Summary of BLUE DOLPHIN ENERGY CO

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

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 pursuing strategic alternatives that will 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 six months ended June 30, 2009 (the "current period"), pipeline revenues were down compared to the six months ended June 30, 2008 (the "previous period"). 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 11 MMcf of gas per day from eight shippers. The GA 350 Pipeline is currently transporting an aggregate of approximately 19 MMcf of gas per day from six shippers.

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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Oil and Gas Exploration and Production.
• Galveston Area Block 321 - In September 2008, we acquired a 0.5% overriding royalty interest in an exploratory well in Galveston Area Block 321. Drilling of the well commenced in late December 2008 and continued through early January 2009. The well commenced production in mid-March 2009. Production is currently being delivered through the Blue Dolphin Pipeline System.

• 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. The B-1 well is currently shut-in due to changes in the production handling agreement. We expect production to resume in late 2009. 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 7% of capacity, the GA 350 Pipeline is currently operating at approximately 29% 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
For the three months ended June 30, 2009 (the "current quarter"), we reported a net loss of $750,249 compared to a net loss of $175,479 for the three months ended June 30, 2008 (the "previous quarter"). For the six months ended June 30, 2009 (the "current period"), we reported a net loss of $1,750,258 compared to a net loss of $700,853 for the six months ended June 30, 2008 (the "previous period").
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008 Revenue from Pipeline Operations. Revenues from pipeline operations decreased by $146,766, or 21%, in the current quarter to $548,636 primarily as a result of decreases in gas volumes transported due to natural production declines. Revenues from the Blue Dolphin Pipeline System decreased to approximately $464,000 in the current quarter compared to approximately $583,000 in the previous quarter. Daily gas volumes transported on the Blue Dolphin Pipeline System averaged 18 MMcf of gas per day in the current quarter, down from 22 MMcf of gas per day in the previous quarter. Revenues on the GA 350 Pipeline decreased to approximately $85,000 compared to approximately $112,000 in the previous quarter due to a decrease in average daily gas volumes transported of 20 MMcf of gas per day in the current quarter from 27 MMcf of gas per day in the previous quarter.
Revenue from Oil and Gas Sales. Revenues from oil and gas sales decreased by $249,478, or 85%, in the current quarter primarily due to lower commodity prices. The sales mix by product was 96% gas and 4% condensate. Our average realized gas price per Mcf in the current quarter was $3.17 compared to $10.99 in the previous quarter. Our average realized condensate price per barrel was $31.96 in the current quarter compared to $110.44 in the previous quarter. Pipeline Operating Expenses. Pipeline operating expenses in the current quarter increased by $89,365 to $491,461 due to an increase in repairs related to damage from Hurricane Ike. The increases were partially offset by decreases in storage tank repairs and insurance expenses.
Lease Operating Expenses. Lease operating expenses decreased by $82,420 in the current quarter due to decreased production.

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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations General and Administrative Expenses and Stock Based Compensation. These expenses increased by $129,526 to $691,074 in the current quarter primarily due to increases in compensation expense, legal fees and office expense. These increases were partially offset by a decrease in property and liability insurance.
Other Income. Other income decreased due to a decrease in interest income of $24,332 in the current quarter. Interest income decreased because of decreases in both the amount of available funds and the interest rate earned on those funds.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008 Revenue from Pipeline Operations. Revenues from pipeline operations decreased by $179,824, or 15%, in the current period to $1,063,395 primarily as a result of decreases in gas volumes transported due to natural production declines. Revenues from the Blue Dolphin Pipeline System decreased to approximately $888,000 in the current period compared to approximately $1,026,000 in the previous period. Daily gas volumes transported on the Blue Dolphin Pipeline System averaged 18 MMcf of gas per day in the current period, down from 21 MMcf of gas per day in the previous period. Revenues on the GA 350 Pipeline decreased to approximately $176,000 compared to approximately $217,000 in the previous period due to a decrease in average daily gas volumes transported of 21 MMcf of gas per day in the current period from 26 MMcf of gas per day in the previous period.
Revenue from Oil and Gas Sales. Revenues from oil and gas sales decreased by $358,252, or 84%, in the current period 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 period was $3.47 compared to $9.50 in the previous period. Our average realized condensate price per barrel was $44.28 in the current period compared to $116.83 in the previous period.
Pipeline Operating Expenses. Pipeline operating expenses in the current period increased by $139,669 to $957,721 due to an increase in storage tank repairs, crane repairs and other repairs related to damage from Hurricane Ike. The increases were partially offset by decreases in insurance and chemical expenses. Lease Operating Expenses. Lease operating expenses decreased by $84,562 in the current period due to decreased production of our producing properties. Impairment of Oil and Gas Properties. We recorded a full cost ceiling impairment of $203,110 for the current period. 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 proved reserves, calculated using prevailing oil and natural gas prices on the last day of the period, or a subsequent higher price under certain circumstances. Any excess of the net book value of our oil and natural gas properties over the ceiling must be recognized as a non-cash impairment expense. Our ceiling was calculated using prices of $47.19 per barrel of oil and $3.65 per MMbtu. Accordingly, at March 31, 2009, our costs exceeded our ceiling limitation, resulting in a write-down of our oil and natural gas properties.
General and Administrative Expenses and Stock Based Compensation. These expenses increased by $160,555 to $1,355,912 in the current period primarily due to increases in compensation expense, consulting fees and office expense. These increases were partially offset by a decrease in property and liability insurance.
Other Income. Other income decreased due to a decrease in interest income of $77,917 in the current period. Interest income decreased because of decreases in both the amount of available funds and the interest rate earned on those funds. Liquidity and Capital Resources
Sources and Uses of Cash. Our primary source of cash is cash flow from operations. During the six months ended June 30, 2009, we had negative cash flow from operations of $1,101,482, excluding working capital changes, due to low utilization of our pipeline systems, loss of oil and gas revenues attributable to Hurricane Ike, significantly lower commodity prices and payment of a severance package.

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                   BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
Currently, we do not enter into any hedges or any type of derivatives to offset
changes in commodity prices. We also do not have any outstanding debt or a
credit facility with a bank or institution that may restrict us from issuing
debt or common stock. Available cash at June 30, 2009 was approximately
$2.7 million.
The following table summarizes our change in cash flows at June 30, 2009 and
2008 (in thousands):

                                                    June 30,       June 30,
                                                      2009           2008

         Cash flow from operations
         Loss from operations                       $  (1,085 )   $     (212 )
         Change in current assets and liabilities         (16 )         (123 )

         Total cash flow from operations               (1,101 )         (335 )

         Net cash inflows
         Capital expenditures                             (16 )         (364 )

         Total cash outflows                              (16 )         (364 )


         Total change in cash flows                 $  (1,117 )   $     (699 )

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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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES