Payments on debt principal		(3,035	)		(1,049	)
Net activity on related-party debt		-			(1,211	)
Net cash used in financing activities		(535	)		(2,260	)
Net change in cash, cash equivalents, and restricted cash		(17,035	)		10,950
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD		18,718			1,521
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	1,683		$	12,471
Supplemental Information:
Non-cash investing and financing activities:
Right of use assets financed via operating lease	$	-		$	215
Interest paid	$	5,784		$	5,737

The accompanying notes are an integral part of these consolidated financial statements.

Blue Dolphin Energy Company

September 30, 2024 | Page 11

Notes to Consolidated Financial Statements 

(1) Organization

Company Overview

Blue Dolphin formed in 1986 as a Delaware corporation.  The company is an independent downstream energy company operating in the Gulf Coast region of the United States.  Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.25 million barrels of petroleum storage tank capacity in Nixon, Texas.  Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”

Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services).  See “Note (4)” to our consolidated financial statements for more information about our business segments.

Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled 83% of the voting power of our Common Stock as of the filing date of this report.  An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products.  Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

Basis of Presentation

We prepared the accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, we condensed or omitted certain information and footnote disclosures normally included in our audited financial statements pursuant to the SEC’s rules and regulations. We eliminated significant intercompany transactions in the consolidation. Management believes all adjustments considered necessary for a fair presentation are included, disclosures are adequate, and the presented information is not misleading.

We derived the consolidated balance sheet as of  December 31, 2023 from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended  December 31, 2023 as filed with the SEC. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, or for any other period.

Reclassifications

When necessary, we reclassified prior period financial information to conform to the current year's presentation.

 

Use of Estimates

The nature of our business requires that we make estimates and assumptions in accordance with U.S.GAAP.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period.

We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of September 30, 2024 and through the filing date of this report.  We base our estimates and judgments on historical experience, various assumptions, and information we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, we may adjust estimates as the operating environment changes, new events occur, or we gain greater insights or experience. While we believe the estimates and assumptions used to prepare these consolidated financial statements are appropriate, actual results could differ from our estimates.

Working Capital

Certain conditions and events exist, in the aggregate, that caused management to evaluate Blue Dolphin's ability to continue as a going concern. Those conditions and events include historical working capital deficits and significant current debt in default. Management believes that we have sufficient liquidity to meet our obligations as they become due through the generation of cash flows from operations and liquidation of current working capital amounts for a reasonable period (defined as one year from the issuance of these financial statements).  Management acknowledges that uncertainty remains related to future operating margins; however, management has a reasonable expectation of Blue Dolphin's ability to generate adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt.

Blue Dolphin Energy Company

September 30, 2024 | Page 12

Notes to Consolidated Financial Statements (Continued)

(2)   Significant Accounting Policies

Significant Accounting Policies

We present a summary of significant Blue Dolphin accounting policies to assist investors and other stakeholders in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who are responsible for their integrity and objectivity. These accounting policies conform to GAAP and management consistently applied these accounting policies in the preparation of our consolidated financial statements.

Cash, Cash Equivalents, and Restricted Cash. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. Although management historically deemed this a normal business risk, management continues to evaluate options to limit risk given current capital, credit, and commodity markets and financial institution health.  Restricted cash, current portion at September 30, 2024 and restricted cash, noncurrent portion at  December 31, 2023 reflected amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene. See "Notes (3) and (9)" to our consolidated financial statements for additional disclosures related to covenants associated with our secured loan agreements.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:

	September 30,		December 31,
	2024		2023
	(in thousands)
Cash and cash equivalents	$	683	$	18,713
Restricted cash, current		1,000		-
Restricted cash, noncurrent		-		5
	$	1,683	$	18,718

Financial Instruments and Fair Value Measurements.  Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. As of September 30, 2024 and December 31, 2023, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values because they are highly liquid or due to the short-term nature of these instruments.  The carrying value of long-term debt approximates fair value as it carries interest rates that fluctuate with the prime rate.

We established a three-tier hierarchy that classifies fair value amounts recognized in the financial statements based on the observability of inputs used to estimate these fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3).  At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy.

Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals.  We value inventory at the lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs.  If the net realizable value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (6)” to our consolidated financial statements for additional disclosures related to inventory.

Revenue Recognition. 

Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer.  We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted.  Under bill and hold arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load. 

We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant.  We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.

Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) terminal services agreements whereby a customer agrees to pay a certain fee per storage tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.

We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.

Revenue from storage tank customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending.  These are optional customer services.  The fixed cost under the customer’s storage tank agreement does not include ancillary services fees. We consider ancillary services as a separate performance obligation under the storage tank agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.

Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date.  We record unearned revenue, which usually consists of customer prepayments, when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.

Contract Balances. The timing of revenue recognition, billings, and cash collections results in billed accounts receivable and customer pre-payments and deposits (contract liabilities) on our consolidated balance sheet.  We bill amounts as customers lift products or upon signing of bulk sales contracts. We sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. These deposits liquidate when we recognize the revenue. 

Blue Dolphin Energy Company

September 30, 2024 | Page 13

Notes to Consolidated Financial Statements (Continued)

New Pronouncements Adopted

During the three and nine months ended September 30, 2024, we did not adopt any ASUs.

New Pronouncements Issued, Not Yet Effective

● ASU 2023-09 — Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, requiring us to disclose specified additional information in our income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require us to disaggregate our income taxes paid disclosure by federal and state taxes, with further disaggregation required for significant individual jurisdictions. ASU 2023-09 allows for adoption using either a prospective or retrospective transition method. We will adopt ASU 2023-09 for our financial statements covering the fiscal year ending December 31, 2025. We are currently evaluating the impact of adopting this ASU.

● ASU 2023-07 — Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). In November 2023, the FASB issued ASU No. 2023-07, requiring us to disclose significant segment expenses regularly provided to our chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require us to disclose the title and position of our CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within physical years beginning after December 15, 2024.  ASU 2023-07 allows early adoption.  We will adopt ASU 2023-07 for our financial statements covering the fiscal year ending December 31, 2024. We are currently evaluating the impact of adopting this ASU.

Blue Dolphin Energy Company

September 30, 2024 | Page 14

Notes to Consolidated Financial Statements (Continued)

(3) Related-Party Transactions

Affiliate Agreements

Financial and Operational Agreements.  Blue Dolphin and certain of its subsidiaries are currently parties to the following financial and operational agreements with Affiliates:

Agreement	Parties	Effective Date	Key Terms
Blue Dolphin Guaranty Fee Agreement	Blue Dolphin Jonathan Carroll	01/01/2023	Related to payoff of Blue Dolphin $2.0 million SBA loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051 as consideration for providing his personal guarantee.
Jet Fuel Purchase Agreements	LE LEH	04/21/2023	Product agreements for the purchase of jet fuel by LE from LEH; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; LEH priced the jet fuel at LEH’s product cost; LE sold the products back to LEH under a prior jet fuel sales agreement between the parties.
Amended and Restated Jet Fuel Sales Agreement	LE LEH	04/01/2023	Jet fuel sales by LE to LEH; 1-year automatic renewals; LEH lifts the jet fuel from LE as needed and sells it to the DLA under preferential pricing terms due to LEH's HUBZone certification.
LE Amended and Restated Guaranty Fee Agreement	LE Jonathan Carroll	01/01/2023	Related to payoff of LE $25.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034 as consideration for providing his personal guarantee.
LE Amended and Restated Master Services Agreement	LE Ingleside	03/01/2023	For storage of LE products intended for customer receipt by barge; LE pays Ingleside a tank rental fee $0.1 million per month.
LRM Amended and Restated Guaranty Fee Agreement	LRM Jonathan Carroll	01/01/2023	Related to payoff of LRM $10.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034 as consideration for providing his personal guarantee.
NPS Guaranty Fee Agreement	NPS Jonathan Carroll	01/01/2023	Related to payoff of NPS $10.0 million GNCU loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031 as consideration for providing his personal guarantee.
NPS Terminal Services Agreement	NPS LEH	11/01/2022	For storage of LEH jet fuel at the Nixon facility; LEH pays NPS tank rental fee $0.2 million per month; 1-year term on an evergreen basis; either party may cancel upon 60 days’ prior written notice.
Office Sub-Lease Agreement	BDSC LEH	09/01/2024	Sub-lease executed on 10/30/24; 24-month extension of prior office sub-lease; term expires 08/31/2026; office lease Houston, Texas; rent approximately $0.003 million per month.
Third Amended and Restated Operating Agreement	Blue Dolphin LE         LRM NPS      BDPL BDPC   BDSC LEH	04/01/2024	1-year term; expires 04/01/2025 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC. LEH operates and manages all Blue Dolphin’s assets. Provided services under the agreement include personnel serving in a variety of capacities across all Blue Dolphin entities, including, but not limited to corporate executives such chief executive officer and chief financial officer. As a result, Blue Dolphin and its subsidiaries have no employees for reporting purposes. All personnel are employed and paid by LEH.

Debt Agreements.  Blue Dolphin and certain of its subsidiaries are currently parties to the following debt agreements with Affiliates:

					Monthly Principal
		Principal			and Interest Payment
Loan Description	Parties	(in millions)		Maturity Date	(in millions)		Interest Rate			Loan Purpose
Affiliate Revolving Credit Agreement	Blue Dolphin and	$5.0 (maximum)(1)		April 2025	Set-off against		WSJ Prime + 2.00%			Working capital
	Subsidiaries				other obligations
	LEH and				owed to Lender
	Subsidiaries
BDPL-LEH Loan Agreement (in forbearance)	BDPL	$	4.0	August 2018	$	0.04		8.00	%	Working capital
	LEH

⁽¹⁾ As of September 30, 2024, only $2.5 million was drawn.

   

Blue Dolphin Energy Company

September 30, 2024 | Page 15

Notes to Consolidated Financial Statements (Continued)

Forbearance.

LEH Payment Agreement.  Pursuant to the LEH Payment Agreement dated  May 9, 2023, LEH agreed to forbear from exercising any of its rights and remedies related to a default pertaining to previous payment violations under the BDPL-LEH Loan Agreement.  Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million and $0.2 million in interest for the three months ended  September 30, 2024 and 2023, respectively. BDPL paid LEH approximately $0.3 million in interest for both the nine months ended September 30, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to payment violations prior to May 2023.

Covenants, Guarantees and Security.

The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type.  Certain BDPL property serves as collateral under the BDPL-LEH Loan Agreement.

See “Note (9)” to our consolidated financial statements for additional information regarding a default under a secured loan agreement and its potential effects on our business, financial condition, and results of operations.

Related-Party Financial Impact

Consolidated Balance Sheets.

Accounts receivable, related party.  Accounts receivable—related party for the sale of jet fuel to LEH totaled $6.7 million and $4.2 million at September 30, 2024 and December 31, 2023, respectively. We net settled amounts owed by Blue Dolphin to LEH under the Third Amended and Restated Operating Agreement against amounts LEH owed to LE under the Amended and Restated Jet Fuel Sales Agreement. We reflected excess amounts owed by LEH to LE in accounts receivable—related party on our consolidated balance sheet.

Accounts payable, related party.  Accounts payable, related party totaled approximately $0.4 million and $0.9 million at September 30, 2024 and December 31, 2023, respectively.  Accounts payable, related party at September 30, 2024 reflected tank rental fees owed by LE to Ingleside under the LE Amended and Restated Master Services Agreement. Accounts payable, related party at December 31, 2023 reflected tank rental fees owed by LE to Ingleside under the LE Amended and Restated Master Services Agreement plus amounts owed to LTRI for previously purchased refinery equipment. 

Related Party Debt.

	September 30,			December 31,
	2024			2023
	(in thousands)
LEH
BDPL-LEH Loan Agreement (in forbearance)	$	5,308		$	5,308
Affiliate revolving credit agreement		2,500			-
LEH Total		7,808			5,308
Less: Long-term debt, related party, current portion		(404	)		-
Less: Line of credit payable, related party		(2,500	)
Less: Accrued interest payable, related party, current portion		(1,308	)		-
	$	3,596		$	5,308

Consolidated Statements of Operations.

Total revenue from operations.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2024				2023				2024				2023
	(in thousands, except percent amounts)								(in thousands, except percent amounts)
Refinery operations
LEH	$	21,185	25.8	%	$	33,060	32.2	%	$	84,591	34.8	%	$	93,824	32.6	%
Third-Parties		60,095	73.1	%		68,538	66.9	%		155,152	63.9	%		189,681	65.8	%
Tolling and terminaling
LEH		540	0.7	%		540	0.5	%		1,620	0.7	%		-	-	%
Third-Parties		289	0.4	%		416	0.4	%		1,427	0.6	%		4,588	1.6	%
	$	82,109	100.0	%	$	102,554	100.0	%	$	242,790	100.0	%	$	288,093	100.0	%

Blue Dolphin Energy Company

September 30, 2024 | Page 16

Notes to Consolidated Financial Statements (Continued)

Interest expense.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
	(in thousands)				(in thousands)
Jonathan Carroll
Guaranty Fee Agreements
Tied to First Term Loan Due 2034	$	96	$	101	$	291	$	304
Tied to NPS Term Loan Due 2031		66		50		166		150
Tied to Second Term Loan Due 2034		40		42		121		126
Tied to Blue Dolphin Term Loan Due 2051		10		10		30		30
LEH
BDPL-LEH Loan Agreement (in forbearance)		106		167		318		491
	$	318	$	370	$	926	$	1,101

Other.  BDSC received sub-lease income from LEH totaling $0.01 million for both the three-month periods ended September 30, 2024 and 2023. BDSC received sub-lease income from LEH totaling $0.02 million for both the nine-month periods ended September 30, 2024 and 2023.  See "Notes (11) and (15)" to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.

The LEH operating fee, related party totaled $0.2 million for the three-month period ended September 30, 2024 compared to approximately $0.1 million for the three-month period ended September 30, 2023. The increase between the periods related to higher manufacturing overhead costs including insurance.  The LEH operating fee, related party totaled $0.6 million for the nine-month period ended September 30, 2024 compared to approximately $0.4 million for the nine-month period ended September 30, 2023. The increase between the periods related to higher manufacturing overhead costs including insurance.

Lease expense associated with the LE Amended and Restated Master Services Agreement (as discussed elsewhere within this "Note (3)" and in "Note (11)" to our consolidated financial statements) totaled $0.3 million for both the three-month periods ended September 30, 2024 and 2023. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.9 million and $0.7 million for the nine-month periods ended  September 30, 2024 and 2023, respectively.

Blue Dolphin Energy Company

September 30, 2024 | Page 17

Notes to Consolidated Financial Statements (Continued)

(4) Revenue and Segment Information

We have two reportable business segments: (i) refinery operations, which derives revenue from refined product sales, and (ii) tolling and terminaling, which derives revenue from storage tank rental fees, ancillary services fees (such as for in-tank blending) and tolling and reservation fees for use of the naphtha stabilizer at the Nixon refinery. ‘Corporate and other’ includes information for BDSC, BDPL, and BDPC. We evaluate the performance of our reportable business segments based on revenues, cost of goods sold, and net income (loss).

Revenue from Contracts with Customers

Disaggregation of Revenue.  We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.

Receivables from Contracts with Customers.  We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.

Contract Liabilities.  Our contract liabilities consist of unearned revenue from customers in the form of prepayments.  We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets.  See “Note (8)” to our consolidated financial statements for more information related to unearned revenue.

Remaining Performance Obligations.  Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.

Contract Balances

	September 30,		December 31,
	2024		2023
Accounts receivable (including related-party), beginning of period	$	4,300	$	1,148
Accounts receivable (including related-party), end of period		7,299		4,300
Unearned revenue, beginning of period	$	3,243	$	3,888
Unearned revenue, end of period		2,721		3,243

Blue Dolphin Energy Company

September 30, 2024 | Page 18

Notes to Consolidated Financial Statements (Continued)

Segment Information

We modified our segment presentation to incorporate applicable depreciation and amortization into our cost of goods sold subtotal. We believe this provides a more complete representation of our cost of goods sold. Prior periods have been modified to conform with this presentation.

Business segment information for the periods indicated (and as of the dates indicated) was as follows:

	Three Months Ended
	September 30,
	2024									2023
	Refinery Operations			Tolling & Terminaling			Corporate & Other			Refinery Operations			Tolling & Terminaling			Corporate & Other
	(in thousands)
Segment revenue	$	81,280		$	1,759		$	-		$	101,598		$	1,886		$	-
Intercompany(1)		-			(930	)		-			-			(930	)		-
Total revenue from operations		81,280			829			-			101,598			956			-
Crude oil, fuel use, and chemicals		80,244			-			-			87,795			-			-
Other conversion costs		5,068			-			-			4,120			-			-
Intercompany processing fees		(930	)		-			-			(930	)		-			-
Tolling and terminaling costs		-			400			-			-			403			-
Depreciation and amortization		302			342			-			303			342			-
Total costs of goods sold		84,684			742			-			91,288			745			-
Other operating and general and administrative expenses(2)		507			69			844			374			306			840
Depreciation and amortization		-			-			61			-			-			54
Interest and other non-operating expenses, net		900			512			136			847			502			194
Total costs and expenses		86,091			1,323			1,041			92,509			1,553			1,088
Income (loss) before income taxes		(4,811	)		(494	)		(1,041	)		9,089			(597	)		(1,088	)
Income tax benefit (expense)		-			-			1,346			-			-			(339	)
Net income (loss)	$	(4,811	)	$	(494	)	$	305		$	9,089		$	(597	)	$	(1,427	)

	Nine Months Ended
	September 30,
	2024									2023
	Refinery Operations			Tolling & Terminaling			Corporate & Other			Refinery Operations			Tolling & Terminaling			Corporate & Other
	(thousands)
Segment revenue	$	239,743		$	5,053		$	-		$	283,505		$	6,689		$	-
Intercompany(1)		-			(2,006	)		-			-			(2,101	)		-
Total revenue from operations		239,743			3,047			-			283,505			4,588			-
Crude oil, fuel use, and chemicals		222,176			-			-			244,927			-			-
Other conversion costs		16,299			-			-			10,491			-			-
Intercompany processing fees		(2,006	)		-			-			(2,101	)		-			-
Tolling and terminaling costs		-			1,220			-			-			1,216			-
Depreciation and amortization		904			1,026			-			911			1,026			-
Total cost of goods sold		237,373			2,246			-			254,228			2,242			-
Other operating and general and administrative expenses(2)		1,561			161			2,858			1,193			932			1,979
Depreciation and amortization		-			-			184			-			-			157
Interest and other non-operating expenses, net		2,440			1,506			408			2,456			1,462			574
Total costs and expenses		241,374			3,913			3,450			257,877			4,636			2,710
Income (loss) before income taxes		(1,631	)		(866	)		(3,450	)		25,628			(48	)		(2,710	)
Income tax benefit (expense)		-			-			1,221			-			-			(612	)
Net income (loss)	$	(1,631	)	$	(866	)	$	(2,229	)	$	25,628		$	(48	)	$	(3,322	)

(1)	Fees associated with an intercompany tolling agreement related to naphtha volumes.
(2)	The LEH operating fee, related party, impairment of fixed assets, and accretion of asset retirement obligations are included in 'other operating and general and administrative expenses' within the refinery operations business segment.

Blue Dolphin Energy Company

September 30, 2024 | Page 19

Notes to Consolidated Financial Statements (Continued)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
	(in thousands)				(in thousands)
Capital expenditures
Refinery operations	$	-	$	-	$	-	$	102
Total capital expenditures	$	-	$	-	$	-	$	102

	September 30,		December 31,
	2024		2023
	(in thousands)
Identifiable assets
Refinery operations	$	79,891	$	86,565
Tolling and terminaling		17,580		16,464
Corporate and other		4,812		3,048
Total identifiable assets	$	102,283	$	106,077

Blue Dolphin Energy Company

September 30, 2024 | Page 20

Notes to Consolidated Financial Statements (Continued)

(5) Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of the dates indicated consisted of the following:

	September 30,		December 31,
	2024		2023
	(in thousands)
Prepaid insurance	$	1,583	$	1,168
Other prepaids		520		230
Prepaid easement renewal fees		15		32
Prepaid crude oil and condensate		-		161
	$	2,118	$	1,591

Blue Dolphin Energy Company

September 30, 2024 | Page 21

Notes to Consolidated Financial Statements (Continued)

  

(6) Inventory

Inventory as of the dates indicated consisted of the following:

	September 30,		December 31,
	2024		2023
	(in thousands)
HOBM	$	23,391	$	5,144
Jet fuel		7,319		8,570
Naphtha		1,905		8,782
Crude oil and condensate		1,077		1,494
Chemicals		177		160
AGO		94		392
Propane		30		24
LPG mix		-		10
	$	33,993	$	24,576

(7) Property, Plant and Equipment, Net

Property, plant and equipment, net, as of the dates indicated consisted of the following:

	September 30,			December 31,
	2024			2023
	(in thousands)
Refinery and facilities	$	72,776		$	72,675
Land		566			566
Other property and equipment		913			913
		74,255			74,154
Less: Accumulated depreciation and amortization		(24,894	)		(22,966	)
		49,361			51,188
Construction in progress		3,669			3,770
	$	53,030		$	54,958

(8) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of the dates indicated consisted of the following:

	September 30,		December 31,
	2024		2023
	(in thousands)
Unearned revenue from contracts with customers	$	2,721	$	3,243
Insurance		844		467
Taxes payable		618		142
Accrued fines and penalties		407		522
Other payable		212		297
Customer deposits		163		163
Board of director fees payable		63		250
	$	5,028	$	5,084

Blue Dolphin Energy Company

September 30, 2024 | Page 22

Notes to Consolidated Financial Statements (Continued)

  

(9) Third-Party Long-Term Debt

Debt Agreements

Blue Dolphin and certain of its subsidiaries are currently parties to the following debt agreements with third parties:

					Monthly Principal
		Principal			and Interest Payment
Loan Description	Parties	(in millions)		Maturity	(in millions)	Interest Rate			Loan Purpose
Veritex Loans
LE Term Loan Due 2034(1)	LE	$	25.0	June 2034	$0.3	WSJ Prime + 2.75%			Refinance loan; capital improvements
	Veritex
LRM Term Loan Due 2034(1)	LRM	$	10.0	December 2034	$0.1	WSJ Prime + 2.75%			Refinance bridge loan; capital improvements
	Veritex
Kissick Debt (in forbearance)(2)	LE	$	11.7	January 2018	$0.5		6.25	%	Working capital
	Kissick Noteholder
GNCU Loan
NPS Term Loan Due 2031(in default)(3)	NPS	$	10.0	October 2031	$0.1		5.75	%	Working capital
	GNCU
SBA EIDLs
Blue Dolphin Term Loan Due 2051 (as modified)(4)	Blue Dolphin	$	2.0	June 2051	$0.01		3.75	%	Working capital
	SBA
LE Term Loan Due 2050(5)	LE	$	0.15	August 2050	$0.0007		3.75	%	Working capital
	SBA
NPS Term Loan Due 2050(5)	NPS	$	0.15	August 2050	$0.0007		3.75	%	Working capital
	SBA
Equipment Loan Due 2025(6)	LE	$	0.07	October 2025	$0.0013		4.50	%	Equipment Lease Conversion
	Texas First

(1)	Restricted cash, current totaled $1.0 million and $0.0 at  September 30, 2024 and December 31, 2023, respectively.  Restricted cash, current reflected amounts held by Veritex in a payment reserve account, which is required to have a balance of $1.0 million.  Although the amount at December 31, 2023 was $0, the payment reserve account was fully replenished on January 2, 2024.
(2)	Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million.
(3)	Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments are due monthly through loan maturity. First principal payment made in October 2024.
(4)	Original principal amount was $0.5 million; the principal amount increased by $1.5 million under a loan modification. Payments deferred for thirty (30) months; first payment due and paid in  November 2023; interest accrues during deferral period; loan not forgivable.
(5)	Payments deferred for thirty (30) months; first payment made in  February 2023; interest accrued during deferral period; loan not forgivable.
(6)	In  May 2019, LE entered into 12-month equipment rental agreement with an option to purchase the backhoe at maturity; equipment rental agreement matured in  May 2020; in  October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility.

Outstanding Principal, Debt Issue Costs, and Accrued Interest

Third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:

	September 30,			December 31,
	2024			2023
	(in thousands)
Veritex Loans
LE Term Loan Due 2034	$	19,072		$	19,858
LRM Term Loan Due 2034		7,968			8,260
Kissick Debt (in forbearance)		2,894			7,147
GNCU Loan
NPS Term Loan Due 2031 (in default)		9,975			9,975
SBA EIDLs
BDEC Term Loan Due 2051		2,103			2,135
LE Term Loan Due 2050		159			162
NPS Term Loan Due 2050		159			162
Equipment Loan Due 2025		18			29
		42,349			47,728
Less: Long-term debt, net, current portion		(13,895	)		(39,440	)
Less: Unamortized debt issue costs		(1,794	)		(1,947	)
Less: Accrued interest payable, current portion		(253	)		(2,596	)
	$	26,407		$	3,745

Blue Dolphin Energy Company

September 30, 2024 | Page 23

Notes to Consolidated Financial Statements (Continued)

Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:

	September 30,			December 31,
	2024			2023
	(in thousands)
Veritex Loans
LE Term Loan Due 2034	$	1,674		$	1,674
LRM Term Loan Due 2034		768			768
GNCU Loan
NPS Term Loan Due 2031 (in default)		730			730
Less: Accumulated amortization		(1,378	)		(1,225	)
	$	1,794		$	1,947

Amortization expense was $0.05 million for both the three-month periods ended September 30, 2024 and 2023. Amortization expense was $0.1 million for both the nine-month periods ended September 30, 2024 and 2023.

Accrued interest related to third-party long-term debt, reflected as accrued interest payable in our consolidated balance sheets, as of the dates indicated consisted of the following:

	September 30,			December 31,
	2024			2023
	(in thousands)
Kissick Debt (in forbearance)	$	-		$	2,169
Veritex Loans
LE Term Loan Due 2034		46			181
LRM Term Loan Due 2034		69			70
GNCU Loan
NPS Term Loan Due 2031 (in default)		17			17
SBA EIDLs
BDEC Term Loan Due 2051		103			135
LE Term Loan Due 2050		9			12
NPS Term Loan Due 2053		9			12
Total accrued third-party interest		253			2,596
Less: Accrued interest payable, current portion		(253	)		(2,596	)
Long-term interest payable, net of current portion	$	-		$	-

We classified the debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 within long-term debt, current portion on our consolidated balance sheets at  December 31, 2023 due to being in default; however, we re-classified the Veritex loans to long-term debt, net of current portion at September 30, 2024 as a result of the loans no longer being in default.  We classified the NPS Term Loan Due 2031 within long-term debt, current portion on our consolidated balance sheets at  September 30, 2024 and  December 31, 2023 due to the loan being in technical default.  The Kissick Debt fell within long-term debt, current portion on our consolidated balance sheet at September 30, 2024 compared to long-term debt, net of current portion at  December 31, 2023 due to principal payments being due within the next twelve months.

Forbearance Agreements, Waivers, and Default

Veritex Forbearance Agreements and Waivers.  Under a November 2022 forbearance agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex forbearance agreement expired in September 2023, and was superseded by a first amendment. The first amendment expired in December 2023, and was superseded by a second amendment.  The second amendment expired in March 2024.  During each of these forbearance periods, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants. 

On July 8, 2024, LE and LRM received a confirmation letter from Veritex dated July 2, 2024 waiving all covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for calendar years 2021, 2022, and 2023. Pursuant to a letter dated June 25, 2024, the USDA approved Veritex's April 18, 2024 letter request for a waiver for the same periods. As of September 30, 2024, LE and LRM complied with all financial covenants related to their respective Veritex loans.

Kissick Payment Agreement. Pursuant to a payment agreement between LE and the Kissick Noteholder dated April 30, 2023, the Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to a default pertaining to previous payment violations under the Kissick Debt.  Under the terms of the Kissick payment agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid the Kissick Noteholder $1.5 million in principal and interest during both the three months ended  September 30, 2024 and 2023. LE paid the Kissick Noteholder $4.4 million and $3.5 million in principal and interest for the nine months ended September 30, 2024 and 2023, respectively. As of the filing date of this report, the Kissick Debt was in forbearance related to payment violations prior to April 2023.

Blue Dolphin Energy Company

September 30, 2024 | Page 24

Notes to Consolidated Financial Statements (Continued)

Default. As of September 30, 2024 and through the filing date of this report, we were in technical default under the NPS Term Loan Due 2031 for failure to provide standalone audited financial statements for NPS, a wholly-owned subsidiary. The default may permit the lender to declare the amount owed under the related loan agreement immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under the secured loan agreement that is in default, either upon maturity or if accelerated, (ii) NPS will be able to refinance or restructure the debt, and/or (iii) the lender will provide a future forbearance or default waiver. Any exercise by the lender of its rights and remedies under the secured loan agreement that is in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.  In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety.  If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Guarantees and Security

Loan Description	Guarantees	Security
Veritex Loans
LE Term Loan Due 2034	•    USDA	•  First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory)
	•    Jonathan Carroll(1)	•   Assignment of all Nixon facility contracts, permits, and licenses
	•    Affiliate cross-guarantees	•   Absolute assignment of Nixon facility rents and leases, including tank rental income
		•   $5.0 million life insurance policy on Jonathan Carroll
LRM Term Loan Due 2034	•    USDA	•   Second priority lien on rights of LE in crude distillation tower and other   collateral of LE
	•    Jonathan Carroll(1)	•   First priority lien on real property interests of LRM
	•    Affiliate cross-guarantees	•   First priority lien on all LRM fixtures, furniture, machinery, and equipment
		•  First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has second priority lien
		•  Substantially all assets
Kissick Debt (in forbearance)(2)	-	•  Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE
GNCU Loan
NPS Term Loan Due 2031 (in default)	•    USDA	•   Deed of trust lien on approximately 56 acres of land and improvements   owned by LE
	•    Jonathan Carroll(1)	•   Leasehold deed of trust lien on certain property leased by NPS from LE
	•    Affiliate cross-guarantees	•   Assignment of leases and rents and certain personal property
SBA EIDLs
Blue Dolphin Term Loan Due 2051	-	•   Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
LE Term Loan Due 2050	-	•   Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
NPS Term Loan Due 2050	-	•   Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
Equipment Loan Due 2025	-	•   First priority security interest in the equipment (backhoe).

(1)

Veritex required Jonathan Carroll to personally guarantee repayment of borrowed funds and accrued interest.

(2)

Subject to the Kissick Subordination Agreement between the Kissick Noteholder and Sovereign Bank (predecessor to Veritex) dated June 22, 2015. Under the agreement, Kissick Noteholder agreed, and LE consented, to: (i) subordinate Kissick Noteholder’s right to payments in favor of Pilot and (ii) subordinate its rights to security interest and liens in favor of Sovereign (now Veritex) as holder of the LE Term Loan Due 2034.

Representations, Warranties, and Covenants

The First Term Loan Due 2034, Second Term Loan Due 2034, NPS Term Loan Due 2031, BDEC Term Loan Due 2051, LE Term Loan Due 2050, and NPS Term Loan Due 2050 contain representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for bank facilities of these types.  Specifically, The First Term Loan Due 2034 and Second Term Loan Due 2034 contain quarterly debt service coverage, total combined current assets, total combined current liabilities, and total combined debt ratios and annual current and debt to net worth ratios. The First Term Loan Due 2034 also requires that a $1.0 million payment reserve account be maintained. The NPS Term Loan Due 2031 requires the provision of standalone audited financial statements for NPS and annual maintenance of debt service coverage and current ratios. There are no covenants associated with the Kissick Debt, BDEC Term Loan Due 2051, LE Term Loan Due 2050, NPS Term Loan Due 2050, and the Equipment Loan Due 2025.

(10) AROs

Refinery and Facilities

Management has concluded that there is no legal or contractual obligation to dismantle or remove our refinery and facilities assets. Management believes that our refinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.

Blue Dolphin Energy Company

September 30, 2024 | Page 25

Notes to Consolidated Financial Statements (Continued)

Pipelines and Facilities and Oil and Gas Properties

We have AROs associated with decommissioning our pipelines and facilities assets, as well as for plugging and abandoning our oil and gas properties.  We recorded a liability for the fair value of an ARO at the time the asset was installed or placed in service. From time to time we adjust the liability due to changes in estimates or the timing of decommissioning the assets. ARO liability as of the dates indicated was as follows:

	September 30,			December 31,
	2024			2023
	(in thousands)
AROs, at the beginning of the period	$	4,504		$	3,710
Changes in estimates of existing obligations		-			1,558
Liabilities settled		(1,505	)		(823	)
Accretion expense		-			59
Less: AROs, current portion		(2,999	)		(4,504	)
Long-term AROs, at the end of the period	$	-		$	-

During the nine months ended September 30, 2024, we settled ARO liabilities totaling $1.5 million related to our pipeline and facilities assets. We also incurred approximately $0.9 million in additional decommissioning related expenses during the nine months ended September 30, 2024 due to the impact of poor weather conditions. During the twelve months ended   December 31, 2023, we recorded an increase in ARO liabilities of $1.6 million due to a change in the timing and cost of decommissioning these assets, settled ARO liabilities totaling $0.8 million, and recognized accretion expense of $0.06 million.

BOEM mandated that our pipelines and facilities assets offshore in federal waters be decommissioned due to their extended period of inactivity. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements.  Management worked with a consultant to develop a decommissioning plan, and BDPL was following the plan. BDPL completed a significant portion of the project from late  December 2023 to mid- February 2024. However, due poor weather conditions that contributed to significant cost overruns, in July 2024 BDPL requested a BSEE extension to decommission the remaining portion of the Blue Dolphin Pipeline System and associated platform until the second quarter of 2025. BDPL’s request for a decommissioning extension was denied by BSEE in September 2024. Management is currently assessing the feasibility and cost of performing decommissioning work in late November or December of 2024 during off-peak weather conditions in the U.S. Gulf of Mexico and vendor availability. Separately, management is also exploring alternatives to reactivate the assets under a potential alternate Rights-of-Use and Easement (RUE).  BDPL's delay in decommissioning its offshore assets does not relieve BDPL of its obligations to comply with BSEE's mandate or of BSEE's authority to impose civil penalties. Further, there can be no assurance that BDPL will be able to complete the anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of September 30, 2024 and December 31, 2023.  At September 30, 2024 and December 31, 2023, BDPL maintained $3.0 million and $4.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.

In  April 2024, BDPL received another civil penalty referral letter from BSEE related to INCs issued by the agency in September 2023.  Although the civil penalty referral letter noted that BSEE would provide BDPL information related to its review within 90 days from the date of its letter, as of the filing date of this report BDPL had not received any further communication related to this letter.  In August 2024, BDPL received two more civil penalty referral letters from BSEE related to INCs issued in October and November 2023. BSEE's 90-day review period related to these letters ends in late November 2024.

See “Note (14)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.

(11) Lease Obligations

Lease Obligations

Office Lease.  We maintain our corporate headquarters in Houston, Texas.  In October 2024, BDSC signed a new 24-month extension, the sixth amendment, to its operating lease.  The sixth amendment was deemed to be a separate contract and not a lease modification. See "Note (15) to our consolidated financial statements for additional disclosures related to the recently executed BDSC office lease.

An Affiliate, LEH, sub-leases a portion of the Houston office space. BDSC received sub-lease income from LEH totaling $0.01 million for both the three-month periods ended September 30, 2024 and 2023. BDSC received sub-lease income from LEH totaling $0.02 million and $0.03 million for the nine-month periods ended September 30, 2024 and 2023, respectively. See “Notes (3) and (15)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.

Tank Lease. LE leases tanks from Ingleside under the LE Amended and Restated Master Services Agreement. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million for both the three-month periods ended September 30, 2024 and 2023. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.9 million and $0.7 million for the nine-month periods ended  September 30, 2024 and 2023, respectively. Due to its one-year term, the lease is being treated as short term.  As a result, the lease was not recorded on our balance sheet. See “Note (3)” to our consolidated financial statements for additional disclosures related to the LE Amended and Restated Master Services Agreement. See "Note (3)" to our consolidated financial statements for additional disclosures related to the LE Amended and Restated Master Services Agreement.

Blue Dolphin Energy Company

September 30, 2024 | Page 26

Notes to Consolidated Financial Statements (Continued)

The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

		September 30,		December 31,
	Balance Sheet Location	2024		2023
		(in thousands)
Assets
Operating lease ROU assets	Operating lease ROU assets	$	-	$	787
Less: Accumulated amortization on operating lease assets	Operating lease ROU assets		-		(629	)
Total lease assets			-		158
Liabilities
Current
Operating lease	Current portion of lease liabilities		-		147
Noncurrent
Operating lease	Long-term lease liabilities, net of current		-		-
Total lease liabilities		$	-	$	147

	September 30,		December 31,
	2024		2023
Weighted average remaining lease term in years
Operating lease		-		0.67
Weighted average discount rate
Operating lease		-		8.25	%

The following table presents information related to lease costs incurred for operating and finance leases:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
	(in thousands)
Operating lease costs	$	41	$	55	$	165	$	158
Short-term lease expense, related party		300		300		900		700
Total lease cost	$	341	$	355	$	1,065	$	858

The table below presents supplemental cash flow information related to leases as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating lease	$	38	$	57	$	147	$	172

As of September 30, 2024, maturities of lease liabilities for the periods indicated were as follows:

	Operating
September 30,	Lease
	(in thousands)
2025	$	-
	$	-

Future minimum annual lease commitments that are non-cancelable:

	Operating
September 30,	Lease
	(in thousands)
2025	$	-
	$	-

Blue Dolphin Energy Company

September 30, 2024 | Page 27

Notes to Consolidated Financial Statements (Continued)

  

(12) Income Taxes

The Inflation Reduction Act ("IRA") was enacted into law in August 2022.  The IRA imposes a 15% alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1.0 billion. We do not fall within the category of “applicable corporations” and are therefore exempt from payment of an alternative minimum tax.

Tax Provision

The provision for income tax benefit (expense) for the periods indicated was as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2024		2023			2024			2023
	(in thousands)					(in thousands)
Current
Federal	$	21	$	(262	)	$	(6	)	$	(382	)
State		27		(77	)		(17	)		(230	)
Deferred
Federal		1,298		(1,277	)		1,244			(4,373	)
Change in valuation allowance		-		1,277			-			4,373
Total provision for income taxes	$	1,346	$	(339	)	$	1,221		$	(612	)

GAAP treats Texas margins tax, a form of business tax imposed on an entity’s gross profit rather than its net income, like an income tax for financial reporting purposes.

Deferred income taxes as of the dates indicated consisted of the following:

	September 30,			December 31,
	2024			2023
	(in thousands)
Deferred tax assets:
NOL and capital loss carryforwards	$	6,725		$	6,014
Business interest expense		3,485			2,534
Start-up costs (crude oil and condensate processing facility)		191			254
ARO liability/deferred revenue		630			946
Other		68			54
Total deferred tax assets		11,099			9,802
Deferred tax liabilities:
Basis differences in property and equipment		(8,419	)		(8,366	)
Total deferred tax liabilities		(8,419	)		(8,366	)
		2,680			1,436
Deferred tax assets (liabilities), net	$	2,680		$	1,436

Deferred Income Taxes

Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.

Valuation Allowance.  As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets.  This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. During the year ended  December 31, 2023, the valuation allowance was reduced to zero based upon the expected utilization of the net deferred tax asset as a result of positive evidence that was evaluated, including recent earnings history and expectations for future taxable income.

At   September 30, 2024, there were no uncertain tax positions for which a reserve or liability was necessary. 

NOL Carryforwards

Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on using pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own more than 5% (after applying certain look-through rules) increases by more than fifty percent [50% over such stockholders’ lowest percentage ownership during the testing period (generally three years)]. Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition.

Blue Dolphin Energy Company

September 30, 2024 | Page 28

Notes to Consolidated Financial Statements (Continued)

The 2005 and 2012 ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of approximately $0.6 million per year. We  may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused and are excluded in the NOL carryforward presented below. NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change. NOL carryforwards generated beginning in 2018  may only be used to offset 80% of taxable income and are carried forward indefinitely.

NOL Carryforwards Available for Use. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the IRC Section 382 limitation):

	Net Operating Loss Carryforward
	Pre-			Post-
	Ownership			Ownership
	Change			Change			Total
	(in thousands)
Balance at December 31, 2022	$	5,147		$	45,624		$	50,771
Net operating losses used and expired		(638	)		(21,493	)		(22,131	)
Balance at December 31, 2023		4,509			24,131			28,640
Net operating losses		-			3,384			3,384
Balance at September 30, 2024	$	4,509		$	27,515		$	32,024

(13) Earnings and Dividends Per Share

A reconciliation between basic and diluted income per share for the periods indicated was as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2024			2023		2024			2023
	(in thousands,					(in thousands,
	except share and per share amounts)					except share and per share amounts)
Net income (loss)	$	(5,000	)	$	7,065	$	(4,726	)	$	22,258
Basic and diluted earnings (loss) per share	$	(0.34	)	$	0.47	$	(0.32	)	$	1.49
Basic and diluted shares used in computing earnings per share		14,921,968			14,921,968		14,921,968			14,921,968

Diluted EPS for the three and nine months ended September 30, 2024 and 2023 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.  Basic and diluted EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding.

Shareholders are entitled to receive such dividends as  may be declared by our Board out of funds legally available for such purpose. However, no dividend  may be declared or paid unless after-tax profit was made in the preceding fiscal year, we comply with covenants in our secured loan agreements, we are current on all required debt payments, and we have received prior written concurrence from certain lenders.

Blue Dolphin Energy Company

September 30, 2024 | Page 29

Notes to Consolidated Financial Statements (Continued)

  

(14) Commitments and Contingencies

Third Amended and Restated Operating Agreement

See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin assets by an Affiliate under the Third Amended and Restated Operating Agreement.

Offshore Pipelines and Platform Requirements

BDPL has pipelines and platform assets subject to BSEE’s idle iron regulations.  Idle iron regulations require lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations.  Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

Platform Inspections.  We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In January 2024, BSEE assessed a civil penalty of $0.2 million against BDPL for failure to complete annual platform inspections in a timely manner.  BDPL paid the civil penalty in April 2024. 

Decommissioning Obligations. BOEM mandated that our pipelines and facilities assets offshore in federal waters be decommissioned due to their extended period of inactivity. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements.  Management worked with a consultant to develop a decommissioning plan, and BDPL was following the plan. BDPL completed a significant portion of the project from late  December 2023 to mid- February 2024. However, due poor weather conditions that contributed to significant cost overruns, in July 2024 BDPL requested a BSEE extension to decommission the remaining portion of the Blue Dolphin Pipeline System and associated platform until the second quarter of 2025. BDPL’s request for a decommissioning extension was denied by BSEE in September 2024. Management is currently assessing the feasibility and cost of performing decommissioning work in late November or December of 2024 during off-peak weather conditions in the U.S. Gulf of Mexico and vendor availability. Separately, management is also exploring alternatives to reactivate the assets under a potential alternate Rights-of-Use and Easement (RUE).  BDPL's delay in decommissioning its offshore assets does not relieve BDPL of its obligations to comply with BSEE's mandate or of BSEE's authority to impose civil penalties. Further, there can be no assurance that BDPL will be able to complete the anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of September 30, 2024 and December 31, 2023.  At September 30, 2024 and December 31, 2023, BDPL maintained $3.0 million and $4.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.

In  April 2024, BDPL received another civil penalty referral letter from BSEE related to INCs issued by the agency in September 2023.  Although the civil penalty referral letter noted that BSEE would provide BDPL information related to its review within 90 days from the date of its letter, as of the filing date of this report BDPL had not received any further communication related to this letter.  In August 2024, BDPL received two more civil penalty referral letters from BSEE related to INCs issued in October and November 2023. BSEE's 90-day review period related to these letters ends in late November 2024.

Default Under a Secured Loan Agreement

See “Note (9)” to our consolidated financial statements for additional information regarding a default under a secured loan agreement and its potential effects on our business, financial condition, and results of operations.

Financing Agreements and Guarantees

Indebtedness.  See “Notes (3) and (9)” to our consolidated financial statements for disclosures related to Affiliate and third-party indebtedness and defaults thereto.

Guarantees.  Affiliates provided guarantees on certain debt of Blue Dolphin and its subsidiaries.  The maximum amount of any guarantee is equal to the principal amount and accrued interest, which amounts are reduced as payments are made.  See “Notes (3) and (9)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party guarantees associated with indebtedness and defaults thereto.

Health, Safety and Environmental Matters

The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failing to obtain and comply with these permits or environmental, health, or safety laws could result in fines, penalties or other sanctions, or a revocation of our permits.

Blue Dolphin Energy Company

September 30, 2024 | Page 30

Notes to Consolidated Financial Statements (Continued)

Legal Matters

In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We  may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, sometimes unspecified, damages or penalties  may be sought from us in some matters, which  may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

Resolved Matters.

RLI Surety Bonds.   Blue Dolphin currently has several surety bonds through RLI as required by different regulatory agencies, including BOEM and the Railroad Commission of Texas. The bonds total approximately $1.25 million in the aggregate, of which $0.2 million is collateralized in cash. In  June,  July, and  December 2023, RLI demanded Blue Dolphin provide additional cash collateral or a letter of credit totaling approximately $1.0 million or provide bond exonerations and replacement bonds.  Although Blue Dolphin received a proposal from another surety to replace the RLI bonds at a 50% collateral requirement, management was hopeful Blue Dolphin and RLI could reach an understanding whereby the existing bonds could be maintained until BDPL completed decommissioning of the subject assets. Abandonment of BDPL’s offshore pipeline and platform assets will eliminate the need for all BOEM supplemental pipeline bonds, reducing the amount of surety bonds held by RLI from $1.25 million to $0.3 million.  On  February 19, 2024, RLI filed suit against Blue Dolphin, BDPL, and BDEX seeking an injunction for the payment of approximately $1.0 million of additional collateral for the bonds. BDPL filed its answer to RLI's lawsuit on April 23, 2024 denying RLI's claims.  On July 22, 2024, BDPL presented a settlement proposal to RLI to resolve the matter through a series of payments collateralizing the bonds with cash. On July 26, 2024, RLI informed the court that the parties reached a settlement in principle, and the parties executed a settlement agreement on September 12, 2024.  BDPL made payments to RLI under the settlement agreement in September and October 2024 of approximately $0.3 million and $0.1 million, respectively. As of the filing date of this report, BDPL was in compliance with the settlement agreement with RLI.

Pilot Dispute Related to Terminal Services Agreement. Effective  May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On  August 25, 2022, Pilot provided the 60-day notice of its intent to terminate the Terminal Services Agreement, which became effective on  October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 barrels of Pilot’s jet fuel remained at the Nixon facility.

On  October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on  October 28, 2022, Pilot’s application for the TRO was denied the same day.  On  December 2, 2022, NPS filed its answer in the Texas Action. On  December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code ("TBCC") of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by  January 7, 2023. After negotiations, NPS agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential dispute compromise pursuant to a Forbearance and Accommodation Agreement dated January 12, 2023, with a forbearance period terminating on  February 28, 2023. As part of the forbearance and accommodation agreement, Pilot paid NPS approximately $1.5 million in  January 2023. 

On  March 31, 2023, NPS and Pilot executed an Amendment to Forbearance and Accommodation Agreement, extending the forbearance period and all deadlines in the unresolved Texas Action to  June 15, 2023.  As part of amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in  April and  June 2023, respectively. The parties also negotiated the sale of all 185,000 barrels of stored jet fuel in  April 2023. On  June 16, 2023, following the expiration of the forbearance and accommodation agreement, the parties agreed to extend the deadline for responses to outstanding discovery requests in the Texas Action to  August 31, 2023. On  August 28, 2023, the parties filed a joint motion to stay the case in anticipation of planned mediation in  December 2023 to settle all outstanding disputes.

A confidential Settlement Agreement by and among LEH, NPS, LE, LRM, Lazarus San Antonio Refinery, LLC, and Blue Dolphin (together the "Lazarus Entities"), on the one hand, and Pilot, Starlight Relatively Holdings LLC, Starlight Relativity Acquisition Company LLC, Tartan, The San Antonio Refinery LLC, and Falls City Terminal LP (together, the "Pilot Entities"), on the other hand, was executed on  December 29, 2023.  Among other matters addressed, NPS's contract-related dispute related to set-off payments and LRM’s contracted-related dispute involving a revenue-sharing arrangement for storing and selling crude oil with Pilot and Tartan, respectively, were fully resolved, and the parties agreed to mutually release all claims against each other.  Further, Pilot and NPS agreed to take such actions as necessary to dismiss the Texas Action.  For the avoidance of doubt, all contractual agreements between the Lazarus Entities and Pilot Entities were terminated.

OSHA Settlement Agreement. In  September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety management violations at the Nixon refinery. Under the agreement, we paid penalties totaling $0.05 million in  November 2022. We remediated a significant portion of identified violations before  December 31, 2022. We remediated the remaining violations on a progressive schedule by  April 2023.

Unresolved Matters.

BOEM Supplemental Pipeline Bonds. To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

Blue Dolphin Energy Company

September 30, 2024 | Page 31

Notes to Consolidated Financial Statements (Continued)

Historically, BDPL maintained $0.9 million in pipeline bonds with BOEM to decommission its trunk pipeline offshore in federal waters.  In  March 2018, BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way, an increase of approximately $3.9 million.  In  June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.  Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to decommissioning its offshore pipelines and platform would likely help in future discussions with BOEM related to the INCs. Fulfilling abandonment obligations related to the subject assets will significantly reduce or eliminate the amount of supplemental pipeline bonds required by BOEM, which  may serve to partially or fully resolve the INCs.

BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose civil penalties. There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We cannot predict the outcome of the supplemental pipeline bond INCs.  Accordingly, we did not record a liability on our consolidated balance sheets as of  September 30, 2024 and  December 31, 2023.  At both  September 30, 2024 and  December 31, 2023, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI. However, as noted below, RLI desires to reduce its risk profile related to BDPL's bonds.  Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.

TCEQ Proposed Agreed Order. In  October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from  January to  March 2020.  The proposed agreed order assessed an administrative penalty of $0.4 million and identified actions needed to correct the alleged violations. In  September 2023, TCEQ presented its final penalty offer of $0.35 million, which LRM accepted. Although LRM believed the penalty matter was resolved in principle, TCEQ referred the matter to the State Office of Administrative Hearings. A preliminary hearing, the purpose of which was to set a hearing schedule, was held on August 8, 2024.  Management participated in the hearing. The next hearing is scheduled for January 2025. At  September 30, 2024, we accrued $0.4 million on our balance sheet within accrued expenses and other current liabilities related to this matter.

BSEE Civil Penalties. We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In January 2024, BSEE assessed a civil penalty of $0.2 million against BDPL for failure to complete annual platform inspections in a timely manner.  BDPL paid the civil penalty in April 2024.  In April 2024, BDPL received another civil penalty referral letter from BSEE related to INCs issued by the agency in September 2023.  Although the civil penalty referral letter noted that BSEE would provide BDPL information related to its review within 90 days from the date of its letter, as of the filing date of this report BDPL had not received any further communication related to this letter.  In August 2024, BDPL received two more civil penalty referral letters from BSEE related to INCs issued in October and November 2023. BSEE's 90-day review period related to these letters ends in late November 2024.

Default under a Secured Loan Agreement. We are currently in technical default under a secured loan agreement. See “Note (9)” to our consolidated financial statements for additional disclosures related to third-party debt, default on such debt, and the potential effects of such a default on our business, financial condition, and results of operations. If the lender exercises its rights and remedies due to the default under our secured loan agreement, our business, financial condition, and results of operations will be materially adversely affected.

(15) Subsequent Events

BDSC Office Lease

We maintain our corporate headquarters in Houston, Texas.  In October 2024, BDSC signed a new 24-month extension, the sixth amendment, to its operating lease.  The sixth amendment was deemed to be a separate contract and not a lease modification. The first two months of the lease cover the holdover period of September and October 2024 wherein management negotiated the lease with the landlord; BDSC was not subject to a holdover rate during the holdover period.  During months 3 through 12, which began on November 1, 2024, the landlord reduced the annual base rent to $29.00 per square foot.  During months 13 through 24 the annual base rent will increase to $30.00 per square foot. As additional rent, BDSC will pay a proportionate share of basic building costs (e.g., utilities) up to a maximum of $1,500 per month.  The total rental area under the sixth amendment is 9,961 square feet, an increase of 2,268 square feet to accommodate additional personnel.  Under the lease amendment, BDSC will receive an improvement allowance of $1.50 per square foot; the improvement allowance will expire six months from the lease signing date.  See "Note (15) to our consolidated financial statements for additional disclosures related to the BDSC office lease.

Affiliate Sub-Lease

In October 2024, BDSC signed a 24-month sub-lease extension with LEH for office space in Houston, Texas.  The term expires on August 31, 2026. Rent is approximately $0.003 million per month.  See "Notes (3) and (11)" to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.

Blue Dolphin Energy Company

September 30, 2024 | Page 32

   

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

The following discussion and analysis is management’s perspective of our current financial condition and results of operations, as well as significant trends that may affect future performance.  All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain.  See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.  You should read the following discussion together with the financial statements and the related notes included elsewhere in this report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Overview and Outlook

Company Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States.  Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.25 million barrels of petroleum storage tank capacity in Nixon, Texas.  Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS).  Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). Blue Dolphin formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled 83% of the voting power of our Common Stock as of the filing date of this report.  An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products.  Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates.  See “Part I, Item 1. Financial Statements– Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

Business Operations Update

During the third quarter of 2024, refining margins were less favorable compared to the third quarter of 2023. Less favorable refining margins on lower sales volumes contributed to Blue Dolphin reporting a net loss of $5.0 million, or $0.34 per share, for the three months ended September 30, 2024 (“Q3 2024”) compared to net income of $7.1 million, or $0.47 per share, for the three months ended September 30, 2023 (“Q32023”).  During the first nine months of 2024, refining margins were also less favorable compared to the first nine months of 2023. Less favorable refining margins on lower sales volumes contributed to Blue Dolphin reporting a net loss of $4.7 million, or $0.32 per share, for the nine months ended September 30, 2024 (“YTD 2024”) compared net income of $22.3 million, or $1.49 per share, for the nine months ended September 30, 2023 (“YTD 2023”).

Our full operating results for the three and nine months ended September 30, 2024 and September 30, 2023 including operating results by segment, can be found within ‘—Results of Operations.’

We used cash flow from operations of $0.1 million for Q3 2024. The use of cash flow from operations was primarily due to a buildup of inventory.  Inventory increased due primarily to unfavorable product pricing, limited opportunities for customers who export to Mexico, and an intentional buildup of inventory by us during periods of low refining margins. At September 30, 2024, we had approximately $0.7 million in cash and cash equivalents. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found within ‘—Liquidity and Capital Resources.’

Blue Dolphin Energy Company

September 30, 2024 | Page 33

Management’s Discussion and Analysis (Continued)

General Trends and Outlook

Uncertainties remain surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and the extent to which these factors may impact working capital, commodity prices, refined product demand, our supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if lenders exercise their rights and remedies under secured loan agreements that are in default, our business, financial condition, and results of operations will be materially adversely affected.

Liquidity and Access to Capital Markets

We continue efforts to improve our balance sheet. During the last eighteen months, we entered into forbearance agreements with the Kissick Noteholder and LEH related to our existing secured loan agreements, and we continue to engage with potential lenders to obtain additional funding to refinance and restructure debt. There can be no assurance that we will be able to raise additional capital on acceptable terms, if at all, or refinance existing debt. If we are unable to refinance or restructure debt, certain of which is currently in default, or forbear or waive defaults and lenders exercise their rights with respect to the debt, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to manage business disruptions, such as those experienced during the height of the COVID-19 pandemic, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Changes in Regulations

Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other greenhouse gas emissions, and renewable fuels standards. The number and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.

Business Strategy and Accomplishments

Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:

Optimize Existing Asset Base	●   Maintain safe operations and enhance health, safety, and environmental systems.
	●   Plan and manage turnarounds and downtime.
Improve Operational Efficiencies	●   Reduce or streamline variable costs incurred in production.
	●   Increase throughput capacity and optimize product slate.
	●   Increase tolling and terminaling revenue.
Seize Market Opportunities	●   Leverage existing infrastructure to engage in renewable energy projects.
	●   Take advantage of market opportunities as they arise.

Successful execution of our business strategy depends on multiple factors.  These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects.  Our business strategy involves risks.  Accordingly, we cannot assure investors that our plans will be successful.  If we are unsuccessful, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs, or otherwise reducing our cash requirements, negotiating with our creditors to restructure our applicable obligations, filing bankruptcy, or ceasing operations. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

Optimize Existing Asset Base

In late Q3 2024, management began a 10-day pre-planned turnaround to repair equipment at the Nixon Facility. Three days of the turnaround occurred in September 2024 while 7 days occurred in October 2024. On a year-to-date basis, management successfully completed two pre-planned turnarounds (13 days in May and 10 days in September and October).  Management also finished projects related to extreme weather protection, including facility improvements to add anti-icing chemical storage, upgrade the chiller system, and install a 'cool down room' for personnel, contractors, and drivers to reduce heat-related injuries.

Improve Operational Efficiencies

Work continued during Q3 2024 to significantly upgrade the Nixon facility's terminal management software.  Once complete, key elements of the plant's terminal loading functions will be automated, improving order management, bills of lading delivery, and reporting.  During YTD 2023, an additional Lease Automatic Custody Transfer (LACT) unit was also installed at the facility, which increases plant reliability and crude charge capacity.

Blue Dolphin Energy Company

September 30, 2024 | Page 34

Management’s Discussion and Analysis (Continued)

Seize Market Opportunities

Management has been working since 2021 to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on renewable energy growth. In recent years, growing public support, U.S. governmental actions to increase energy independence, and environmental concerns related to climate change have fueled demand for clean energy products, technologies, and solutions. Throughout 2023 and 2024, management has had meaningful discussions with potential commercial partners and efforts continue to find the right opportunity based on geographic suitability, existing infrastructure, market demand, technological expertise, potential for synergy with our core business, and financial viability. Reductions or modifications to, or the elimination of, governmental incentives or policies that support renewable energy or the imposition of additional taxes, tariffs, duties, or other assessments on renewable energy projects, could result in, among other things, the lack of a satisfactory market for the development and/or financing of new renewable energy projects and us abandoning the development of renewable energy projects.

Downstream Operations

Our refinery operations segment consists of the following assets and operations:

Property		Key Products Handled	Operating Subsidiary	Location
Nixon facility		Crude Oil	LE	Nixon, Texas
●	Crude distillation tower (15,000 bpd)	Refined Products
●	Petroleum storage tanks (operations support)
●	Loading and unloading facilities
●	Land (56 acres)

Crude Oil and Condensate Supply

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. On December 29, 2023, we entered a new crude supply agreement with MVP, effective January 1, 2024. This agreement provides a firm source of light-sweet Eagle Ford crude oil to the Nixon facility under improved credit terms, and management believes that MVP can provide us with adequate amounts of crude oil and condensate for the foreseeable future.  Related to the crude supply agreement, MVP stores crude oil at the Nixon facility under a terminal services agreement. At September 30, 2024, accounts payable for crude oil and condensate was $5.9 million.

During 2023, we operated under a crude supply agreement with Tartan.  Tartan also stored crude oil at the Nixon facility under a terminal services agreement.  In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the crude supply agreement and terminal services agreement. The effective date of the termination was December 31, 2023.  During Q3 2023, the vast majority of our crude was sourced from Tartan under the crude supply agreement.  At September 30, 2023, accounts payable for crude oil and condensate was $0.

Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility. If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices may increase, crude oil transportation costs could increase, and our liquidity may be reduced. Similarly, if producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations.  If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Products and Markets

Our market is the Gulf Coast region of the U.S., which is represented by the EIA as PADD 3.  We sell our products primarily in the U.S. within PADD 3.  Occasionally, we sell refined products to customers that export to other countries, such as naphtha and distillate to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2024				2023				2024				2023
	(in thousands, except percent amounts)								(in thousands, except percent amounts)
LPG mix	$	188	0.2	%	$	37	0.0	%	$	304	0.1	%	$	149	0.1	%
Naphtha		26,731	32.9	%		27,659	27.2	%		59,513	24.8	%		57,562	20.3	%
Jet fuel		31,171	38.4	%		33,060	32.5	%		84,591	35.3	%		93,824	33.1	%
HOBM		3,672	4.5	%		16,047	15.8	%		30,573	12.8	%		59,732	21.1	%
AGO		19,518	24.0	%		24,795	24.5	%		64,762	27.0	%		72,238	25.4	%
	$	81,280	100.0	%	$	101,598	100.0	%	$	239,743	100.0	%	$	283,505	100.0	%

Blue Dolphin Energy Company

September 30, 2024 | Page 35

Management’s Discussion and Analysis (Continued)

The Nixon refinery’s product slate is adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO.  An Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to the Affiliate's HUBZone certification.  The product sales agreement with the Affiliate has a one-year term with automatic renewals.  Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.

Customers. Customers for our refined products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area). An Affiliate, LEH, purchases the majority of our jet fuel.  We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products.

Competition. Most of our competitors are larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.

Safety and Downtime. We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals.  Our storage tanks are equipped with leak detection devices. We also have response and control plans in place for spill prevention and emergencies.

The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages.

We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Shutdowns for maintenance may result in lost margin opportunity, potential increased maintenance expense, and reduced refined products inventory, which could adversely impact our ability to meet our payment obligations.

Midstream Operations

Our tolling and terminaling segment consists of the following assets and operations:

Property		Key Products Handled	Operating Subsidiary	Location
Nixon facility		Crude Oil	LRM, NPS	Nixon, Texas
●	Petroleum storage tanks and terminal services	Refined Products
●	Loading and unloading facilities

Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil.  Our storage customers are typically from the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area).  Shipments are received and redelivered from the Nixon facility via third party trucks.  Contract terms range from month-to-month to three years.

Operations Safety. Our midstream operations are operated in a manner materially consistent with industry safe practices and standards.  These operations are subject to OSHA regulations and comparable state and local regulators. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies.

Blue Dolphin Energy Company

September 30, 2024 | Page 36

Management’s Discussion and Analysis (Continued)

Inactive Operations

We own other pipeline and facilities assets and have leasehold interests in oil and gas properties.  These assets are inactive.  We account for these inactive operations in ‘corporate and other.’  Our pipeline assets were fully impaired in 2016 and our oil and gas leasehold interests were fully impaired in 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and nine months ended September 30, 2024 and 2023.  See “Part I, Item 1. Financial Statements – Note (14)” related to pipelines and platform decommissioning requirements and related risks.

Property		Operating Subsidiary	Location
Freeport facility		BDPL	Freeport, Texas
●	Crude oil and natural gas separation and dehydration
●	Natural gas processing, treating, and redelivery
●	Vapor recovery unit
●	Two onshore pipelines
●	Land (162 acres)
Offshore Pipelines (Trunk Line and Lateral Lines)		BDPL	Gulf of Mexico
Oil and Gas Leasehold Interests		BDPC	Gulf of Mexico

Pipeline and Facilities Safety. Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.

Remainder of Page Intentionally Left Blank

Blue Dolphin Energy Company

September 30, 2024 | Page 37

Management’s Discussion and Analysis (Continued)

Results of Operations

Below is a discussion and analysis of the factors contributing to our consolidated financial results of operations.  This information should be read in conjunction with our financial statements in “Part I, Item 1. Financial Statements.” While management intends for the financial statements, together with the following information, to provide investors with a reasonable basis for assessing our historical operations, they should not serve as the only criteria for predicting future performance.

Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per barrel commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations.  When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher-value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally result in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes.  Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.

The general outlook for the oil and natural gas industry for the remainder of 2024 remains unclear given uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East. We can provide no assurances that refining margins will be positive and demand will increase.

How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: refinery operations segment margin (deficit), refining segment margin (deficit) per MBbls, refinery throughput, production and sales data, refinery downtime, tolling and terminaling revenue, and intercompany processing fees.  We modified our segment presentation to incorporate applicable depreciation and amortization into our cost of goods sold subtotal. We believe this provides a more complete representation of our cost of goods sold. Prior periods have been modified to conform with this presentation.

Refining Segment Margin (Deficit) per MBbls. We use refining segment margin (deficit) per MBbls as a downstream benchmark. This non-GAAP measure supplements presented GAAP financial information. Management uses refining segment margin (deficit) per MBbls to analyze our core refining results of operations, assess internal performance against forecasted amounts, and evaluate impacts on our financial performance considering potential capital investments. As this non-GAAP measure has important limitations as an analytical tool, it should not be considered a substitute for GAAP financial measures. Management believes this measure may help investors, analysts, lenders, and rating agencies analyze our results of operations and liquidity in conjunction with presented GAAP financial results.

Refinery Throughput, Production, and Sales Data. The revenue generated from the refinery operations business segment primarily depends on the crude oil volumes processed into refined products and the refined products volumes sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the direct and indirect markets served by our assets, as well as refinery downtime.

Refinery Downtime. The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Shutdowns for maintenance may result in lost margin opportunity, potential increased maintenance expense, and reduced refined products inventory, which could adversely impact our ability to meet our payment obligations.  However, management may temporarily take the refinery offline or reduce throughput to preserve margins in a weak margin environment.

Tolling and Terminaling Revenue. Tolling and terminaling revenue primarily represents storage tank rental fees and ancillary services fees (such as for in-tank blending) associated with customer tank rental agreements. As a result, combined tank rental revenue and ancillary services fees are one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.

Intercompany processing fees. We have an intercompany tolling agreement in place between LE and LRM related to naphtha throughput volumes moving through the naphtha stabilizer unit at the Nixon facility. Although intercompany transactions are eliminated during consolidation, evaluation of intercompany processing fees provides investors with helpful information related to our tolling and terminaling business segment.

Cost of operations. We manage costs and expenses in tandem with meeting environmental, safety, and regulatory requirements while maintaining the mechanical integrity of our assets. Operating costs and expenses are comprised primarily of labor, repair, other maintenance, and utility costs. Refinery operating expenses generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed and the timing of those expenses within the reporting period. Tolling and terminaling operating costs and expenses are relatively fixed.

Blue Dolphin Energy Company

September 30, 2024 | Page 38

Management’s Discussion and Analysis (Continued)

Consolidated Results

Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.

Q3 2024 Versus Q3 2023

Overview.  Net loss for Q3 2024 totaled $5.0 million, or $0.34 per share, compared to net income of $7.1 million, or $0.47 per share, in Q32023. The $12.1 million, or $0.81 per share, decrease in net income between the periods resulted from less favorable refining margins on lower sales volumes.  The Nixon refinery was down for 3 days in Q3 2024 as part of a 10-day pre-planned turnaround for equipment repairs. The Nixon refinery was down for 4 days in Q3 2023 related to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (1 day).

Total Revenue from Operations.  Total revenue from operations was $82.1 million for Q3 2024 compared to $102.6 million for Q32023, representing a decrease of 19.9%.  The decrease in total revenue from operations in Q3 2024 compared to Q3 2023 related primarily to a 20.0% decrease in refinery operations revenue and a 13.3% decline in tolling and terminaling revenue.   Refinery operations revenue in Q3 2024 decreased primarily due to lower market pricing and lower sales volumes; tolling and terminaling revenue in Q3 2024 declined primarily due to lower tank rental fees.

Total Cost of Goods Sold.  Total cost of goods sold was $85.4 million for Q3 2024 compared to $92.0 million for Q32023, representing a decrease of 7.2%. The decrease related to higher crude acquisition costs, inventory write downs of $1.9 million that were recorded as a result of recognizing inventory at the lower of cost or net realizable value.

Total Other Operating and General Administrative Expenses. Total other operating and general and administrative expenses and totaled $1.4 million in Q3 2024 compared to $1.5 million in Q32023, representing a decrease of $0.1 million.  General and administrative expenses within the category totaled $1.0 million in Q3 2024 compared to $1.1 million in Q32023, representing a decrease of 6.4%. The decrease was primarily related to lower professional fees.

Total Other Income (Expense).  Total other expense was $1.5 million in each ofQ3 2024 and Q32023. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.

	Three Months Ended September 30,
	2024			2023			2024			2023			2024			2023			2024			2023
	Refinery Operations						Tolling and Terminaling						Corporate and Other						Total
	(in thousands)
Revenue	$	81,280		$	101,598		$	1,759		$	1,886		$	-		$	-		$	83,039		$	103,484
Intercompany(1)		-			-			(930	)		(930	)		-			-			(930	)		(930	)
Total revenue from operations		81,280			101,598			829			956			-			-			82,109			102,554
Crude oil, fuel use, and chemicals		80,244			87,795			-			-			-			-			80,244			87,795
Other conversion costs		5,068			4,120			-			-			-			-			5,068			4,120
Intercompany processing fees		(930	)		(930	)		-			-			-			-			(930	)		(930	)
Tolling and terminaling costs		-			-			400			403			-			-			400			403
Depreciation and amortization		302			303			342			342			-			-			644			645
Total costs of goods sold		84,684			91,288			742			745			-			-			85,426			92,033
Other operating and general and administrative expenses(2)		507			374			69			306			844			840			1,420			1,520
Depreciation and amortization		-			-			-			-			61			54			61			54
Interest and other non-operating expenses, net		900			847			512			502			136			194			1,548			1,543
Total costs and expenses		86,091			92,509			1,323			1,553			1,041			1,088			88,455			95,150
Income (loss) before income taxes		(4,811	)		9,089			(494	)		(597	)		(1,041	)		(1,088	)		(6,346	)		7,404
Income tax benefit (expense)		-			-			-			-			1,346			(339	)		1,346			(339	)
Net income (loss)	$	(4,811	)	$	9,089		$	(494	)	$	(597	)	$	305		$	(1,427	)	$	(5,000	)	$	7,065

(1)	Fees associated with an intercompany tolling agreement related to naphtha volumes.
(2)	The LEH operating fee, related party, abandonment expense, and accretion of asset retirement obligations are included in 'other operating and general and administrative expenses' within the refinery operations business segment.

Blue Dolphin Energy Company

September 30, 2024 | Page 39

Management’s Discussion and Analysis (Continued)

YTD 2024 Versus YTD 2023

Overview. Net loss for YTD 2024 was $4.7 million, or $0.32 per share, compared to net income of $22.3 million, or $1.49 per share, for YTD 2023. The $27.0 million, or $1.81 per share, decrease in net income between the periods resulted from less favorable refining margins on lower sales volumes.  The Nixon refinery was down for 21 days in YTD 2024 relating to pre-planned maintenance turnarounds (one in May for 13 days and another one in September for 3 days), maintenance and repairs (2 days), and weather (3 days of freezing temperatures in January 2024).  The Nixon refinery was down for 11 days in YTD 2023 relating to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (8 days).

Total Revenue from Operations.  Total revenue from operations was $242.8 million for YTD 2024 compared to $288.1 million for YTD 2023, representing a decrease of 15.7%. The decrease related to declines in both refinery operations and tolling and terminaling revenue. Refinery operations revenue in YTD 2024 decreased primarily due to lower market pricing and lower sales volumes; tolling and terminaling revenue in YTD 2024 declined primarily due to lower tank rental fees.

Total Cost of Goods Sold.  Total cost of goods sold was $239.6 million for YTD 2024 compared to $256.5 million for YTD 2023, representing a decrease of 6.6%.  The decrease was related to lower sales volume. 

Total Other Operating Expenses and General and Administrative Expenses. Total other operating expenses and general and administrative expenses totaled $4.6 million in YTD 2024 compared to $4.1 million in YTD 2023, representing an increase of $0.5 million. General and administrative expenses within the category totaled $3.5 million in YTD 2024 compared to $3.2 million in YTD 2023, representing an increase of 8.2%. The increase was primarily related to an increase in professional service fees and liabilities settled associated with decommissioning our pipeline assets.

Total Other Income (Expense).  Total other expense in YTD 2024 totaled $4.4 million compared to $4.5 million in YTD 2023, representing a decrease of 3.1%. The decrease was due to lower related party interest expenses in YTD 2024 compared to YTD 2023.  Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.

	Nine Months Ended September 30,
	2024			2023			2024			2023			2024			2023			2024			2023
	Refinery Operations						Tolling and Terminaling						Corporate and Other						Total
	(in thousands)
Revenue	$	239,743		$	283,505		$	5,053		$	6,689		$	-		$	-		$	244,796		$	290,194
Intercompany(1)		-			-			(2,006	)		(2,101	)		-			-			(2,006	)		(2,101	)
Total revenue from operations		239,743			283,505			3,047			4,588			-			-
Crude oil, fuel use, and chemicals		222,176			244,927			-			-			-			-			222,176			244,927
Other conversion costs		16,299			10,491			-			-			-			-
Intercompany processing fees		(2,006	)		(2,101	)		-			-			-			-
Tolling and terminaling costs		-			-			1,220			1,216			-			-
Depreciation and amortization		904			911			1,026			1,026			-			-
Total costs of goods sold		237,373			254,228			2,246			2,242			-			-			222,176			244,927
Other operating and general and administrative expenses(2)		1,561			1,193			161			932			2,858			1,979			4,580			4,104
Depreciation and amortization		-			-			-			-			184			157			184			157
Interest and other non-operating expenses, net		2,440			2,456			1,506			1,462			408			574			4,354			4,492
Total costs and expenses		241,374			257,877			3,913			4,636			3,450			2,710			231,294			253,680
Income (loss) before income taxes		(1,631	)		25,628			(866	)		(48	)		(3,450	)		(2,710	)		(5,947	)		22,870
Income tax benefit (expense)		-			-			-			-			1,221			(612	)		1,221			(612	)
Net income (loss)	$	(1,631	)	$	25,628		$	(866	)	$	(48	)	$	(2,229	)	$	(3,322	)	$	(4,726	)	$	22,258

(1)	Fees associated with an intercompany tolling agreement related to naphtha volumes.
(2)	The LEH operating fee, related party, abandonment expense, and accretion of asset retirement obligations are included in 'other operating and general and administrative expenses' within the refinery operations business segment.

Blue Dolphin Energy Company

September 30, 2024 | Page 40

Management’s Discussion and Analysis (Continued)

Downstream Operations

Our refinery operations business segment is owned by LE.  Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land.  Refinery operations revenue is derived from refined product sales.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2024			2023		2024		2023
	(in thousands)
Refinery operations revenue	$	81,280		$	101,598	$	239,743	$	283,505
Crude oil, fuel use, and chemicals		80,244			87,795		222,176		244,927
Other conversion costs		5,068			4,120		16,299		10,491
Depreciation and amortization		302			303		904		911
Cost of goods sold		85,614			92,218		239,379		256,329
Refinery operations segment margin (deficit)		(4,334	)		9,380		364		27,176
Add: depreciation and amortization		302			303		904		911
Adjusted refinery operations segment margin (deficit)	$	(4,032	)	$	9,683	$	1,268	$	28,087
Sales (MBbls)		1,034			1,081		2,753		3,005
Refining segment margin (deficit) per MBbls	$	(4.19	)	$	8.68	$	0.13	$	9.04
Adjusted refining segment margin (deficit) per MBbls	$	(3.90	)	$	8.96	$	0.46	$	9.35

Q3 2024 Versus Q3 2023

Refinery Downtime. Refinery downtime decreased from 4 days in Q3 2023 to 3 days in Q3 2024. Refinery downtime in Q3 2024 related to a pre-planned maintenance turnaround for equipment repairs.  Refinery downtime in Q32023 related to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (1 day).

Adjusted Refinery Operations Segment Margin (Deficit). We had an adjusted refinery operations segment deficit of $4.0 million in Q3 2024 compared to adjusted segment margin of $9.7 million in Q32023, representing a decrease of $13.7 million. The decrease in Q3 2024 was related to less favorable refining margins and lower sales volume. We incurred an inventory impairment expense of $1.9 million in Q3 2024 based on high volumes of naphtha and HOBM inventory. We incurred an inventory impairment expense of $1.5 million in Q3 2023 related to naphtha inventory. 

Adjusted Refining Segment Margin (Deficit) per MBbls. On a per barrel basis, adjusted refining segment deficit was $3.90 for Q3 2024 compared to adjusted segment margin of $8.96 for Q32023, representing a decrease of $12.86 per barrel. The decrease related to less favorable refining margins and and lower sales volume in Q3 2024 compared to the same period a year earlier.

YTD 2024 Versus YTD 2023

Refinery Downtime. Refinery downtime increased from 11 days in YTD 2023 to 21 days in YTD 2024. Refinery downtime in YTD 2024 related to pre-planned maintenance turnarounds (one in May for 13 days and another one in September for 3 days), maintenance and repairs (2 days), and weather (3 days of freezing temperatures in January 2024).  Refinery downtime in YTD 2023 related to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (8 days).

Adjusted Refinery Operations Segment Margin. Adjusted refinery operations segment margin was $1.3 million in YTD 2024 compared to $28.1 million in YTD 2023, representing a decrease of $26.8 million. The significant decrease in YTD 2024 was related to less favorable refining margins and lower sales volume.  We incurred an inventory impairment expense of $7.9 million in YTD 2024 based on high volumes of naphtha and HOBM inventory and maintenance turnaround expenses.

Adjusted Refining Segment Margin per MBbls. On a per barrel basis, adjusted refining segment margin was $0.46 for YTD 2024 compared to $9.35 for YTD 2023, representing a decrease of $8.89 per barrel. The decrease related to less favorable refining margins and lower sales volume in YTD 2024 compared to the same period a year earlier.

Remainer of Page Intentionally Left Blank

Blue Dolphin Energy Company

September 30, 2024 | Page 41

Management’s Discussion and Analysis (Continued)

Midstream Operations

Our tolling and terminaling business segment is owned by LRM and NPS.  Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2024			2023			2024			2023
	(in thousands)
Tolling and terminaling revenue	$	1,759		$	1,886		$	5,053		$	6,689
Less: intercompany(1)		(930	)		(930	)		(2,006	)		(2,101	)
Total revenue		829			956			3,047			4,588
Tolling and terminaling costs		400			403			1,220			1,216
Depreciation and amortization		342			342			1,026			1,026
Cost of goods sold		742			745			2,246			2,242
Tolling and terminaling segment margin	$	87		$	211		$	801		$	2,346

⁽¹⁾ Fees associated with an intercompany tolling agreement related to naphtha volumes.

Q3 2024 Versus Q32023

Tolling and Terminaling Total Revenue. Tolling and terminaling total revenue, which consists of storage tank rental and ancillary services fees less intercompany processing fees, totaled $0.8 million in Q3 2024 compared to $1.0 million in Q32023, representing a decrease of approximately $0.1 million.  The decrease in Q3 2024 related to lower tank rental fees compared to the period a year earlier. 

Tolling and Terminaling Segment Margin.  We had tolling and terminaling segment margin of $0.1 million in Q3 2024 compared to $0.2 million in Q3 2023, representing a decrease of $0.1 million. The decrease in Q3 2024 compared to Q3 2023 related to lower tolling and terminaling total revenue.

YTD 2024 Versus YTD 2023

Tolling and Terminaling Total Revenue. Tolling and terminaling total revenue totaled $3.0 million in YTD 2024 compared to $4.6 million in YTD 2023, representing a decrease of $1.5 million.  The decrease in YTD 2024 related to lower tank rental fees. Tank rental fees in YTD 2023 included temporary terminal service fees associated with Pilot. 

Tolling and Terminaling Segment Margin.  We had tolling and terminaling segment margin of $0.8 million in YTD 2024 compared to $2.3 million in YTD 2023, representing a decrease of $1.5 million.  The decrease in YTD 2024 compared to YTD 2023 related to lower tolling and terminaling total revenue.

Blue Dolphin Energy Company

September 30, 2024 | Page 42

Management’s Discussion and Analysis (Continued)

Non-GAAP Measures

Adjusted Refinery Operations Segment Margin (Deficit).  'Adjusted Refinery Operations Segment Margin (Deficit)' is a non-GAAP financial measure used to provide management and investors with (i) important supplemental indicators of the operational performance of our business, (ii) additional criteria for evaluation of our performance relative to our peers, and (iii) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. Adjusted refinery operations segment margin (deficit) has limitations as an analytical tool and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss), gross margin, or any other measure of financial performance presented in accordance with GAAP.

We define this financial metric as follows:

Adjusted Refinery Operations Segment Margin (Deficit) – Gross margin plus non-cash depreciation of our downstream assets, plus/minus certain material non-cash and or other items that may not continue at the same level in the future.  The following table presents a reconciliation of the GAAP financial measure of gross margin to adjusted gross margin for each periods indicated (in thousands).

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2024	2023	2024	2023
	(in thousands)
Refinery operations segment margin (deficit)	$ (4,334)	$ 9,380	$ 364	$ 27,176
Add: depreciation and amortization	302	303	904	911
Adjusted refinery operations segment margin (deficit)	$ (4,032)	$ 9,683	$ 1,268	$ 28,087

Capital Resources and Liquidity

Working Capital. Certain conditions and events exist, in the aggregate, that caused management to evaluate Blue Dolphin's ability to continue as a going concern.  Those conditions and events include historical working capital deficits and significant current debt in default. Management believes that we have sufficient liquidity to meet our obligations as they become due through the generation of cash flows from operations and liquidation of current working capital amounts for a reasonable period (defined as one year from the issuance of these financial statements).  Management acknowledges that uncertainty remains related to future operating margins; however, management has a reasonable expectation of Blue Dolphin's ability to generate adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt.

We had positive working capital of $9.9 million at September 30, 2024 compared to a working capital deficit of $6.1 million at December 31, 2023, representing a $16.0 million improvement. Our significant current debt is primarily the result of bank debt to GNCU being in technical default for failure to provide standalone audited financial statements. The current portion of long-term debt on our consolidated balance sheets totaled $13.9 million and $39.4 million at  September 30, 2024 and December 31, 2023, respectively.  The $25.5 million decrease in current debt between the periods primarily related to the Veritex loans being reclassified to long-term debt, net of current portion at September 30, 2024 as a result of no longer being in default. We continue to engage with potential lenders to obtain additional funding to refinance and restructure debt and further improve working capital.

Our current assets totaled $45.3 million at September 30, 2024 compared to $49.3 million at December 31, 2023, representing a $4.0 million decrease. Our current liabilities totaled $35.4 million at September 30, 2024 compared to $55.4 million at December 31, 2023, representing a $20.0 million decrease.

Liquidity. Cash and cash equivalents totaled $0.7 million and $18.7 million at September 30, 2024 and December 31, 2023, respectively, representing a decrease of $18.0 million. A significant portion of our liquidity at September 30, 2024 was invested in inventory.  Restricted cash, current totaled $1.0 million and $0.0 at September 30, 2024 and December 31, 2023, respectively. Restricted cash, current related to a Veritex payment reserve account. Although the payment reserve account had a balance of $0.0 at December 31, 2023, the account was fully replenished on January 2, 2024.  Accounts receivable—related party, which was associated with the sale of jet fuel to LEH, totaled $6.7 million and $4.2 million at September 30, 2024 and December 31, 2023, respectively.

We generally rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Third Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations.

We continue efforts to improve our balance sheet. During the last eighteen months, we entered into forbearance agreements with the Kissick Noteholder and LEH related to our existing secured loan agreements, and we continue to engage with potential lenders to obtain additional funding to refinance and restructure debt. However, there can be no assurance that we will be able to raise additional capital on acceptable terms, or at all.

Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Similarly, capital, credit, and commodity markets, as well as armed conflicts in the Middle East and Europe continue to evolve, and the extent to which these factors may impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of confidence.  In the long term, we may not be able to manage business disruptions or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Sources and Use of Cash

Components of Cash Flow.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2024			2023			2024			2023
	(in thousands)
Cash Flows Provided By (Used In):
Operating activities	$	(117	)	$	11,214		$	(16,500	)	$	13,312
Investing activities		-			-			-			(102	)
Financing activities		702			(305	)		(535	)		(2,260	)
Increase in Cash and Cash Equivalents	$	585		$	10,909		$	(17,035	)	$	10,950

Cash Flow from Operations.  We used $0.1 million in cash flow from operations during Q3 2024 compared to generating $11.2 million in cash flow from operations during Q32023. The $11.3 million decrease in cash flow used from operations between the periods was primarily due to a buildup of inventory in Q3 2024.   Inventory increased due primarily to unfavorable product pricing, limited opportunities for customers who export to Mexico, and an intentional buildup of inventory by us during periods of low refining margins.

We used $16.5 million in cash flow from operations during YTD 2024 compared to generating $13.3 million in cash flow from operations during YTD 2023. The $29.8 million decrease in cash flow used from operations was primarily due to earning $27.0 million less in net income between the periods.

Capital Expenditures. Capital expenditures totaled $0 for Q3 2024 and YTD 2024. Capital expenditures totaled $0.1 million for both Q3 2023 and YTD 2023. Due to continued uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, we anticipate continuing to limit capital expenditures for the remainder of 2024. However, to the extent we can capitalize on green energy growth opportunities, we may finance capital expenditures through project-based government loans.

Blue Dolphin Energy Company

September 30, 2024 | Page 43

Management’s Discussion and Analysis (Continued)

We account for capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion.  We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Management determines projects based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.

Financing Activities.  During YTD 2024, Blue Dolphin made debt principal payments totaling $3.0 million.  Proceeds from related-party debt totaled $2.5 million during YTD 2024. During YTD 2023, Blue Dolphin made debt principal payments totaling $1.0 million and paid off amounts owed to LEH totaling $1.2 million related to a June 2017 promissory note, as amended, for Blue Dolphin working capital.  

Debt and Lease Obligations

Debt Agreements.

Related-Party Agreements Summary.  Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with related parties:

				Monthly Principal
		Principal		and Interest Payment
Loan Description	Parties	(in millions)	Maturity Date	(in millions)	Interest Rate	Loan Purpose
Affiliate Revolving Credit Agreement	Blue Dolphin and	$5.0 (maximum)(1)	April 2025	Set-off against	WSJ Prime + 2.00%	Working capital
	Subsidiaries			other obligations
	LEH and			owed to Lender
	Subsidiaries
BDPL-LEH Loan Agreement (in forbearance)	BDPL	$4.0	August 2018	$0.04	8.00%	Working capital
	LEH

⁽¹⁾ As of September 30, 2024, only $2.5 million was drawn.

Third-Party Agreements Summary.  Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with third parties:

					Monthly Principal
		Principal			and Interest Payment
Loan Description	Parties	(in millions)		Maturity Date	(in millions)	Interest Rate			Loan Purpose
Veritex Loans
LE Term Loan Due 2034(1)	LE	$	25.0	June 2034	$0.3	WSJ Prime + 2.75%			Refinance loan; capital improvements
	Veritex
LRM Term Loan Due 2034(1)	LRM	$	10.0	December 2034	$0.1	WSJ Prime + 2.75%			Refinance bridge loan; capital improvements
	Veritex
Kissick Debt (in forbearance)(2)	LE	$	11.7	January 2018	$0.5		6.25	%	Working capital
	Kissick Noteholder
GNCU Loan
NPS Term Loan Due 2031 (in default)(3)	NPS	$	10.0	October 2031	$0.1		5.75	%	Working capital
	GNCU
SBA EIDLs
Blue Dolphin Term Loan Due 2051 (as modified)(4)	Blue Dolphin	$	2.0	June 2051	$0.07		3.75	%	Working capital
	SBA
LE Term Loan Due 2050(5)	LE	$	0.15	August 2050	$0.0007		3.75	%	Working capital
	SBA				$0.0007
NPS Term Loan Due 2050(5)	NPS	$	0.15	August 2050	$0.0007		3.75	%	Working capital
	SBA
Equipment Loan Due 2025(6)	LE	$	0.07	October 2025	$0.0013		4.50	%	Equipment Lease Conversion
	Texas First

(1)	Restricted cash, current totaled $1.0 million and $0.0 at September 30, 2024 and December 31, 2023, respectively. Restricted cash, current reflected amounts held by Veritex in a payment reserve account, which is required to have a balance of $1.0 million.  Although the amount at December 31, 2023 was $0, the payment reserve account was fully replenished on January 2, 2024.
(2)	Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million.
(3)	Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity. First principal payment made in October 2024.
(4)	Original principal amount was $0.5 million; the principal amount increased by $1.5 million under a loan modification. Payments deferred for thirty (30) months; first payment due and paid in November 2023; interest accrues during deferral period; loan not forgivable.
(5)	Payments deferred for thirty (30) months; first payment made February 2023; interest accrued during deferral period; loan not forgivable.
(6)	In May 2019, LE entered into 12-month equipment rental agreement with option to purchase a backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility.

Blue Dolphin Energy Company

September 30, 2024 | Page 44

Management’s Discussion and Analysis (Continued)

Guarantees and Security.

Loan Description	Guarantees		Security
Veritex Loans
LE Term Loan Due 2034	●	USDA	●	First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory)
	●	Jonathan Carroll(1)	●	Assignment of all Nixon facility contracts, permits, and licenses
	●	Affiliate cross-guarantees	●	Absolute assignment of Nixon facility rents and leases, including tank rental income
			●	$5.0 million life insurance policy on Jonathan Carroll
LRM Term Loan Due 2034	●	USDA	●	Second priority lien on rights of LE in crude distillation tower and other collateral of LE
	●	Jonathan Carroll(1)	●	First priority lien on real property interests of LRM
	●	Affiliate cross-guarantees	●	First priority lien on all LRM fixtures, furniture, machinery, and equipment
			●	First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has second priority lien
			●	Substantially all assets
Kissick Debt (in forbearance)(2)	-		●	Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE
GNCU Loan
NPS Term Loan Due 2031 (in default)	●	USDA	●	Deed of trust lien on approximately 56 acres of land and improvements owned by LE
	●	Jonathan Carroll(1)	●	Leasehold deed of trust lien on certain property leased by NPS from LE
	●	Affiliate cross-guarantees	●	Assignment of leases and rents and certain personal property
BDPL-LEH Loan Agreement (in forbearance)	●	-	●	Certain BDPL property
SBA EIDLs
Blue Dolphin Term Loan Due 2051	-		●	Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
LE Term Loan Due 2050	-		●	Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
NPS Term Loan Due 2050	-		●	Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
Equipment Loan Due 2025	-		●	First priority security interest in the equipment (backhoe).

(1)

Veritex required Jonathan Carroll to personally guarantee repayment of borrowed funds and accrued interest.

(2)

Subject to the Kissick Subordination Agreement between the Kissick Noteholder and Sovereign Bank (predecessor to Veritex) dated June 22, 2015. Under the agreement, Kissick Noteholder agreed, and LE consented, to: (i) subordinate Kissick Noteholder’s right to payments in favor of Pilot and (ii) subordinate its rights to security interest and liens in favor of Sovereign (now Veritex) as holder of the LE Term Loan Due 2034.

Lease Agreements.

Office Lease.  We maintain our corporate headquarters in Houston, Texas.  In October 2024, BDSC signed a new 24-month extension, the sixth amendment, to its operating lease.  The sixth amendment was deemed to be a separate contract and not a lease modification. The first two months of the lease cover the holdover period of September and October 2024 wherein management negotiated the lease with the landlord; BDSC was not subject to a holdover rate during the holdover period.  During months 3 through 12, which began on November 1, 2024, the landlord reduced the annual base rent to $29.00 per square foot.  During months 13 through 24 the annual base rent will increase to $30.00 per square foot. As additional rent, BDSC will pay a proportionate share of basic building costs (e.g., utilities) up to a maximum of $1,500 per month.  The total rental area under the sixth amendment is 9,961 square feet, an increase of 2,268 square feet to accommodate additional personnel.  Under the lease amendment, BDSC will receive an improvement allowance of $1.50 per square foot; the improvement allowance will expire six months from the lease signing date.  See "Note (15) to our consolidated financial statements for additional disclosures related to the BDSC office lease.

An Affiliate, LEH, sub-leases a portion of the Houston office space. BDSC received sub-lease income from LEH totaling $0.01 million for both the three-month periods ended September 30, 2024 and 2023. BDSC received sub-lease income from LEH totaling $0.02 million and $0.03 million for the nine-month periods ended September 30, 2024 and 2023, respectively.

Tank Lease. LE leases tanks from Ingleside under the LE Amended and Restated Master Services Agreement. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million for both the three-month periods ended September 30, 2024 and 2023. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.9 million and $0.7 million for the nine-month periods ended September 30, 2024 and 2023, respectively.

Remainder of Page Intentionally Left Blank

Blue Dolphin Energy Company

September 30, 2024 | Page 45

Management’s Discussion and Analysis (Continued)

Outstanding Principal, Debt Issue Costs, and Accrued Interest.  Related and third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:

Outstanding Principal and Accrued Interest.

	September 30,			December 31,
	2024			2023
	(in thousands)
Veritex Loans
LE Term Loan Due 2034	$	19,072		$	19,858
LRM Term Loan Due 2034		7,968			8,260
Kissick Debt (in forbearance)		2,894			7,147
GNCU Loan
NPS Term Loan Due 2031 (in default)		9,975			9,975
LEH
BDPL-LEH Loan Agreement (in forbearance)		5,308			5,308
Affiliate revolving credit agreement		2,500			-
SBA EIDLs
BDEC Term Loan Due 2051		2,103			2,135
LE Term Loan Due 2050		159			162
NPS Term Loan Due 2050		159			162
Equipment Loan Due 2025		18			29
		50,157			53,036
Less: Long-term debt, net, current portion		(14,299	)		(39,440	)
Less: Unamortized debt issue costs		(1,794	)		(1,947	)
Less: Accrued interest payable, current portion		(1,561	)		(2,596	)
	$	32,503		$	9,053

We classified the debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 within long-term debt, current portion on our consolidated balance sheets at December 31, 2023 due to being in default; however, we re-classified the Veritex loans to long-term debt, net of current portion at September 30, 2024 as a result of the loans no longer being in default.  We classified the NPS Term Loan Due 2031 within long-term debt, current portion on our consolidated balance sheets at September 30, 2024 and December 31, 2023 due to the loan being in technical default.  The Kissick Debt fell within long-term debt, current portion on our consolidated balance sheet at September 30, 2024 compared to long-term debt, net of current portion at December 31, 2023 due to principal payments being due within the next twelve months.

Debt Issue Costs. Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:

	September 30,			December 31,
	2024			2023
	(in thousands)
Veritex Loans
LE Term Loan Due 2034	$	1,674		$	1,674
LRM Term Loan Due 2034		768			768
GNCU Loan
NPS Term Loan Due 2031 (in default)		730			730
Less: Accumulated amortization		(1,378	)		(1,225	)
	$	1,794		$	1,947

Amortization expense was $0.05 million for both the three-month periods ended September 30, 2024 and 2023. Amortization expense was $0.1 million for both the nine-month periods ended September 30, 2024 and 2023.

Blue Dolphin Energy Company

September 30, 2024 | Page 46

Management’s Discussion and Analysis (Continued)

Accrued Interest. Related-party and third-party accrued interest payable associated with long-term debt in our consolidated balance sheets, as of the dates indicated consisted of the following:

	September 30,			December 31,
	2024			2023
	(in thousands)
Kissick Debt (in forbearance)	$	-		$	2,169
LEH
BDPL-LEH Loan Agreement (in forbearance)		1,308			1,308
Veritex Loans
LE Term Loan Due 2034		46			181
LRM Term Loan Due 2034		69			70
SBA EIDLs
BDEC Term Loan Due 2051		103			135
LE Term Loan Due 2050		9			12
NPS Term Loan Due 2053		9			12
GNCU Loan
NPS Term Loan Due 2031 (in default)		17			17
		1,561			3,904
Less: Accrued interest payable, current portion		(1,561	)		(2,596	)
Long-term interest payable, net of current portion	$	-		$	1,308

Forbearance Agreements, Waivers, and Default.

Veritex Forbearance Agreements and Waivers. Under a November 2022 forbearance agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex forbearance agreement expired in September 2023, and was superseded by a first amendment. The first amendment expired in December 2023, and was superseded by a second amendment. The second amendment expired in March 2024. During each of these forbearance periods, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants.  

On July 8, 2024, LE and LRM received a confirmation letter from Veritex dated July 2, 2024 waiving all covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for calendar years 2021, 2022, and 2023. Pursuant to a letter dated June 25, 2024, the USDA approved Veritex's April 18, 2024 letter request for a waiver for the same periods. As of September 30, 2024, LE and LRM complied with all financial covenants related to their respective Veritex loans.

Kissick Payment Agreement. Pursuant to a Payment Agreement between LE and the Kissick Noteholder dated April 30, 2023, the Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to a default pertaining to previous payment violations under the Kissick Debt.  Under the terms of the Kissick payment agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid the Kissick Noteholder $1.5 million in principal and interest during both the three months ended September 30, 2024 and 2023. LE paid the Kissick Noteholder $4.4 million and $3.5 million in principal and interest for the nine months ended September 30, 2024 and 2023, respectively. As of the filing date of this report, the Kissick Debt was in forbearance related to payment violations prior to April 2023.

LEH Payment Agreement. Pursuant to the LEH Payment Agreement dated May 9, 2023, LEH agreed to forbear from exercising any of its rights and remedies related to a default pertaining to previous payment violations under the BDPL-LEH Loan Agreement.  Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million and $0.2 million in interest for the three months ended September 30, 2024 and 2023, respectively. BDPL paid LEH approximately $0.3 million in interest for both the nine months ended September 30, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to payment violations prior to May 2023.

Defaults. As of September 30, 2024 and through the filing date of this report, we were in technical default under the NPS Term Loan Due 2031 for failure to provide standalone audited financial statements for NPS, a wholly-owned subsidiary. The default may permit the lender to declare the amount owed under the related loan agreement immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under the secured loan agreement that is in default, either upon maturity or if accelerated, (ii) NPS will be able to refinance or restructure the debt, and/or (iii) the third party will provide a future forbearance or default waiver. Any exercise by lenders of their rights and remedies under secured loan agreements that are in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.  In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety.  If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Blue Dolphin Energy Company

September 30, 2024 | Page 47

Management’s Discussion and Analysis (Continued)

Concentration of Risk

Customers.

We routinely assess the financial strength of our customers.  To date, we have not experienced significant write-downs in accounts receivable balances.  We believe that our accounts receivable credit risk exposure is limited.

						Portion of
						Accounts
	Number		% Total			Receivable at
	Significant		Revenue from			September 30,
Three Months Ended	Customers		Operations			(in millions)
September 30, 2024		4		75.1	%	$	0.3
September 30, 2023		3		73.5	%	$	0.1

						Portion of
						Accounts
	Number		% Total			Receivable at
	Significant		Revenue from			September 30,
Nine Months Ended	Customers		Operations			(in millions)
September 30, 2024		3		72.5	%	$	0.3
September 30, 2023		3		72.6	%	$	0.1

One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.  The Affiliate lifts the jet fuel, which is stored at the Nixon Facility, as needed.  For the three months ended September 30, 2024 and 2023, the Affiliate accounted for 26.5% and 32.2% of total revenue from operations, respectively. For the nine months ended September 30, 2024 and 2023, the Affiliate accounted for 31.4% and 32.6% of total revenue from operations, respectively.  Accounts receivable of the Affiliate totaled $0 at September 30, 2024.

Bank Accounts.

Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor.  At September 30, 2024 and December 31, 2023, our cash balances (including restricted cash) exceeded the FDIC insurance limit per depositor by $1.2 million and $18.2 million, respectively. Instability and volatility in the capital, credit, and commodity markets, as well as with financial institutions, could adversely affect our cash balances (including restricted cash) in excess of FDIC insurance limits per depositor. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.

Regulatory Activities

BOEM -- Supplemental Pipeline Bonds. See "Part II, Item 1. Legal Proceedings —Unresolved Matters—BOEM Supplemental Pipeline Bonds." 

BSEE -- Offshore Pipelines and Platform Requirements. BDPL has pipelines and platform assets subject to BSEE's idle iron regulations. Idle iron regulations require lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

Platform Inspections.  We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In January 2024, BSEE assessed a civil penalty of $0.2 million against BDPL for failure to complete annual platform inspections in a timely manner.  BDPL paid the civil penalty in April 2024. 

Decommissioning Obligations. BOEM mandated that our pipelines and facilities assets offshore in federal waters be decommissioned due to their extended period of inactivity. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements.  Management worked with a consultant to develop a decommissioning plan, and BDPL was following the plan. BDPL completed a significant portion of the project from late December 2023 to mid-February 2024. However, due poor weather conditions that contributed to significant cost overruns, in July 2024 BDPL requested a BSEE extension to decommission the remaining portion of the Blue Dolphin Pipeline System and associated platform until the second quarter of 2025. BDPL’s request for a decommissioning extension was denied by BSEE in September 2024. Management is currently assessing the feasibility and cost of performing decommissioning work in late November or December of 2024 during off-peak weather conditions in the U.S. Gulf of Mexico and vendor availability. Separately, management is also exploring alternatives to reactivate the assets under a potential alternate Rights-of-Use and Easement (RUE).  BDPL's delay in decommissioning its offshore assets does not relieve BDPL of its obligations to comply with BSEE's mandate or of BSEE's authority to impose civil penalties. Further, there can be no assurance that BDPL will be able to complete the anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of September 30, 2024 and December 31, 2023.  At September 30, 2024 and December 31, 2023, BDPL maintained $3.0 million and $4.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.$4.5

In April 2024, BDPL received another civil penalty referral letter from BSEE related to INCs issued by the agency in September 2023.  Although the civil penalty referral letter noted that BSEE would provide BDPL information related to its review within 90 days from the date of its letter, as of the filing date of this report BDPL had not received any further communication related to this letter.  In August 2024, BDPL received two more civil penalty referral letters from BSEE related to INCs issued in October and November 2023. BSEE's 90-day review period related to these letters ends in late November 2024.

Blue Dolphin Energy Company

September 30, 2024 | Page 48

Management’s Discussion and Analysis (Continued)

Surety Bonds. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—RLI Surety Bonds."

Civil Penalties. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—BSEE Civil Penalties."

OSHA. See "Part II, Item 1. Legal Proceedings—Resolved Matters—OSHA Settlement Agreement."

TCEQ.  See "Part II, Item 1. Legal Proceedings—Unresolved Matters—TCEQ Proposed Order."

Off-Balance Sheet Arrangements

None.

Blue Dolphin Energy Company

September 30, 2024 | Page 49

Management’s Discussion and Analysis (Continued)

Accounting Standards

Critical Accounting Policies and Estimates.

Significant Accounting Policies.  Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for credit losses, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share.

Estimates. The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Although commodity price volatility, recession and inflation, armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of certainty.

We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of September 30, 2024 and through the filing date of this report.  The accounting matters assessed included, but not limited to, our allowance for credit losses, inventory, and related reserves, and the carrying value of long-lived assets.

New Accounting Standards and Disclosures

New Pronouncements Adopted.  During the three and nine months ended September 30, 2024, we did not adopt any ASUs.

New Pronouncements Issued, Not Yet Effective. 

● ASU 2023-09 — Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, requiring us to disclose specified additional information in our income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require us to disaggregate our income taxes paid disclosure by federal and state taxes, with further disaggregation required for significant individual jurisdictions. ASU 2023-09 allows for adoption using either a prospective or retrospective transition method. We will adopt ASU 2023-09 for our financial statements covering the fiscal year ending December 31, 2025.  We are currently evaluating the impact of adopting this ASU.

● ASU 2023-07 — Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). In November 2023, the FASB issued ASU No. 2023-07, requiring us to disclose significant segment expenses regularly provided to our chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require us to disclose the title and position of our CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within physical years beginning after December 15, 2024.  ASU 2023-07 allows early adoption.  We will adopt ASU 2023-07 for our financial statements covering the fiscal year ending December 31, 2024. We are currently evaluating the impact of adopting this ASU.

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Blue Dolphin Energy Company

September 30, 2024 | Page 50

Controls and Procedures

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Treasurer (principal financial officer and principal accounting officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on our evaluation, our Chief Executive Officer (principal executive officer) and Treasurer (principal financial officer and principal accounting officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three and nine months ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Remainder of Page Intentionally Left Blank

Blue Dolphin Energy Company

September 30, 2024 | Page 51

Legal Proceedings

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes.  We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

Resolved Matters

RLI Surety Bonds.   Blue Dolphin currently has several surety bonds through RLI as required by different regulatory agencies, including BOEM and the Railroad Commission of Texas. The bonds total approximately $1.25 million in the aggregate, of which $0.2 million is collateralized in cash. In June, July, and December 2023, RLI demanded Blue Dolphin provide additional cash collateral or a letter of credit totaling approximately $1.0 million or provide bond exonerations and replacement bonds.  Although Blue Dolphin received a proposal from another surety to replace the RLI bonds at a 50% collateral requirement, management was hopeful Blue Dolphin and RLI could reach an understanding whereby the existing bonds could be maintained until BDPL completed decommissioning of the subject assets. Abandonment of BDPL’s offshore pipeline and platform assets will eliminate the need for all BOEM supplemental pipeline bonds, reducing the amount of surety bonds held by RLI from $1.25 million to $0.3 million.  On February 19, 2024, RLI filed suit against Blue Dolphin, BDPL, and BDEX seeking an injunction for the payment of approximately $1.0 million of additional collateral for the bonds. BDPL filed its answer to RLI's lawsuit on April 23, 2024 denying RLI's claims.  On July 22, 2024, BDPL presented a settlement proposal to RLI to resolve the matter through a series of payments collateralizing the bonds with cash. On July 26, 2024, RLI informed the court that the parties reached a settlement in principle, and the parties executed a settlement agreement on September 12, 2024.  BDPL made payments to RLI under the settlement agreement in September and October 2024 of approximately $0.3 million and $0.1 million, respectively. As of the filing date of this report, BDPL was in compliance with the settlement agreement with RLI. 

Pilot Dispute Related to Terminal Services Agreement. Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the 60-day notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 barrels of Pilot’s jet fuel remained at the Nixon facility.

On October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the TRO was denied the same day.  On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code ("TBCC") of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After negotiations, NPS agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential dispute compromise pursuant to a Forbearance and Accommodation Agreement dated January 12, 2023, with a forbearance period terminating on February 28, 2023. As part of the forbearance and accommodation agreement, Pilot paid NPS approximately $1.5 million in January 2023. 

On March 31, 2023, NPS and Pilot executed an Amendment to Forbearance and Accommodation Agreement, extending the forbearance period and all deadlines in the unresolved Texas Action to June 15, 2023.  As part of amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all 185,000 barrels of stored jet fuel in April 2023. On June 16, 2023, following the expiration of the forbearance and accommodation agreement, the parties agreed to extend the deadline for responses to outstanding discovery requests in the Texas Action to August 31, 2023. On August 28, 2023, the parties filed a joint motion to stay the case in anticipation of planned mediation in December 2023 to settle all outstanding disputes.

A confidential Settlement Agreement by and among LEH, NPS, LE, LRM, Lazarus San Antonio Refinery, LLC, and Blue Dolphin (together the "Lazarus Entities"), on the one hand, and Pilot, Starlight Relatively Holdings LLC, Starlight Relativity Acquisition Company LLC, Tartan, The San Antonio Refinery LLC, and Falls City Terminal LP (together, the "Pilot Entities"), on the other hand, was executed on December 29, 2023.  Among other matters addressed, NPS's contract-related dispute related to set-off payments and LRM’s contracted-related dispute involving a revenue-sharing arrangement for storing and selling crude oil with Pilot and Tartan, respectively, were fully resolved, and the parties agreed to mutually release all claims against each other.  Further, Pilot and NPS agreed to take such actions as necessary to dismiss the Texas Action.  For the avoidance of doubt, all contractual agreements between the Lazarus Entities and Pilot Entities were terminated.

OSHA Settlement Agreement. In September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety management violations at the Nixon refinery. Under the agreement, we paid penalties totaling $0.05 million in November 2022. We remediated a significant portion of identified violations before December 31, 2022. We remediated the remaining violations on a progressive schedule by April 2023.

Blue Dolphin Energy Company

September 30, 2024 | Page 52

Legal Proceedings & Risk Factors

Unresolved Matters

BOEM Supplemental Pipeline Bonds. To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

Historically, BDPL maintained $0.9 million in pipeline bonds with BOEM to decommission its trunk pipeline offshore in federal waters.  In March 2018, BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way, an increase of approximately $3.9 million.  In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.  Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to decommissioning its offshore pipelines and platform would likely help in future discussions with BOEM related to the INCs. Fulfilling abandonment obligations related to the subject assets will significantly reduce or eliminate the amount of supplemental pipeline bonds required by BOEM, which may serve to partially or fully resolve the INCs.

BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose civil penalties. There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We cannot predict the outcome of the supplemental pipeline bond INCs.  Accordingly, we did not record a liability on our consolidated balance sheets as of  September 30, 2024 and  December 31, 2023.  At both  September 30, 2024 and  December 31, 2023, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI. However, as noted below, RLI desires to reduce its risk profile related to BDPL's bonds.  Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.

TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020.  The proposed agreed order assessed an administrative penalty of $0.4 million and identified actions needed to correct the alleged violations. In September 2023, TCEQ presented its final penalty offer of $0.35 million, which LRM accepted. Although LRM believed the penalty matter was resolved in principle, TCEQ referred the matter to the State Office of Administrative Hearings. A preliminary hearing, the purpose of which was to set a hearing schedule, was held on August 8, 2024.  Management participated in the hearing. The next hearing is scheduled for January 2025. At  September 30, 2024, we accrued $0.4 million on our balance sheet within accrued expenses and other current liabilities related to this matter.

BSEE Civil Penalties. We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In January 2024, BSEE assessed a civil penalty of $0.2 million against BDPL for failure to complete annual platform inspections in a timely manner.  BDPL paid the civil penalty in April 2024.  In April 2024, BDPL received another civil penalty referral letter from BSEE related to INCs issued by the agency in September 2023.  Although the civil penalty referral letter noted that BSEE would provide BDPL information related to its review within 90 days from the date of its letter, as of the filing date of this report BDPL had not received any further communication related to this letter.  In August 2024, BDPL received two more civil penalty referral letters from BSEE related to INCs issued in October and November 2023. BSEE's 90-day review period related to these letters ends in late November 2024.

Default under a Secured Loan Agreement. As of the filing date of this report, we were in technical default under the NPS Term Loan Due 2031 for failure to provide standalone audited financial statements for NPS, a wholly-owned subsidiary. If the lender exercises its rights and remedies due to the default under our secured loan agreement, our business, financial condition, and results of operations will be materially adversely affected.

ITEM 1A.  RISK FACTORS

In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC. 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.  There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Blue Dolphin Energy Company

September 30, 2024 | Page 53

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

See “Part I, Item. 1. Financial Statements – Note (9)” for disclosures related to a default on a secured loan agreement.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

Blue Dolphin Energy Company

September 30, 2024 | Page 54

Exhibits

ITEM 6.  EXHIBITS

Exhibits Index

No.	Description
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.
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.
31.2*	Bryce D. Klug Certification Pursuant to 18 U.S.C. Section 1350, as adopted to section 302 of the Sarbanes-Oxley Act of 2002.
32.2*	Bryce D. Klug Certification Pursuant to 18 U.S.C. Section 1350, as adopted to section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	Inline XBRL Instance Document.
101.SCH*	Inline XBRL Taxonomy Schema Document.
101.CAL*	Inline XBRL Calculation Linkbase Document.
101.LAB*	Inline XBRL Label Linkbase Document.
101.PRE*	Inline XBRL Presentation Linkbase Document.
101.DEF*	Inline XBRL Definition Linkbase Document.
104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

* Filed herewith

Blue Dolphin Energy Company

September 30, 2024 | Page 55

Signature Page

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BLUE DOLPHIN ENERGY COMPANY
	(Registrant)
November 14, 2024	By:	/s/ JONATHAN P. CARROLL
		Jonathan P. Carroll Chief Executive Officer, President, Assistant Treasurer, and Secretary (Principal Executive Officer)
November 14, 2024	By:	/s/ BRYCE D. KLUG
		Bryce D. Klug Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer)

Blue Dolphin Energy Company

September 30, 2024 | Page 56