Overview

You should read the following discussion and analysis together with our consolidated financial statements and notes thereto and the discussion Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" and Item 1A. "Risk Factors" included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2007. The following information contains forward-looking statements that involve risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See "Disclosure Regarding Forward-Looking Statements" below.

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

We maintain a Peruvian subsidiary through our wholly-owned subsidiary BPZ Energy, Inc., a Texas corporation ("BPZ - Texas"). Currently, we have exclusive rights and license agreements for oil and gas exploration and production covering a total of approximately 2.4 million acres, in four blocks, in northwest Peru. The license contracts cover 100% ownership of Block Z-1 (739,205 acres), Block XIX (472,860 acres), Block XXII (948,000 acres) and Block XXIII (248,000 acres). The Block Z-1 contract was signed in November 2001, the Block XIX contract was signed in December 2003 and Blocks XXII and XXIII contracts were both signed in November 2007. Our license contracts provide for an initial exploration period of seven to thirteen years for Block Z-1 and seven to ten years for Blocks XIX, XXII and XXIII. In addition, the contracts require that we conduct specified activities on the properties during this period. If the exploration activities are successful, the total contract term can extend up to 30 years for oil exploration and production and up to 40 years for gas exploration and production.

In addition, through our wholly-owned subsidiary, SMC Ecuador Inc., a Delaware corporation, and its registered branch in Ecuador, it owns a 10% non-operated working interest in an oil and gas producing property, Block 2, located in the southwest region of Ecuador (the "Santa Elena Property"). The license agreement covering the property extends through May 2016.

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

Oil Development

Corvina Field

We started producing oil from our recent discoveries at the CX-11 platform, located in the Corvina Field in its offshore Block Z-1, under an extended well testing program which began on November 1, 2007. The Corvina field consists of 47,000 acres in water depths of less than 200 feet. We are currently concentrating our drilling efforts on West Corvina, which consists of 3,500 acres and we have completed a total of three oil producing wells, the CX11-21XD, the CX11-18XD and the CX11-14D. The oil is delivered by barge to the Petroperu refinery in Talara, located approximately 100 miles south of the platform. The remainder is kept in production inventory until such time it is delivered to the refinery.

On October 24, 2007, our former primary marine transportation contractor entered into two short-term agreements with the commercial division of the Peruvian Navy to lease two tankers to transport oil to market. On January 30, 2008, one of the tankers, the Supe, sank after catching fire. At the time of the incident, the tanker contained approximately 1,300 barrels of oil, most of which burned in the fire. No Company employees were injured. Official environmental impact assessments concluded that environmental issues have been adequately controlled. Even though no civil claims have been asserted against us as a result of the Supe incident, we believe that we, as a contracting party, and our third party marine contractor, as the time charterer of the Supe, may have limited exposure to civil liability resulting from the Supe incident. However, we consider any such liability to be remote and that such limited exposure, while unknown at this time, will not have a material effect on our financial statements. Consequently, the contract with the commercial branch of the Peruvian Navy was allowed to expire in March 2008. We have not entered into any new contracts with the Peruvian Navy. As a result of the incident, our operations were voluntarily suspended at the CX-11 platform.

On March 14, 2008, we were notified by the Organismo Supervisor de la Inversión en Energía y Mineria ("OSINERGMIN"), the government regulatory agency in Peru responsible for monitoring industrial safety, that we could resume drilling and testing operations at the CX-11 platform and as a result, we began testing the CX11-18XD well. Three drill stem tests were conducted in the Upper Zorritos formation. The first two drill stem tests targeted the lower sands in zones that had not previously been tested. The third drill stem test targeted sands that had tested oil in our CX11-21XD well. We began producing from the 18XD well in May 2008 and, on June 9, 2008, we received the clearance needed to transport oil from the CX-11 platform to the nearby Talara refinery by the corresponding Peruvian environmental agency. In addition, our floating production storage and offloading ("FPSO") vessel was placed in position near the CX-11 platform and is currently receiving production from the platform.

Upon completion of the CX11-18XD well referred to above, we spudded the CX11-20XD well in May 2008. The CX11-20XD well is positioned higher up the geologic structure from the CX11-21XD well. The well has been positioned to further develop the top gas sands found in the previously drilled 21XD well, the oil sands currently producing in the 21XD and 18XD wells, the oil sands encountered and briefly tested in the 18XD well during the initial drill-stem test number one, as well as sands found in the 14D well. The well tested positive for oil in quantities that we believe to be commercially producible. We completed two drill stem tests on four sets of oil sands in the well. Currently, we intend to complete the CX11-20XD well as an oil-producing well under the extended well testing program currently ongoing at the Corvina field. However, because the well crosses sands which tested positive for what we believe to be economic quantities of gas in both the 21XD and 18XD wells, we intend to re-complete the CX11-20XD well to allow the well to produce both gas and oil when the gas is needed for our gas-to-power project.

We intend to spud the CX11-15D well by mid-November 2008. We expect this well to take approximately 90 days to reach total depth, and to be tested and completed in early 2009. The 15D well represents the final well to be drilled from the CX-11 platform under the initial Corvina drilling program. Upon completion of the CX11-15D well, we intend to focus our drilling efforts on the Albacora Field.

Albacora Field

The Albacora Field is located in the northern part of our offshore Block Z-1. It consists of approximately 6,000 acres and, like the Corvina Field, Albacora is located in water depths of less than 200 feet. Once the drilling rig has been moved from Corvina and set in place the Albacora A-1 platform which is currently being refurbished, we plan to drill the A-14XD well, a twin well to Albacora's discovery well to the Albacora 8-X-2 discovery well. The first well in Albacora will qualify will qualify as an exploratory well as we plan on testing the prospective Lower Zorritos formation sands. The 8-X-2 discovery well, drilled 35 years ago, tested oil and gas in the upper Zorritos formation sands at quantities we believe to be commercially producible. Our initial drilling plans in Albacora are to drill at least six new wells and then recomplete three oil wells currently shut-in at the A-1 platform.

Gas-to-Power Project

The Corvina Gas-to-Power project entails the installation of a 10-mile gas pipeline from the CX-11 platform to shore, construction of gas processing facilities and an approximately 135 megawatt ("MW") simple-cycle electric generating plant. The proposed power plant site is located adjacent to an existing substation and power transmission lines which, with certain upgrades, are expected to be capable of handling up to 360 MW of power. In order to support our proposed electric generation project, we commissioned an independent power market analysis for the region. The Peruvian electricity market is deregulated and power is transported through an interconnected national grid managed by the Committee for Economic Dispatching of Electricity (known as COES). Based on this study, we believe we will be able to sell economic quantities of electricity from the initial 135 MW power plant. The market study also indicates that there may be future opportunities for us to generate and sell significantly greater volumes of power into the Peruvian and possibly Ecuadorian power markets. Our plan is to own 100% of the power plant. Accordingly, our revenues from the natural gas delivered to the power plant will be derived from the sale of electricity, which is currently projected to commence mid 2010, though this schedule is subject to many factors outside our control, including obtaining all necessary financing and equipment. No assurance can be given that we can meet this schedule.

We are currently working on securing and finalizing funding for our gas to power initiatives comprised of approximately $120 million of senior debt to be syndicated by the International Finance Committee ("IFC"), which is expected to close by mid 2009. This financing will be subject to identification of the lending syndicate members and subsequent negotiation and approval of the necessary loan documentation.

On September 26, 2008, we entered into a $51.5 million contract, through its subsidiary Empresa Eléctrica Nueva Esperanza, SRL, for purchase of equipment and services (the "Agreement") with GE Packaged Power, Inc. and GE International, Inc. Sucursal de Peru, which are part of GE Energy's aeroderivative business. The Agreement obligates us to purchase three LM6000 gas-fired turbines, with an option to purchase a fourth unit, and required an initial down payment of $5.1 million. Monthly progress payments of $1.1 million will commence in October 2008 for the first unit, $2.3 million in November 2008 for both the first and second units, $3.4 million in December 2008 through September of 2009 for all three units, $2.3 million in October of 2009 for two units and $1.1 million in November of 2009 for the final unit. A final payment of $1.7 million per unit ($5.1 million total) is due five days after the issuance of the seller's Notice of Readiness to Ship for each unit. The contract also contains an option to purchase one additional unit for $18.2 million. Each turbine will have a generation capacity of 45 megawatts, with excess capacity of approximately 5%. Delivery of the three units is scheduled for the fourth quarter 2009. See "Liquidity, Capital Resources and Capital Expenditures" for further detail regarding the Agreement.

Initially, we expect that funding of payments due under the Agreement may come from an on-lending arrangement (loans between our subsidiaries) contained in the $215 million reserve-based lending facility. After the $120 million project financing mentioned above is closed and funded as expected, any amounts borrowed under the on-lending arrangement from the $215 million reserve-based lending facility will be repaid from those proceeds. For a more detailed description of the on-lending arrangement from the $215 million reserve-based lending facility, see Note 9, "Long-Term Debt and Capital Lease Obligations".

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

On June 26, 2008, we entered into a Memorandum of Understanding ("MOU") with Shell Exploration Company (West) B.V. ("Shell"). This non-binding MOU establishes the basis for both parties to move forward with negotiations for a possible joint venture agreement with the ultimate goal of jointly developing Blocks Z-1, XIX and XXIII in Northwest Peru into large-scale oil and gas ventures, including regional power generation, gas supply for local and regional industry, and liquefied natural gas ("LNG"). Our purpose in considering forming a joint venture is to complement BPZ's assets, local knowledge and experience, stakeholder relationships, and vision with Shell's technology, equipment, manpower and leadership, especially in gas marketing.

The purpose of the joint venture would be to accelerate the exploration of Blocks Z-1, XIX and XXII. In addition, we would expect an agreement that includes, but is not limited to, the following fundamental features:

†          An unincorporated joint venture in Blocks Z-1, XIX and XXIII.



†          BPZ would be the operator of record in the three blocks mentioned
above.

† BPZ would initially retain 100% of the oil and gas assets in the Corvina, Delfin and Mero fields as well as 100% of the oil assets in the Albacora field, (the "Carved-out areas") to enable BPZ to appraise the Carved-out areas. Shell would have the option to buy a 50% interest in any one of these four Carved-out areas, beginning in July 2012 and

ending at an agreed time, at prevailing market prices. Additionally, Shell would join with BPZ to refurbish the platform and drill the first well in Albacora. BPZ would retain 100% of the potential oil assets and 50% of the potential gas assets discovered in Albacora until such time Shell elects to exercise its option to buy the remaining 50% interest in the potential oil assets.

† BPZ would retain its 100% ownership of its planned gas-to-power project, subject to Shell's option to buy a 50% interest in the project at a later date.

† Shell would commit to a three-phase exploration and appraisal program for up to approximately $300 million. Shell has the option to exit at the end of each phase. If Shell exercises its option to exit at the end of any phase, the respective participation would revert back to BPZ at no cost. The work program would be focused on appraising the Mancora gas formation found in Blocks Z-1, XXIII and XIX and the deepwater prospects in Block Z-1, as well as other prospects, thus enhancing BPZ's ability to fulfill its commitments mandated by the license contracts covering Blocks Z-1, XIX and XXIII. This program would primarily consist of 2-D and 3-D seismic surveys in Blocks XXIII and Z-1, respectively, and the drilling of approximately 12 new wells. Shell and BPZ would share costs equally after the initial $300 million program.

† Any future oil and/or prospective gas production, excluding that acquired from the Carved-out areas, would be shared by both parties.

† In case sufficient gas is discovered to warrant a LNG project, BPZ and Shell would form a joint venture to develop the project, with Shell serving as the operator.

However, both parties have agreed that under no circumstance will an agreement be finalized for the acquisition of the Company's rights in the three blocks until all necessary board of director, management and government approvals have been obtained and fully defined agreements have been negotiated and executed by both parties or their respective affiliated companies. Negotiations on the agreement with Shell are underway. No assurances can be made that such an agreement will be finalized and consummated.

Results of Operations



Revenue



            For the three months ended        For the nine months ended
                   September 30,                    September 30,
                   2008             2007            2008             2007
Revenue   $           33,440,330    $   -   $          44,843,046    $   -

We began producing oil on a limited basis in November 2007 from the CX11-21XD and 14D wells in the Corvina Field under an extended well testing program. During the second quarter 2008, we added production from the 18XD well under the extended well testing program. The oil is delivered by barge to the Petroperu refinery in Talara, located approximately 100 miles south of the platform. The remainder is kept in production inventory until we increase the inventory quantities to a sufficient level that the refinery in Talara will accept delivery. We have entered into two contracts for the sale of oil to Petroperu since we began oil production in November 2007. The first contract was for the sale of up to 200,000 barrels of oil to the refinery in Talara. The contract was fulfilled in June 2008. The current sales contract with Petroperu is for the deliver of up to 400,000 barrels of oil to the Talara refinery. Similar to the first sales contract, the current sales contract is based on Northwest Oil Basket pricing which is comprised of Oman, Fortes and Suez Blend pricing. The unadjusted sales price is based on the past five-day average before the crude oil delivery date. The price is then discounted for the quality of the oil delivered. The determination of quality is based on the gravity of the oil expressed in degrees, as determined under standards established by the American Petroleum Institute ("API"). The price is discounted at a rate of 0.53% of the basket price per one degree API lower than the benchmark of 33 degrees API as stipulated in the contract. In addition a fixed premium of $0.75 per barrel is added to the price as a result of the high diesel content of the crude oil.

Royalties are calculated by Perupetro as stipulated in the Block Z-1 license agreement based on the same Northwest Oil Basket. However, their calculation is based on the past two week average price before the crude oil delivery date, as opposed to being based on the past five-day average price before the crude oil delivery date.

The Corvina wells were voluntarily shut-in as a result of the barge incident on January 30, 2008. Production resumed in full on June 9, 2008, as a result of receiving the clearance needed to transport oil from the CX-11 platform to the

nearby Talara refinery by the corresponding Peruvian environmental agency. In addition, our FPSO vessel was placed in position near the CX-11 platform and began receiving production from the platform during the second quarter ended June 30, 2008.

During the three and nine months period ended September 30, 2008, we produced approximately 329,090 barrels and 455,841 barrels, respectively. We sold approximately 322,171 barrels and 437,243 barrels during the three and nine months ended September 30, 2008 at an average price, net of royalties, of approximately $103.80 per barrel and $102.56, respectively. In January 2008, we incurred production and transportation delays due to the incident involving one of the Peruvian Navy tankers being used to transport oil to market. 1 "Oil Development - Corvina Field" above for a more detailed discussion of the incident. Approximately 1,300 barrels of oil were lost in the fire aboard the tanker. The cost of the crude oil lost was approximately $62,000 and was expensed through lease operating expense and depreciation, depletion and amortization.

We had no oil sales during the three and nine months ended September 30, 2007.

Operating Expenses



                              For the three months ended          For the nine months ended
                                    September 30,                       September 30,
                                2008              2007              2008             2007
General and
administrative             $    10,406,515    $   5,574,985    $   28,644,083    $  12,437,516
Lease operating expense          3,582,490                -         6,942,112                -
Geological, geophysical
and engineering                    210,731        1,955,155           507,342        3,925,406
Depreciation, depletion
and amortization                 5,673,404           56,651         7,946,772          163,437
Total operating
expenses                   $    19,873,140    $   7,586,791    $   44,040,309    $  16,526,359

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

General and administrative costs have increased from $5,574,985 and $12,437,516 during the three and nine month period ended September 30, 2007, respectively, to $10,406,515 and $28,644,083, during the three and nine month period ended September 30, 2008, respectively. Included in general and administrative expenses is stock-based compensation expense. The increase was due to Stock-based compensation expense for the three and nine months ended September 30, 2008 was approximately $4,959,553 and $13,419,317 compared to $2,811,352 and $4,712,874 during the same period ended September 30, 2007. Stock based compensation expense is primarily related to our restricted stock grants, and accrued stock-based compensation under our 2007 Long-Term Incentive Plan and 2007 Directors Compensation Incentive Plan. We use equity incentives to attract and retain key personnel. In addition, the remaining increase in general and administrative is a result of the addition of necessary personnel to support our increased activity levels.

We incurred lease operating expense during the three and nine months ended September 30, 2008 of $3,582,490 and $6,942,112, respectively, due to the commencement of oil production. This amount includes approximately $38,000 related to the cost of the approximately 1,300 barrels of oil that was lost as a result of the tanker incident. As mentioned previously, we had no oil production during the nine months ended September 30, 2007 and therefore no lease operating expense during the same period.

Geological, geophysical and engineering cost for the three months ended September 30, 2008 as compared to the same period ended September 30, 2007 decreased significantly from $1,955,155 to $210,731, respectively, and from $3,925,406 to $507,342 for the nine month period ended September 30, 2007 and September 30, 2008, respectively. The decrease is primarily due to performing 200 kilometers of 2-D seismic in Block XIX during the quarter ended September 30, 2007 in accordance with the Block XIX License Contract.

Depreciation, depletion and amortization increased significantly from $56,651 and $163,437 during the three and nine months ended September 30, 2007, respectively, to $5,673,404 and $7,946,772 during the three and nine months ended September 30, 2008, respectively, primarily due to depletion expense generated by oil production in the Corvina Field. This amount includes approximately $24,000 related to the cost of the approximately 1,300 barrels of oil that was lost as a result of the tanker incident.

We received net cash distributions from our investment in Ecuador property of approximately $200,000 and $800,000 during the three and nine months ended September 30, 2008, respectively, compared to net cash distributions of approximately

$242,844 and $250,797 duringthe three and nine months ended September 30, 2007, respectively. Since our investment consists of an interest in a producing oil and gas property, we are amortizing the investment on a straight-line basis over the remaining term of the license agreement covering the property. Accordingly, we recorded $46,896 and $140,688 of amortization expense during the three and nine months ended September 30, 2008, respectively, and the same amounts during the three and nine months ended September 30, 2007.

We capitalized interest expense of $892,727 and $2,901,982 during the three and nine months ended September 30, 2008, respectively, primarily related to our capital lease obligations and the IFC convertible debt. We incurred interest expense of approximately $2,939 and $4,104 during the three and nine months ended September 30, 2007, respectively.

We received interest income of approximately $10,005 and $206,499 during the three and nine months ended September 30, 2008, respectively, as compared to $256,557 and $754,304 during the three and nine months ended September 30, 2007, respectively, as a result of the increased cash balances during the three and nine months ended September 30, 2007 due to lower operating expenses.

Other income and (expense) increased from $(17,730) and $27,059 during the three and nine months ended September 30, 2007, respectively, to $(68,146) and $155,847 for the three and nine months period ended September 30, 2008 respectively. The increase for the three and nine months ended September 30, 2008, is mostly due to realized foreign exchange rate loss of approximately $58,147 and an exchange rate gain of approximately $165,637, respectively. The exchange rate gain is primarily related to the early recovery of IGV or Value Added Taxes in Peru. IGV under the early recovery program is denominated in the Peruvian Nuevo Sol currency. However, the total gain during the nine months ended September 30, 2008 was partially offset in the third quarter by Nuevo Sol denominated accounts payable being settled during the quarter. A net foreign currency gain was realized due to the strengthening of the Nuevo Sol against the US Dollar. See Item 3. Quantitative and Qualitative Disclosures About Market Risk, "Foreign Currency Exchange Rate Risk" for a more detailed discussion.

We recognized a total tax provision for the three and nine months ended September 30, 2008 of approximately $5,050,821 and $5,291,401, respectively, compared to tax gain of $11,301 and a tax loss of $39,001 for the same periods ended September 30, 2007. The difference is primarily due to oil sales from our production in Block Z-1 during the three months ended September 30, 2008. We are subject to Peruvian income tax on our earnings at a statutory rate, as defined in the Block Z-1 License Contract, of 22%. Because we are under an extended well testing program from which we will finalize a development plan for Block Z-1 we have not moved into the commercial phase of production as defined by the license contract. As such, certain deductions are disallowed by the Peruvian tax regime while the Company operates under the extended well testing program. In addition, the tax provision amount is based on taxable Peruvian . . .