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 nine months ended September 30, 2009 (the "current period"), pipeline revenues were down compared to the nine months ended September 30, 2008 (the "previous period") due to decreased volumes transported on both the Blue Dolphin Pipeline System and GA350 Pipeline. 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 12 MMcf of gas per day from eight shippers. The GA 350 Pipeline is currently transporting an aggregate of approximately 17 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 early 2010. 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 8% of capacity, the GA 350 Pipeline is currently operating at approximately 26% 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 September 30, 2009 (the "current quarter"), we reported a net loss of $321,386 compared to a net loss of $442,737 for the three months ended September 30, 2008 (the "previous quarter"). For the nine months ended September 30, 2009 (the "current period"), we reported a net loss of $2,071,644 compared to a net loss of $1,143,590 for the nine months ended September 30, 2008 (the "previous period").
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Revenue from Pipeline Operations. Revenues from pipeline operations decreased by $118,922, or 21%, in the current quarter to $442,249 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 $331,000 in the current quarter compared to approximately $468,000 in the previous quarter. Daily gas volumes transported on the Blue Dolphin Pipeline System averaged 13 MMcf of gas per day in the current quarter, down from 23 MMcf of gas per day in the previous quarter. Revenues on the GA 350 Pipeline increased to approximately $111,000 compared to approximately $93,000 in the previous quarter despite a decrease in average daily gas volumes transported of 18 MMcf of gas per day in the current quarter from 22 MMcf of gas per day in the previous quarter.
Revenue from Oil and Gas Sales. Revenues from oil and gas sales decreased by $77,839, or 65%, in the current quarter to $42,269 due to lower commodity prices and production from High Island Block 115 being shut-in. The sales mix by product was 66% gas and 34% condensate. Our average realized gas price per Mcf in the current quarter was $3.32 compared to $9.97 in the previous quarter. Our average realized condensate price per barrel was $86.75 in the current quarter compared to $140.34 in the previous quarter.
Pipeline Operating Expenses. Pipeline operating expenses in the current quarter decreased by $105,886 to $309,695 due to decreases in storage tank repairs and painting costs, salt water transportation expenses, legal fees and pump motor repairs. The decreases were partially offset by increases in crane repairs. Lease Operating Expenses. Lease operating expenses decreased by $10,979 to $29,731 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. General and administrative expenses decreased by $66,843 to $434,721 in the current quarter primarily due to a decrease in officer salaries, which was partially offset by an increase in legal fees.
Depletion, Depreciation and Amortization. Depletion, depreciation and amortization decreased by $31,327 to $133,362 in the current quarter due to a reduced value in oil and gas properties attributable to prior write-downs. Other Income. Other income increased by $104,307 due to a one year consulting agreement with Lazarus Energy Holdings, LLC.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Revenue from Pipeline Operations. Revenues from pipeline operations decreased by $298,746, or 17%, in the current period to $1,505,644 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 $1,219,000 in the current period compared to approximately $1,494,000 in the previous period. Daily gas volumes transported on the Blue Dolphin Pipeline System averaged 17 MMcf of gas per day in the current period, down from 23 MMcf of gas per day in the previous period. Revenues on the GA 350 Pipeline decreased to approximately $287,000 compared to approximately $310,000 in the previous period due to a decrease in average daily gas volumes transported of 20 MMcf of gas per day in the current period from 24 MMcf of gas per day in the previous period.
Revenue from Oil and Gas Sales. Revenues from oil and gas sales decreased by $436,901, or 80%, in the current period to $108,290 due to lower commodity prices and High Island Block 115 being shut-in as a result of changes in the production handling agreement. The sales mix by product was 84% gas and 16% condensate. Our average realized gas price per Mcf in the current period was $3.11 compared to $11.83 in the previous period. Our average realized condensate price per barrel was $72.81 in the current period compared to $118.40 in the previous period.
Pipeline Operating Expenses. Pipeline operating expenses in the current period increased by $33,783 to $1,267,416 due to an increase in crane repairs and other repairs related to damage from Hurricane Ike. The increases were partially offset by decreases in insurance, storage tank repairs, legal fees and salt water transportation costs.
Lease Operating Expenses. Lease operating expenses decreased by $95,541 to $78,436 in the current period due to decreased production from 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. General and administrative expenses increased by $93,712 to $1,790,633 in the current period primarily due to increases in compensation expense, legal fees and office expenses related to the current office lease. These increases were partially offset by a decrease in property and liability insurance.
Other Income. Other income increased by $26,390 due to a one year consulting agreement with Lazarus Energy Holdings, LLC. This increase was partially offset by a decrease in interest income.

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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources
Sources and Uses of Cash. Our primary source of cash is cash flow from operations. During the nine months ended September 30, 2009, we had negative cash flow from operations of $2,586,351, excluding working capital changes, due to low utilization of our pipeline systems, loss of oil and gas revenues attributable to natural production declines, significantly lower commodity prices and payment of a severance package. Also, as mentioned in note 7, on July 31, 2009 we loaned $2 million to Lazarus Energy Holdings, LLC. 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 September 30, 2009 was approximately $1.2 million.
The following table summarizes our change in cash flows at September 30, 2009 and 2008:

                                                September 30,       September 30,
                                                    2009                2008
    Cash flow from operations
    Loss from operations                       $    (2,071,644 )   $    (1,143,590 )
    Change in current assets and liabilities          (514,707 )         1,063,315

    Total cash flow from operations                 (2,586,351 )           (80,275 )

    Net cash outflows
    Capital expenditures                               (15,643 )          (698,972 )
    Payments on borrowings                             (97,961 )                 -

    Total cash outflows                               (113,604 )          (698,972 )


    Total change in cash flows                 $    (2,699,955 )   $      (779,247 )

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