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

† availability and cost of capital;

† actions or inactions of third party operators for properties where we have an interest;

† the risks associated with exploration;

† the level of production from our oil and gas properties;

† oil and gas price volatility;

† uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures;

† regulatory developments; and

† general economic conditions.

Additional factors that could cause actual results to differ materially from those indicated in the forward-looking statements are discussed under the caption "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2008. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date thereof. We undertake no duty to update these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the additional factors which may affect our business, including the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this quarterly report.
Executive Summary
We are engaged in two lines of business: (i) pipeline transportation services to producer/shippers, and (ii) oil and gas exploration and production. Our assets are located offshore and onshore in the Texas Gulf Coast area. Our goal is to create greater long-term value for our stockholders by increasing the utilization of our existing pipeline assets and acquiring additional strategic assets that diversify our asset base, improve our competitive position and are accretive to earnings. Although we are primarily focused on acquisitions of pipeline assets and maximizing our current facilities, we also continue to review, evaluate opportunities and acquire additional oil and gas properties. Pipeline Transportation. Although the Blue Dolphin Pipeline System added a new shipper in the three months ended March 31, 2009 (the "current quarter"), pipeline revenues were down compared to the three months ended March 31, 2008 (the "previous quarter"). Deliveries from Galveston Area Block 321 into the Blue Dolphin Pipeline System began in mid-March 2009. The Blue Dolphin Pipeline System is currently transporting an aggregate of approximately 19 MMcf of gas per day from nine shippers. The GA 350 Pipeline is currently transporting an aggregate of approximately 23 MMcf of gas per day from six shippers.

† High Island Block 115 - The B-1 well resumed production in February 2009 after being shut-in due to damage to third party onshore facilities resulting from Hurricane Ike in September 2008. We maintain a 2.5% working interest in the well.

† High Island Block 37 - The A-2 well resumed production in February 2009 after being shut-in due to damage to third party onshore facilities resulting from Hurricane Ike. We maintain a 2.8% working interest in the well.

Our pipeline assets remain significantly under-utilized. The Blue Dolphin Pipeline System is currently operating at approximately 12% of capacity, the GA 350 Pipeline is currently operating at approximately 35% of capacity and the Omega Pipeline is inactive. Production declines, temporary stoppages or cessations of production from wells tied into our pipelines or from our working and overriding royalty interests in wells in Galveston Area and High Island blocks could have a material adverse effect on our cash flows and liquidity if the resulting revenue declines are not offset by revenues from other sources. Due to our small size, geographically concentrated asset base and limited capital resources, any negative event has the potential to have a material adverse impact on our financial condition. We are continuing our efforts to increase the utilization of our existing assets and acquire additional assets that will diversify our asset base, improve our competitive position and be accretive to earnings.
Results of Operations
We reported a net loss of $1,000,009 in the current quarter compared to a net loss of $525,374 in the previous quarter.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Revenue from Pipeline Operations. Revenues from pipeline operations decreased by $33,058, or 6%, in the current quarter to $514,759 primarily as a result of decreases in gas volumes transported. Revenues from the Blue Dolphin Pipeline System decreased to approximately $424,000 in the current quarter compared to approximately $443,000 in the previous quarter. Daily gas volumes transported on the Blue Dolphin Pipeline System averaged 19 MMcf of gas per day in the current quarter, down from 21 MMcf of gas per day in the previous quarter. Revenues on the GA 350 Pipeline decreased to approximately $91,000 compared to approximately $105,000 in the previous quarter due to a decrease in average daily gas volumes transported of 22 MMcf of gas per day in the current quarter from 25 MMcf of gas per day in the previous quarter.
Revenue from Oil and Gas Sales. Revenues from oil and gas sales decreased by $108,774, or 83%, in the current quarter due to the interruption in production from High Island Block 115 and High Island Block 37 as a result of damage to third party shore facilities caused by Hurricane Ike in September 2008, as well as lower commodity prices. The sales mix by product was 95% gas and 5% condensate. Our average realized gas price per Mcf in the current quarter was $3.66 compared to $7.89 in the previous quarter. Our average realized condensate price per barrel was $42.68 in the current quarter compared to $115.45 in the previous quarter.
Pipeline Operating Expenses. Pipeline operating expenses in the current quarter increased by $50,304 to $466,260 due to increases in storage tank repairs, crane repairs and other repairs related to damage from Hurricane Ike. The increases were partially offset by decreases in salt water disposal and insurance expenses.
Impairment of Oil and Gas Properties. We recorded a full cost ceiling impairment of $203,110 for the current quarter. Under the full cost method of accounting, we are required on a quarterly basis to determine whether the book value of our oil and natural gas properties (excluding unevaluated properties) is less than or equal to the "ceiling," based upon the expected after tax present value (discounted at 10%) of the future net cash flows from our

                                                    March 31,       March 31,
                                                      2009            2008
        Cash flow from operations
        Loss from operations                       $      (557 )   $      (273 )
        Change in current assets and liabilities           254             103

        Total cash flow from operations                   (303 )          (170 )

        Cash outflows
        Capital expenditures                               (16 )             -

        Total cash outflows                                (16 )             -


        Total change in cash flows                 $      (319 )   $      (170 )

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