BLUE DOLPHIN ENERGY CO - Annual Report: 2011 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2011

or

For the transition period from                 to                .

Commission File No. 0-15905

BLUE DOLPHIN ENERGY COMPANY

(Exact name of registrant as specified in its charter)

(713) 568-4725

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this    Form 10-K.  ¨

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

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

Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2011 was approximately $3,436,139 million based on the closing price of $3.01 per share on the NASDAQ Capital Market.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the registrant’s definitive proxy statement for its 2012 Annual Meeting of Stockholders, which is to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, under the Securities and Exchange Act of 1934 within 120 days of the registrant’s fiscal year ended December 31, 2011, are incorporated by reference in Part III of this report.

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BLUE DOLPHIN ENERGY COMPANY

FORM 10-K REPORT INDEX

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CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION

FOR THE PURPOSE OF “SAFE HARBOR” AS DEFINED IN THE

SECURITIES ACT OF 1933, AS AMENDED,

AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

This annual report on Form 10-K of Blue Dolphin Energy Company (referred to herein, with its predecessors and subsidiaries, as “Blue Dolphin,” “we,” “us” and “our”) contains forward-looking statements that are based on management’s current expectations, estimates and projections related to Blue Dolphin’s operations, the energy industry and other-related industries. Words such as “expect,” “plan,” “believe,” “anticipate,” “project,” “estimate” and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond Blue Dolphin’s control and are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. It is not possible to identify all of these risks, uncertainties or assumptions. Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are: realization of anticipated benefits of acquired operations; volatility of refining margins; market acceptance of our refined products; performance of third-party operators; potential downtime for maintenance and repairs; environmental costs and liabilities associated with our operations; related party transactions and ownership; continued declines in throughput volumes and production rates from our U.S. Gulf of Mexico leasehold properties; our ability to offset revenue from one key customer; our ability to generate sufficient funds from operations or obtain financing from other sources; changing crude oil or natural gas prices; changes in reserve estimates; local and regional events that may negatively affect our assets; competition from larger companies; acquisition opportunities; operating hazards; insurance coverage limitations; retention and recruitment of key employees; compliance with environmental and other regulations; the effects of greenhouse gas emissions regulation; and the factors set forth under the heading “Risk Factors” in Item 1A of this report, as well as disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report. Other unpredictable or unknown factors not discussed in this report could also have material adverse effects on forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Blue Dolphin undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

On February 15 2012, we acquired Lazarus Energy, LLC, a Delaware limited liability company (“LE”) pursuant to a merger that has the potential to expand the size and scope of our business (the “Acquisition”). Except as otherwise noted, the description of our business contained in this Item 1 refers to the business of Blue Dolphin and its consolidated subsidiaries on a pre-acquisition basis. Further, the financial results contained in this report, which is for the twelve month period ended December 31, 2011, do not include any results from our crude oil and condensate processing operations which we acquired as part of the Acquisition.

The Company

Blue Dolphin, a Delaware corporation formed in 1986, manages the investments and conducts the operations of its wholly-owned subsidiaries. At December 31, 2011, Blue Dolphin operated two lines of business through its subsidiaries: (i) pipeline transportation services to producers/shippers and (ii) oil and gas exploration and production.

At December 31, 2011, Blue Dolphin’s subsidiaries were as follows:

Our principal executive office is located at 801 Travis Street, Suite 2100, Houston, Texas, 77002, and our telephone number is (713) 568-4725. At December 31, 2011, we had five (5) full-time employees at locations in Freeport and Houston, Texas and regularly used the services of one (1) consultant. Our common stock, par value $0.01 per share (“Common Stock”) is publicly traded on the OTCQX U.S. Premier under the ticker symbol “BDCO” Our corporate website address is http://www.blue-dolphin.com.

Certain terms that are commonly used in the oil and gas industry, including terms that define our rights and obligations with respect to our interests in properties, are defined in the “Glossary of Certain Oil and Gas Terms” of this report.

Recent Developments

Acquisition of Lazarus Energy, LLC (“LE”). As previously reported, we entered into a Purchase and Sale Agreement (the “PSA”) with Lazarus Energy Holdings, LLC, a Delaware limited liability company (“LEH”) and LEH’s wholly-owned subsidiaries to acquire one hundred percent (100%) of the issued and outstanding membership interests of LE, (the “Acquisition”). LE’s primary asset is a 56-acre crude oil processing facility, located near Nixon, Texas (the “Nixon Facility”). On February 15, 2012, we consummated the Acquisition and issued, in reliance on the exemption provided by Section 4(2) of the Securities Act 8,393,560 shares of Common Stock, subject to anti-dilution adjustments, to LEH as consideration for LE (the “Original BDEC Shares”). Additionally, on February 21, 2012, pursuant to the anti-dilution provisions contained in the PSA, and in reliance on the exemption provided by Section 4(2) of the Securities Act, we issued 32,896 shares of Common Stock to LEH (the “Anti-Dilution Shares” and together with the Original BDEC Shares, the “BDEC Shares”) effective February 15, 2012. As a result of our issuance of the BDEC Shares, LEH currently owns eighty percent (80%) of our issued and outstanding Common Stock. The issuance of the BDEC Shares to LEH resulted in a change in control of Blue

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Dolphin. Further, pursuant to the terms of the PSA, the composition of Blue Dolphin’s Board of Directors (the “Board”) and management changed. The Acquisition will be accounted for as a “reverse acquisition” in which LE is deemed to be the “Acquirer” and accounting predecessor and Blue Dolphin is deemed to be the “Acquiree.” Following the Acquisition, the combined company will continue to operate under the name Blue Dolphin Energy Company. See our Current Reports on Form 8-K filed with the Securities and Exchange Commission on July 22, 2011, February 2, 2012, February 21, 2012, February 28, 2012 and March 14, 2012, for more information on the Acquisition.

Management of Blue Dolphin’s Assets. As part of LEH’s assignment of the membership interests of LE, on February 15, 2012, Blue Dolphin, LE and LEH entered into a Management Agreement (the “Management Agreement”) pursuant to which LEH agreed to manage and operate the Nixon Facility and Blue Dolphin’s other operations (collectively, the “Services”). Pursuant to the terms of the Management Agreement, LEH shall retain, as compensation for the Services, the right to receive (i) weekly payments based on revenues from the sale of diesel blend stocks processed by the Nixon Facility not to exceed $750,000 per month, (ii) reimbursement for certain accounting costs related to the preparation of LE’s financial statements not to exceed $50,000 per month, (iii) $0.25 for each barrel processed at the Nixon Facility during the term of the Management Agreement, up to a maximum quantity of 10,000 barrels per day determined on a monthly basis, and (iv) $2.50 for each barrel processed at the Nixon Facility during the term of the Management Agreement, to the extent the quantity exceeds 10,000 barrels per day determined on a monthly basis. We further agreed to reimburse LEH at cost for all reasonable expenses incurred while performing the services. All compensation owed to LEH under the Management Agreement is to be paid to LEH within 30 days of the end of each calendar month. The Management Agreement expires upon the earliest to occur of (a) the date of the termination of the Joint Marketing Agreement between LE and a third party dated August 12, 2011, which has an initial term of three years and year-to-year renewals at the option of either party thereafter, (b) August 12, 2014, or (c) upon written notice of either party to the Management Agreement of a material breach of the Management Agreement by the other party. If the Management Agreement is renewed after the expiration of its initial term, then it will thereafter be reviewed on an annual basis by the Board and may be terminated if the Board determines that the Management Agreement is no longer in the best interest of Blue Dolphin.

LEH owns approximately eighty percent (80%) of our issued and outstanding Common Stock. Jonathan P. Carroll, our Chief Executive Officer, President, Assistant Treasurer and Secretary, and Tommy L. Byrd, our interim Chief Financial Officer, Treasurer and Assistant Secretary, are also a member and Chief Financial Officer, respectively, of LEH and, as a result may, under certain circumstances, have interests that differ from or conflict with our interests. Further, pursuant to the Management Agreement, LEH manages and operates the Nixon Facility and Blue Dolphin’s other operations. As a result of their relationship with LEH, Messrs. Carroll and Byrd may experience conflicts of interest in the execution of their duties on behalf of Blue Dolphin including with respect to the Management Agreement. See “Part I, Item 1A. Risk Factors” of this report related to related party transactions.

Lazarus Energy Development, LLC (“LED”) Acquisition. Pursuant to the terms of the PSA, we had the option to acquire all of the issued and outstanding membership interests of LED, a Delaware limited liability company and a wholly-owned subsidiary of LEH. Among other assets, LED holds approximately 46 acres of real property adjacent to the Nixon Facility. On February 7, 2012, we paid LEH a refundable deposit of approximately $183,000 to exercise the option and as partial payment of the purchase price for LED. As part of the acquisition, we agreed to assume an LED loan in the amount of $1.5 million collateralized by the real property adjacent to the Nixon Facility. We expect to complete the acquisition of LED from LEH in the second quarter of 2012 for a total purchase price of approximately $1.68 million. See “Part I, Item 1A. Risk Factors” of this report related to acquisition opportunities, as well as “Liquidity and Capital Resources” under “Part II, Item 7” of this report for additional information on how we plan to fund the acquisition of LED.

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Nasdaq Listing. On May 27, 2011, we received a letter from Nasdaq’s Listing Qualifications Department (the “Staff”) notifying us that our stockholders’ equity had fallen below the $2.5 million minimum requirement for continued listing as set forth in Marketplace Rule 5550(b) (the “Stockholders’ Equity Requirement”). As a result of meeting the Stockholders’ Equity Requirement by a relatively slim margin related to a previous deficiency, a Nasdaq Hearings Panel (the “Panel”) placed us on a one year monitoring period (the “Panel Monitoring Period”). Receipt of Staff’s May 27, 2011 letter created an additional deficiency for the Panel’s consideration. We submitted a plan to meet the Stockholders’ Equity Requirement to the Panel on May 31, 2011. On June 9, 2011, we were notified by the Panel that our Common Stock would be delisted as a result of no longer meeting the Stockholders’ Equity Requirement. Although we filed an appeal of the Panel’s decision to the Nasdaq Listing and Hearing Review Council (the “Review Council”), our Common Stock ceased trading on The Nasdaq Capital Market effective with the open of business on Monday, June 13, 2011, and began trading on the OTCQB Marketplace under the same ticker symbol immediately following suspension of trading on Nasdaq.

On July 21, 2011, we submitted a compliance plan to the Review Council based, in part, on the pending cash sale of certain of our assets to Sunoco Partners Marketing & Terminals L.P. (“Sunoco”), which would increase stockholders’ equity. On August 30, 2011, following the consummation of the transaction with Sunoco, we received notification from the Panel, pursuant to instructions received from the Review Council, that: (i) our Common Stock would resume trading on the Nasdaq Capital Market effective September 1, 2011 before the open of the markets and (ii) our continued compliance with the Stockholders’ Equity Requirement was subject to a Panel Monitoring Period.

On January 3, 2012, we were notified by Staff that we failed to hold an annual meeting of shareholders, solicit proxies and provide proxy statements to Nasdaq as set forth in Marketplace Rule 5620(a) and 5620(b) (the “Annual Meeting Requirement”). As we were under a Panel Monitoring Period, receipt of Staff’s January 3, 2012 letter created an additional deficiency for the Panel’s consideration. On January 18, 2012, we submitted a compliance plan to the Panel based on our then scheduled 2011 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on January 27, 2012. The definitive proxy statement for the Annual Meeting was filed with the Securities and Exchange Commission (the “SEC”) on December 28, 2011. The Annual Meeting was delayed beyond the 2011 calendar year as a result of the Acquisition, certain parameters of which required stockholder approval.

On December 8, 2011, the Staff determined that the Acquisition qualified as a “Business Combination” and that, pursuant to Marketplace Rule 5110(a), we would have to apply and be approved for initial listing of our Common Stock on the Nasdaq Capital Market on a post-Acquisition basis (the “New Nasdaq Listing Application”). If closing of the Acquisition occurred prior to us receiving approval of the New Nasdaq Listing Application, our Common Stock was subject to delisting pursuant to Marketplace Rule 5110(a). We submitted the New Nasdaq Listing Application to the Staff on December 13, 2011 and have worked with the Staff to provide additional information as requested. On February 15, 2012, we consummated the Acquisition. On February 24, 2012, we received notification that the Panel had determined to delist our Common Stock from the Nasdaq Capital Market and suspend trading in the shares effective at the open of business on February 28, 2012. Simultaneous with the Nasdaq delisting, our Common Stock began trading on the OTCQX U.S. Premier tier of the OTC Markets under the ticker symbol “BDCO”. We plan to continue to file with the SEC any and all reports as may be required under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) following the delisting. Although we are attempting to relist our Common Stock on the Nasdaq Capital Market, there can be no assurance that the Staff will approve the New Nasdaq Listing Application.

Disposition of Pipeline Assets. On August 3, 2011, BDPL, a wholly-owned subsidiary of Blue Dolphin completed the sale of its eighty-three and one-third percent (83 ¹/3%) interest in the Buccaneer Pipeline to Sunoco for net proceeds of approximately $3.6 million in cash. The Buccaneer Pipeline is located onshore in Brazoria County, Texas. Assets in the sale also included above ground storage tanks, a barge loading terminal, a pumping station and related equipment. As a result of the sale, Blue Dolphin no longer handles the onshore transportation and storage of oil.

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Crude Oil and Condensate Processing

The standard refining process is complex and involves numerous stages to create final products. By contrast, the Nixon Facility’s operations are only involved in the first stage of the refining process. The Nixon Facility, which has an operating capacity of approximately 15,000 barrels of oil per day, consists of tankage, a distillation unit, recovery facilities and the necessary utility systems. As a “topping unit,” the Nixon Facility separates input crude oil and condensate into diesel and jet fuel for sale into nearby markets, as well as naphtha and atmospheric gasoil for sale to nearby refineries for further processing. Input crude oil and condensate is currently purchased on the spot market (month to month) and delivered by truck. However, the facility also has the ability to receive crude oil and condensate via pipeline. Refined products are currently sold and delivered by truck. The Nixon Facility’s assets are held by LE. Financial results contained in this report do not include those of our Nixon Facility’s operations.

Pipeline Operations

We gather and transport oil and natural gas for producers/shippers operating offshore in the vicinity of our pipelines in the U.S. Gulf of Mexico and charge a fee based on anticipated throughput volumes. We handle the sale of gas through a chemical plant complex and intrastate pipeline system tie-in. All of our pipeline assets are held by and the business conducted by BDPL. Unless otherwise stated herein, all gas liquid volumes transported are attributable to production from third-party producers/shippers.

Pipeline Assets. The following provides a summary of our pipeline segments:

The BDPS includes: (i) approximately 188 acres of land in Brazoria County, Texas where the Blue Dolphin Pipeline comes ashore and where the BDPS’ onshore facilities, pipeline easements and rights-of-way are located, (ii) an offshore platform and (iii) the Blue Dolphin Pipeline. The BDPS gathers and transports oil and gas from various offshore fields in the Galveston Area of the U.S. Gulf of Mexico to our onshore facilities located in Freeport, Texas. The oil is processed, stored and sold by a third-party. The gas is transported to the Dow Chemical Plant Complex and a major intrastate pipeline system with further downstream tie-ins to other intrastate and interstate pipeline systems and end users.

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Exploration and Production

Our oil and gas exploration and production activities include leasehold interests in properties located in the U.S. Gulf of Mexico and the North Sumatra Basin offshore Indonesia. Our leasehold interests, which are held in and the operations conducted by BDPC, are subject to royalty and overriding royalty interests. We evaluate and manage oil and gas properties giving consideration to geography, reserve life and hydrocarbon mix based on seismic and other data.

During the year ended December 31, 2011, our unamortized cost exceeded the present value of estimated future net revenues, and we recorded an impairment to our U.S. Gulf of Mexico oil and gas properties of $252,706. Although our U.S. Gulf of Mexico oil and gas properties may continue to operate over the next twelve to eighteen months, we expect the operating costs to exceed gross revenues based on current reserves and net cash flow estimates making these properties uneconomic.

Exploration and Production Assets. The following provides a summary of our oil and gas properties:

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At December 31, 2011, there were no active drilling or development activities associated with our exploration and production assets.

Productive Wells and Acreage. The following table sets forth our ownership interest at December 31, 2011, in productive oil and natural wells in the areas indicated. Wells are classified as oil or natural gas according to their predominant production stream. Gross wells reflect the total number of producing wells in which we have an interest, and net wells are determined by multiplying gross wells by our average working or royalty interest. Productive wells consist of producing wells and wells capable of production.

The following table sets forth the approximate developed and undeveloped acreage that we held as leasehold interest at December 31, 2011. Undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or natural gas, regardless of whether or not such acreage contains proved reserves.

Reserve Categories. Reserves are classified as either proved, probable or possible according to the degree of certainty associated with the estimates. This report contains no estimates of probable or possible reserves. Proved reserves as reported herein are further sub-categorized as either developed or undeveloped depending on their development and production status. The quantities of proved developed and undeveloped oil and gas reserves presented herein include only those amounts which we reasonably expect to recover in the future from known oil and gas reservoirs under existing economic and operating conditions. Therefore, proved developed and undeveloped reserves are limited to those quantities that are believed to be recoverable at prices and costs, and under regulatory practices and technology, existing at the time of the estimate. Accordingly, changes in oil and gas prices, operation and development costs, regulations, technology, future production and other factors, many of which are beyond our control, could significantly affect the estimates of proved developed and undeveloped reserves and the discounted present value of future net revenue attributable thereto.

Estimates of production and future net revenue cannot be expected to represent accurately the actual production or revenue that may be recognized with respect to oil and gas properties or the actual present market value of such properties. See Note (11), Supplemental Oil and Gas Information (Unaudited), in the “Notes to Consolidated Financial Statements” for further information concerning our proved developed and undeveloped reserves, changes in proved developed and undeveloped reserves, estimated future net revenue and costs incurred in our oil and gas activities and the discounted present value of estimated future net revenue from our proved developed and undeveloped reserves.

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Reserves Basis of Presentation. Our proved reserves and future net cash flows estimates for oil and natural gas were prepared by independent petroleum engineering consulting firms registered with the Society of Petroleum Engineers, as follows:

Mr. Lieberman has 37 years of experience in petroleum engineering, petroleum studies and evaluations. He attended Colorado School of Mines and Pennsylvania State University and earned a Bachelor of Science Degree in Petroleum and Natural Gas Engineering. He is a registered and active member of the Society of Petroleum Engineers.

Mr. Lonquist has more than 23 years of experience in petroleum engineering, underground storage engineering, mining engineering and financial consulting services for energy production, transmission and energy storage companies, banks, trusts and institutional investors. He earned a Bachelor of Science in Petroleum Engineering from Texas A&M University. He is a registered and active member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers.

Evaluations done by Messrs. Lieberman and Lonquist were done in accordance with the generally accepted petroleum engineering and evaluation principles and the most recent definitions and guidelines established by the SEC. All reserve definitions contained herein are in accordance with the SEC’s Rule 4-10(a)(1)-(32) of Regulation S-X.

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Estimated Proved Reserves and Future Net Cash Flows. The following table presents the estimates of proved developed and undeveloped reserves (as hereinafter defined) and the discounted present value of future net revenue or expenses from proved developed and undeveloped reserves after income taxes to our net interest in oil and gas properties as of December 31, 2011. The discounted present value of future net revenue or expenses is calculated using the SEC Method (defined below) and is not intended to represent the current market value of the oil and gas reserves we own.

Proved Natural Gas and Oil Reserves

as of December 31, 2011

We had total estimated proved undeveloped reserves of 175.3 Mbbls and 104.0 Mbbls as of December 31, 2011 and 2010, respectively. During 2011, we did not convert any proved undeveloped reserves to proved developed reserves. At December 31, 2011, no material amounts of proved undeveloped reserves have remained undeveloped for five years or more after they were initially disclosed as proved undeveloped reserves.

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Internal Controls over Reserve Estimates. We engaged independent petroleum engineering consulting firms to prepare our final reserve estimates and have relied on their expertise to ensure that our reserve estimates were prepared in compliance with SEC guidelines and with generally accepted petroleum engineering principles. The technical persons primarily responsible for the preparation of the reserve reports have been identified herein. We provided the independent petroleum engineering consulting firms with estimate preparation material such as property interests, production, current operation costs, current production prices and other information. This information was reviewed by our Principal Executive Officer and Principal Financial Officer to ensure accuracy and completeness of the data prior to submission to the petroleum engineering consulting firms.

Capital Expenditures for Proved Reserves. The following table presents information regarding the costs we expect to incur in activities associated with our proved reserves. These expenditures represent costs associated with the plugging and abandonment of wells. The information regarding proved reserves summarized in the preceding table assumes the following estimated undiscounted capital expenditures in the years indicated (amounts in thousands).

Estimated Undiscounted Capital Expenditures

Associated with Plugging and Abandonment of Wells

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Production, Price and Cost Data. The following table presents information regarding production volumes and revenue, average sales prices and costs (after deduction of royalties and interests of others) with respect to crude oil, condensate and natural gas attributable to our interests for each of the periods indicated.

Net Production, Price and Cost Data

Drilling, Exploration and Development Activity. During 2011, there were no wells drilled or any other exploratory or development activities conducted.

Other Assets

We own a non-hazardous Class I salt water disposal well located near the town of Mermentau, Jefferson Davis Parish, Louisiana. The well is not currently operational.

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Customers

Revenue from customers exceeding 10% of our total revenue for 2011 and 2010 were as follows:

Markets & Competition

Petroleum industry operations and profitability are influenced by many factors. Prices for crude oil, natural gas, petroleum products and petrochemicals are generally determined by supply and demand. Demand for crude oil and its products and for natural gas is largely driven by the conditions of local, national and global economies, although weather patterns and taxation relative to other energy sources also play a significant part. Laws and governmental policies, particularly in the areas of taxation, energy and the environment affect where and how companies conduct their operations and formulate their products and, in some cases, limit their profits directly.

In view of the many uncertainties that affect petroleum industry operations, it is impossible to accurately predict the price and marketability of our oil and natural gas production or the rates charged for our transportation services. Currently, our oil production is sold at market prices at the time of lifting and our natural gas production is sold at market prices at the time of transmission to a major intrastate pipeline.

Intellectual Property

We rely on intellectual property laws to protect our brand, as well as those of our subsidiaries. “Blue Dolphin” is a registered trademark in the U.S. in name and logo form. “Petroport” is a registered trademark in the U.S. in name form. In addition, www.blue-dolphin.com is a registered domain name. Previously held patents in Belgium, Denmark, France, Germany, Great Britain, Greece, Israel, Italy, the Netherlands and Spain related to an offshore storage facility and terminal were abandoned in 2010.

Governmental Regulation

We are subject to numerous environmental, legal and regulatory requirements related to our domestic and foreign operations, which can have a significant impact upon our overall operations.

Domestic. In the United States, laws and regulations under which our operations are subject include, among others:

Federal Regulation of Natural Gas Transportation. Historically, the transportation and sales for resale of natural gas in interstate commerce have been regulated by the Natural Gas Act (“NGA”), the Natural Gas Policy Act (“NGPA”) and the rules and regulations promulgated by the Federal Energy Regulatory Commission (“FERC”). In the past, the federal government has regulated the prices at which gas could be sold. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining NGA and NGPA price and non-price controls affecting producer sales of gas, effective January 1, 1993. The Energy Policy Act of 2005 (the “2005 Energy Act”) did not alter our non-FERC-jurisdictional status, but the 2005 Energy Act greatly expanded FERC’s enforcement authority, including enforcement against

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market manipulation “in connection with” FERC-jurisdictional transactions. Under the 2005 Energy Act, FERC has undertaken vigorous enforcement actions against a number of entities, including those not subject to direct FERC regulation, and, in an effort to increase transparency in natural gas markets, has taken steps to require reporting by interstate, major non-interstate and potentially certain intrastate pipelines. Additionally, energy pricing has attracted renewed political interest. Therefore Congress could reenact regulatory controls in the future. The rates, terms and conditions applicable to interstate transportation of gas by pipelines are regulated by FERC under the NGA, as well as under Section 311 of the NGPA. FERC has extended certain reporting requirements to otherwise non-jurisdictional intrastate pipelines and to major non-interstate natural gas pipelines, including non-jurisdictional gathering lines that deliver more than 50 million MMBtu per year, a cutoff that excludes us from this requirement. In February 2007, FERC issued a policy order acknowledging its lack of jurisdiction over offshore gathering, but stated that FERC would intervene in the event that interstate pipelines with affiliated offshore gathering lines engage in anti-competitive behavior, such as conditioning access to interstate pipeline service upon use of the affiliated gathering line.

All of our pipelines located offshore in federal waters are subject to the requirements of the Outer Continental Shelf Lands Act (“OCSLA”), which was administered by the Bureau of Ocean Energy Management, Regulation and Enforcement and, after October 1, 2011, its successors, the Bureau of Ocean Energy Management (the “BOEM”) and the Bureau of Safety and Environmental Enforcement (the “BSEE”). Together with the FERC, the BOEM and BSEE require that all pipelines operating on or across the shelf provide open-access, non-discriminatory service. There are currently no regulations implemented by the FERC under its OCSLA authority on gatherers and other entities outside the reach of its NGA jurisdiction. Therefore, we do not believe that any FERC, BOEM or BSEE action taken under OCSLA will affect us in a way that materially differs from the way it affects other natural gas producers, gatherers and marketers with which we compete.

Aside from the OCSLA requirements and federal safety and operational regulations, regulation of gas gathering activities is primarily a matter of state oversight. Regulation of gathering activities in Texas includes various transportation, safety, environmental and non-discriminatory purchase/transport requirements.

Federal Regulation of Oil Pipelines. Our operation of the Buccaneer Pipeline previously subjected us to a variety of regulations promulgated by FERC and imposed on all oil pipelines pursuant to federal law. The Buccaneer Pipeline was sold to Sunoco in August 2011 and the associated FERC tariffs were adopted by Sunoco per its adoption notice FERC no. 191.0.0 issued August 25, 2011.

Safety and Operational Regulations. Our operations are generally subject to safety and operational regulations administered by the BSEE, the Department of Transportation, the Coast Guard, FERC and/or various state agencies. The recently enacted Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 requires that the Secretary of Transportation develop several new regulatory programs to enhance pipeline safety over the coming years. In addition, the OCSLA authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the OCS. Specific design and operational standards may apply to OCS vessels, rigs, platforms and structures. Violations of lease conditions or regulations issued pursuant to the OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or private prosecution. Currently, we believe that we are in material compliance with the various safety and operational regulations that we are subject to. However, as safety and operational regulations are frequently changed, we are unable to predict the future effect changes in these regulations will have on our operations, if any.

Federal Oil and Gas Leases. Our U.S. Gulf of Mexico exploration and production operations are currently located on federal oil and gas leases in the OCS, which are administered by BOEM. Such leases are issued through competitive bidding, contain relatively standardized terms and require compliance with detailed BOEM regulations and orders pursuant to the OCSLA that are subject to interpretation and change by

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BOEM. For offshore operations, lessees must obtain BOEM approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies, such as the U.S. Coast Guard, the Army Corps of Engineers and the Environmental Protection Agency (the “EPA”), lessees must obtain a permit from BOEM prior to the commencement of drilling. BOEM has promulgated regulations requiring offshore production facilities located on the OCS to meet stringent engineering and construction specifications. To cover the various obligations of lessees on the OCS, BOEM generally requires that lessees have substantial net worth or post bonds or other acceptable assurance that such obligations will be met. The cost of such bonds or other surety can be substantial, and there is no assurance that bonds or other surety can be obtained in all cases. We are currently in compliance with the bonding requirements of BOEM. Under some circumstances, BOEM may require any of our operations on federal leases to be suspended or terminated. Any such suspension or termination could materially adversely affect our financial condition and results of operations.

With respect to our operations that are conducted on offshore federal leases, liability may generally be imposed under OCSLA for clean-up costs and pollution damages resulting from such operations, generally excluding damages caused by acts of war or the negligence of third parties. Under certain circumstances, including but not limited to conditions deemed a threat or harm to the environment, BOEM may also require any of our operations on federal leases to be suspended or terminated in the affected area. Furthermore, BOEM generally requires that offshore facilities be dismantled and removed within one year following production cessation or lease expiration.

Environmental Regulation. Our activities with respect to: (i) exploration, development and production of oil and natural gas and (ii) operation and construction of pipelines, plants and other facilities for the transportation of oil and natural gas are subject to stringent environmental regulation by local, state and federal authorities, including the EPA. Such regulation has increased the cost of planning, designing, drilling, operating and, in some instances, abandoning wells and related equipment. Similarly, such regulation has also increased the cost of design, construction and operation of crude oil and natural gas pipelines and processing facilities. Although we believe that compliance with existing environmental regulations will not have a material adverse effect on our operations or earnings, there can be no assurance that significant costs and liabilities, including civil and criminal penalties, will not be incurred. Moreover, future developments, such as stricter environmental laws and regulations or claims for personal injury or property damage resulting from our operations, could result in substantial costs and liabilities. In the event significant changes in environmental requirements occur, we may be required to expend amounts that are material relative to our total capital structure.

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) imposes liability, without regard to fault or the legality of the original conduct, on parties the statute defines as responsible for the release or threatened release of a “hazardous substance” into the environment. Responsible parties, which include the present owner or operator of a site where the release occurred, the owner or operator of the site at the time of disposal of the hazardous substance, and persons that disposed of or arranged for the disposal of a hazardous substance, are liable for response and remediation costs and for damages to natural resources. Petroleum and natural gas are excluded from the definition of hazardous substances; however, this exclusion does not apply to all materials used in our operations. State statutes impose similar liability. At this time, neither we nor any of our predecessors have been designated as a potentially responsible party under CERCLA or similar state statute.

The federal Resource Conservation and Recovery Act (“RCRA”) and its state counterparts regulate solid and hazardous wastes and impose civil and criminal penalties for improper handling and disposal of such wastes. EPA and various state agencies have promulgated regulations that limit the disposal options for such wastes. Certain wastes generated by our oil and gas operations are currently exempt from regulation as hazardous wastes, but in the future could be designated as hazardous wastes under RCRA or other applicable statutes and therefore may become subject to more rigorous and costly requirements.

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We currently own or lease, or have in the past owned or leased, various properties used for the exploration and production of oil and gas or used to store and maintain equipment regularly used in these operations. Although our past operating and disposal practices at these properties were standard for the industry at the time, hydrocarbons or other substances may have been disposed of or released on or under these properties or on or under other locations. In addition, many of these properties have been operated by third parties whose waste handling activities were not under our control. These properties and any waste disposed thereon may be subject to CERCLA, RCRA, and state laws which could require us to remove or remediate wastes and other contamination or to perform remedial plugging operations to prevent future contamination.

The Oil Pollution Act of 1990 (“OPA”) and regulations promulgated thereunder include a variety of requirements related to the prevention of oil spills and impose liability for damages resulting from such spills. OPA imposes liability on owners and operators of onshore and offshore facilities and pipelines for removal costs and certain public and private damages arising from a spill. OPA establishes a liability limit for onshore facilities of $350 million and offshore facilities of $75 million plus all clean-up costs. OPA establishes lesser liability limits for vessels depending upon their size. A party cannot take advantage of the liability limits if the spill is caused by gross negligence or willful misconduct or resulted from a violation of federal safety, construction or operating regulations. If a party fails to report a spill or cooperate in the clean-up, liability limits do not apply. OPA imposes ongoing requirements on responsible parties, including proof of financial responsibility for potential spills. The amount of financial responsibility required depends upon a variety of factors, including the facility or vessel type, size, storage capacity, oil throughput, proximity to sensitive areas, type of oil handled, discharge history, worst-case spill potential and other considerations. We believe we have established adequate financial responsibility. While our financial responsibility requirements under OPA may be amended to impose additional costs, we do not expect the impact of such a change to be any more burdensome on us than on others similarly situated.

The Clean Air Act and state air quality laws and regulations contain provisions that impose pollution control requirements on emissions to the air and require permits for construction and operation of certain emissions sources, including sources located offshore. We may be required to incur capital expenditures for air pollution control equipment in connection with maintaining or obtaining construction and operating permits and approvals addressing emission-related issues, although we do not expect to be materially adversely affected by such expenditures.

The Clean Water Act (“CWA”) regulates the discharge of pollutants to waters of the United States and imposes permit requirements on such discharges, including discharges to wetlands. Federal regulations under the CWA and OPA require certain owners or operators of facilities that store or otherwise handle oil, to prepare and implement spill prevention, control and countermeasure plans and facility response plans relating to the possible discharge of oil into surface waters. With respect to certain of our operations, we are required to prepare and comply with such plans and to obtain and comply with permits. The CWA also prohibits spills of oil and hazardous substances to waters of the United States in excess of levels set by regulations and imposes liability in the event of a spill. State laws further provide varying civil and criminal penalties and liabilities for the spills to both surface and ground waters. We believe we are in substantial compliance with the requirements of the CWA, OPA and state laws, and that any non-compliance would not have a material adverse effect on us.

Various federal and state programs regulate the conservation and development of coastal resources. The federal Coastal Zone Management Act was passed to preserve and, where possible, restore the natural resources of the coastal zone of the United States and to provide for federal grants for state management programs that regulate land use, water use and coastal development. Under the Louisiana Coastal Zone Management Program, coastal use permits are required for certain activities, even if the activity only partially infringes upon the coastal zone. Among other things, projects involving use of state lands and water bottoms, dredge or fill activities that intersect with more than one body of water, mineral activities, including the exploration and production of oil and gas, and pipelines for the gathering, transportation or

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transmission of oil, gas and other minerals require such permits. General permits, which entail a reduced administrative burden, are available for a number of routine oil and gas activities. The Texas Coastal Coordination Act (“TCCA”) establishes the Texas Coastal Management Program that applies in the nineteen Texas counties that border the U.S. Gulf of Mexico and its tidal bays. The TCCA provides for the review of state and federal agency rules and agency actions for consistency with the goals and policies of the Coastal Management Plan. These coastal programs may affect agency permitting of our facilities.

Legislation and Rulemaking. In October 1996, the U.S. Congress enacted the Coast Guard Authorization Act of 1996 (P.L. 104-324), which amended the OPA to establish requirements for evidence of financial responsibility for certain offshore facilities. The evidence of financial responsibility amount required is $35 million for certain types of offshore facilities located seaward of the seaward boundary of a state, including properties used for oil transportation. We currently maintain the statutory $35 million coverage.

Federal and state legislation and regulations have been proposed that, if enacted or promulgated, could significantly affect operations in the oil and gas industry. It is not possible to predict which of the proposals, if any, will be adopted and what effect, if any, they would have on our operations. However, changes in various federal, state and local laws and regulations covering the discharge of materials into the environment, occupational health and safety issues or otherwise relating to the protection of public health and the environment, may affect our operations and costs to do business. Historically, the trend in such laws and regulations has been to place more restrictions and limitations on activities that may impact the general or work environment, such as emissions of pollutants, generation and disposal of wastes and use and handling of chemical substances, the cost of compliance of which has continued to increase. It is not possible to predict which of the proposed federal, state and local laws and regulations, if any, will be adopted and the impact such changes may have on our operations and capital structure. We will adopt measures that maintain our compliance.

Foreign. In Indonesia, our operations are subject to the government acts, laws and regulations of the Republic of Indonesia, as well as to any international treaties or conventions to which the Republic of Indonesia is a signatory.

Employees

At December 31, 2011, we had five (5) full-time employees and regularly used the services of one (1) consultant. Our employees, along with the expertise provided by our engineering consultant, manage our ongoing administrative, business development and marketing operations. From time to time, we use third parties to assist with major maintenance, engineering and construction projects and activities.

Environmental

A description of our environmental activities is included in Part II, Item 8, “Financial Statements and Supplementary Data.”

Available Information

We make available, free of charge on or through our website (http://www.blue-dolphin.com), our annual, quarterly and current reports, and any amendments to those reports, as soon as practical after these reports are filed with the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, Northeast, Washington, D.C. 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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Information about each of our directors, as well as each of the Board’s standing committee charters, our corporate governance guidelines and our code of business conduct are also available, free of charge, through our website. Information contained on our website is not part of this report.

Glossary of Certain Oil and Gas Terms

The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry.

Back-in After Payout Interest. A contractual right of a non-participating partner to participate in a well or wells after the wells have produced enough for the participating partners to recover their capital costs of drilling, completing and operating the wells.

Bbl. One stock tank barrel, or 42 U.S. gallons of liquid volume, used in reference to oil or other liquid hydrocarbons.

Bcf. One billion cubic feet of gas.

Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Condensate. Hydrocarbons which are in the gaseous state under reservoir conditions and which become liquid when temperature or pressure is reduced; a mixture of pentanes and higher hydrocarbons.

Development Well. A well drilled within the proved area of a gas or oil reservoir to the depth of a stratigraphic horizon known to be productive.

Exploratory Well. A well drilled to find and produce gas or oil in an unproved area, to find a new reservoir in a field previously found to be productive of gas or oil in another reservoir or to extend a known reservoir.

Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Leasehold Interest. The interest of a lessee under an oil and gas lease.

Mbbls. One thousand barrels of oil or other liquid hydrocarbons.

Mcf. One thousand cubic feet of gas.

Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of gas to one barrel of oil, condensate or gas liquids.

MMbtu. One million British Thermal Units.

MMcf. One million cubic feet of gas.

MMcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl of oil, condensate or gas liquids.

Net Revenue Interest. The percentage of production to which the owner of a working interest is entitled.

Non-operating Working Interest. A working interest, or a fraction of a working interest, in a lease where the owner is not the operator of the lease.

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Overriding Royalty Interest. An interest in oil and gas produced at the surface, free of the expense of production that is in addition to the usual royalty interest reserved to the lessor in an oil and gas lease.

Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of oil, gas or both.

Proved Developed Reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved developed reserves are further categorized into two sub-categories — proved developed producing reserves and proved developed non-producing reserves.

Proved Developed Producing. Reserves sub-categorized as producing are expected to be recovered from completion intervals which are open and producing at the time of the estimate.

Proved Developed Non-producing. Reserves sub-categorized as non-producing, which include shut-in and behind pipe reserves. Shut-in reserves are expected to be recovered from: (i) completion intervals which are open at the time of the estimate but which have not started producing, (ii) wells which were shut-in awaiting pipeline connections or as a result of a market interruption or (iii) wells not capable of producing for mechanical reasons.

Proved Reserves. The estimated quantities of oil, gas and condensate that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved reserves are further categorized into two sub-categories – proved developed and proved undeveloped depending on their development and production status.

Proved Undeveloped Reserves. Reserves that are expected to be recovered from new wells or from existing wells where a relatively significant expenditure is required for recompletion.

Reversionary Interest. A form of ownership interest in property that reverts back to the transferor after expiration of an intervening income interest or the occurrence of another triggering event.

Royalty Interest. An interest in a gas and oil property entitling the owner to a share of gas and oil production free of any of the operational costs associated with the production.

Undivided Interest. A form of ownership interest in which more than one person concurrently owns an interest in the same oil and gas lease or pipeline.

Working Interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production after the corresponding percentage of operational costs and royalties are paid.

There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a description of significant factors that might cause our future operating results to differ materially from those currently expected. The risks described below are not the only risks we face. Additional risks and uncertainties not specified herein, not currently known to us or currently deemed to be immaterial also may materially adversely affect our business, financial position, operating results and/or cash flows.

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Risks Related to our Business

The success of our acquisition of LE will depend on our ability to realize the anticipated benefits from integrating LE’s business into our operations.

We may fail to realize the anticipated benefits from this integration on a timely basis, or at all, for a variety of reasons, including the following:

Refining margins are volatile, and a reduction in anticipated refining margins will adversely affect the amount of cash we will have available for working capital.

Historically, refining margins have been volatile, and they are likely to continue to be volatile in the future. Our financial results are primarily affected by the relationship, or margin, between our specialty products prices and the prices for crude oil. The cost to acquire crude oil and the price at which we can ultimately sell our refined products depend upon numerous factors beyond our control.

The prices at which we sell specialty products are strongly influenced by the commodity price of crude oil. If crude oil prices increase, our specialty products segment margins will fall unless we are able to pass along these price increases to our wholesale customers. Increases in selling prices for specialty products typically lag the rising cost of crude oil and may be difficult to implement when crude oil costs increase dramatically over a short period of time.

The sale of refined products to the wholesale market is an important part of our business going forward, and if we fail to grow and maintain our market share or gain market acceptance of our refined products, our operating results could suffer.

Selling refined products to the wholesale market is an important part of our business, and as our refined products revenue increases as a portion of our overall revenue, our success in the wholesale market becomes increasingly important to our operating results. Our success in the wholesale market depends in large part on our ability to grow and maintain our image and reputation as an independent operator and to expand into and gain market acceptance of our refined products. Adverse perceptions of product quality, whether or not justified, or allegations of product quality issues, even if false or unfounded, could tarnish our reputation and cause our wholesale customers to choose refined products offered by our competitors.

We are dependent on third-party operators for the transportation of crude oil into and refined products out of our Nixon Facility, and if these third-party operators become unavailable to us, our ability to process crude oil and sell refined products to wholesale markets could be materially and adversely affected.

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We rely on trucks for the receipt of crude oil into and the sale of refined products out of our Nixon Facility. Since we do not own or operate any of these trucks, their continuing operation is not within our control. If any of the third-party trucking companies that we use, or the trucking industry in general, become unavailable to transport crude oil or our refined products because of acts of God, accidents, government regulation, terrorism or other events, our revenue and net income would be materially and adversely affected.

Potential downtime for maintenance at the Nixon Facility could reduce our revenue and cash available for payments of our obligations.

Although currently operating at anticipated levels, the Nixon Facility is still in a recommissioning phase and may require additional unscheduled downtime for unanticipated maintenance or repairs. Any scheduled or unscheduled maintenance reduces our revenues and increases our operating expenses during the period of time that our processing unit is not operating and could reduce our ability to meet our payment obligations.

Our operations, including our operation of the Nixon Facility, subject us to the inherent risk of incurring significant environmental costs and liabilities.

There is inherent risk of incurring significant environmental costs and liabilities in the operation of the Nixon Facility due to our handling of petroleum hydrocarbons and wastes, because of air emissions and water discharges related to our operations, and as a result of historical operations and waste disposal practices of prior owners of our facilities. We currently own or operate properties that for many years have been used for industrial activities, including refining or terminal storage operation. Private parties, including the owners of properties adjacent to our operations and facilities where our petroleum hydrocarbons or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. We may not be able to recover some or any of these costs from insurance or other sources of indemnity. To the extent that the costs associated with meeting any or all of these requirements are substantial and not adequately provided for, there could be a material adverse effect on our business, financial condition, and results of operations.

Our relationship with LEH and our related party transactions with LEH and its affiliates may cause conflicts of interest that may adversely affect us.

LEH owns approximately eighty percent (80%) of our issued and outstanding Common Stock. Jonathan P. Carroll, our Chief Executive Officer, President, Assistant Treasurer and Secretary, and Tommy L. Byrd, our interim Chief Financial Officer, Treasurer and Assistant Secretary, are also a member and Chief Financial Officer, respectively, of LEH and as a result may, under certain circumstances, have interests that differ from or conflict with our interests. Further, pursuant to the Management Agreement, LEH manages and operates the Nixon Facility and Blue Dolphin’s other operations. As a result of their relationship with LEH, Messrs. Carroll and Byrd may experience conflicts of interest in the execution of their duties on behalf of Blue Dolphin including with respect to the Management Agreement.

LEH has no fiduciary duty to make decisions in our best interest. LEH is entitled to vote the Common Stock it owns in accordance with its interests, which may be contrary to our interests and those of other stockholders. LEH has interests that differ from the interests of our stockholders and, as a result, there is a risk that important business decisions will not be made in the best interest of our stockholders. LEH and its other affiliates are not limited in their ability to compete with us and are not obligated to offer us business opportunities. We believe that the transactions and agreements that we have entered into with LEH and its affiliates are on terms that are at least as favorable as could reasonably have been obtained at such time from third parties. However, these relationships could create, or appear to create, potential conflicts of interest when our Board is faced with decisions that could have different implications for us and LEH or its affiliates. The appearance of conflicts, even if such conflicts do not materialize, might

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adversely affect the public’s perception of us, as well as our relationship with other companies and our ability to enter into new relationships in the future, which may have a material adverse effect on our ability to do business.

LEH holds a significant interest in us.

LEH owns approximately eighty percent (80%) of our issued and outstanding Common Stock. Through its ownership of such a large amount of Common Stock, LEH has significant influence over matters such as the election of our Board, control over our business, policies and affairs and other matters submitted to our stockholders.

Declines in throughput volumes and production rates from our leasehold properties in the U.S. Gulf of Mexico are expected to continue.

In recent years, throughput volumes on our pipelines and production rates from our leasehold properties in the U.S. Gulf of Mexico have continued to decline as a result of decreased activity in the U.S. Gulf of Mexico and depleting reserves. Following the April 2010 Deepwater Horizon explosion and oil spill, regulators have continued to move slowly in issuing new drilling permits in the U.S. Gulf of Mexico. This has negatively impacted our ability to attract new producers/shippers to our pipelines and make additional investments in new oil and gas properties. Although our U.S. Gulf of Mexico oil and gas properties may continue to operate over the next twelve to eighteen months, we expect the operating costs to exceed gross revenues based on current reserves and net cash flow estimates making these properties uneconomic.

During the past year, we have been primarily dependent on revenue from one key customer.

As a result of decreased revenue from pipeline operations and oil and gas sales related to our U.S. Gulf of Mexico leasehold interests, revenue from the North Sumatra Basin-Langsa Field accounted for approximately 54% of our total revenue in 2011 compared to approximately 26% in 2010. Unless we are able to offset this revenue with revenue from the sale of refined products, transportation throughput, interests in other oil and gas properties or other revenue generating assets at an acceptable cost, our financial condition could be materially adversely affected if production from the North Sumatra Basin-Langsa Field declines sharply or ceases.

If we are not able to generate sufficient funds from operations or obtain financing from other sources, we may not be able to continue our operations.

In recent years we have used a portion of our cash reserves to fund working capital requirements that were not funded from our operations. Continued pipeline underutilization, low commodity prices, production problems, reserve declines, unfavorable drilling results and other factors beyond our control could further reduce funds from our operations. Currently, we project that our current cash reserves will be sufficient to meet our obligations. If we are unable to realize the benefits of our acquisition of LE or obtain additional funds, we may have to seek debt and/or equity financing to meet our working capital requirements. Our history of losses may affect our ability to raise additional capital and increase the cost and terms of obtaining such financing. In the event we are not able to raise additional capital, we may be forced to sell our assets or discontinue our operations.

A substantial and extended decline in the prices of oil or gas would have a material adverse effect on our operations.

Our revenue, profitability, operating cash flow and potential for growth are largely dependent on prevailing oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply and demand for oil and natural gas, uncertainties within the market and a variety of other factors beyond our control. These factors include:

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In addition, low or declining oil and natural gas prices could have collateral effects that could adversely affect us, including the following:

Reserve estimates depend on many assumptions that may prove to be inaccurate. Any material inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net present value of our reserves to be overstated.

Estimating reserves of oil and gas is complex. The process relies on interpretations of available geologic, geophysical, engineering and production data. The extent, quality and reliability of this data can vary. The process also requires certain economic assumptions, some of which are mandated by the SEC, including oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The accuracy of a reserve estimate is a function of:

The proved reserve information set forth in this report is based on estimates prepared by third-party petroleum engineering consulting firms based on information that we provided. Although our U.S. Gulf of Mexico oil and gas properties may continue to operate over the next twelve to eighteen months, we expect the operating costs to exceed gross revenues based on current reserves and net cash flow estimates making these properties uneconomic. Actual quantities of recoverable oil and gas reserves, future production, oil and gas prices, taxes, development expenditures, abandonment costs and operating expenses prepared by others will likely vary from these estimates. Any significant variance could materially affect the quantities and net present value of our reserves. Furthermore, the present value of future net cash flows will most likely not equate to the current market value of their estimated proved oil and gas reserves. In accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves were based on the historical 12-month average price (based on the first of the month pricing for the most recently ended fiscal year) and costs in effect at December 31, 2011. Actual future prices and costs may be materially different from the prices and costs they used.

We cannot control the activities on properties we do not operate.

Currently, third parties operate or control the development and operation of the oil and gas properties in which we have an interest. As a result, we depend on these third-parties to properly conduct lease acquisition, drilling, completion and production operations. The failure of any such third party operator or drilling contractors, as well as other service providers working on their behalf, to properly perform services or to act in ways that are in our best interest, could adversely affect our interests.

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We own and generally anticipate that we will continue to own substantially less than a 50% working interest in our oil and gas prospects and properties and will therefore engage in joint operations with other working interest owners. Since we own or control less than a majority of the working interest, decisions affecting our interest could be made by the owners of a majority of the working interest. For instance, if we are unwilling or unable to participate in the costs of operations approved by owners of a majority of the working interests in a well, our working interest in the well (and possibly other wells on the property) will likely be subject to contractual “non-consent penalties.” These penalties may include, full or partial forfeiture of our interest in the well or a relinquishment of our interest in production from the well in favor of the participating working interest owners until the participating working interest owners have recovered a multiple of the costs which would have been borne by us if we had elected to participate, which often ranges from 400% to 600% of such costs.

The geographic concentration of our assets may have a greater effect on us compared to other companies.

The majority of our onshore assets are located in the eagle Ford Shale and Gulf Coast areas of Texas, while the majority of our offshore assets are located in the U.S. Gulf of Mexico. As a result, we are at a greater risk of being impacted by local and regional conditions compared to oil and gas companies that have their assets more geographically diversified. Any negative regional event, including commodity price fluctuations, natural disasters and restrictive governmental regulations could adversely impact our business.

Strong competition from larger companies may negatively impact our ability to continue our operations.

The oil and gas industry is highly competitive. Our competitors include major integrated oil and gas companies, large independent energy companies, affiliates of major interstate and intrastate pipelines and national and local refinery operators and gatherers, many of which possess greater financial and other resources than we do. Our ability to successfully compete in the marketplace is affected by many factors, including our ability to access capital and absorb risks. We believe these factors largely put us at a competitive disadvantage in consummating transactions and acquiring new assets.

We intend to continue pursuing acquisitions. Our business may be adversely affected if we cannot effectively integrate acquired operations.

One of our business strategies is to acquire operations that are complementary to our existing business operations. The evaluation of opportunities involves time and expense, and acquiring operations and assets involves financial, operational and legal risks, including, but not limited to:

Competition from other potential buyers could cause us to pay a higher price than we otherwise might have paid and reduce our acquisition opportunities. We are often out-bid by larger, better capitalized companies for the acquisition opportunities that we pursue.

Operating hazards may adversely affect our ability to conduct business.

Our operations are subject to inherent risks normally associated with oil and gas operations, including, but not limited to:

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If any of these events were to occur, we could suffer substantial losses from injury and loss of life, damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. Our offshore operations are also subject to a variety of operating risks exclusive to the marine environment, such as hurricanes or other adverse weather conditions and restrictive governmental regulation. These regulations may, in certain circumstances, impose strict liability for pollution damage or result in the interruption or termination of operations.

Our pipelines and other assets face operating hazards, and the potential limits on insurance coverage could expose us to potentially significant liability costs.

Our pipelines, exploration and production and other assets are subject to certain operating hazards, and our cash flow from those operations, if any, could decline as a result of a major accident, explosion or fire, severe weather or other natural disaster, or otherwise is forced to curtail its operations or shut down. These operating hazards could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in significant curtailment or suspension of our related operations.

Although we maintain insurance policies, including personal and property damage and business interruption insurance for each of our facilities with insurers in amounts and with coverage and deductibles that we, with the advice of our insurance advisors and brokers, believe are reasonable and prudent, we cannot ensure that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or significant interruption of operations. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. In addition, we are not fully insured against all risks incident to our business because certain risks are not fully insurable, coverage is unavailable or premium costs, in our judgment, do not justify such expenditures. For example, we are not insured for environmental accidents at all of our facilities.

Our business requires the retention and recruitment of a skilled workforce and the loss of key employees could result in the failure to implement our business plan.

The success of our business operations depends largely upon the efforts of key executive officers and technical personnel. Given our small size, we may not be able to retain required personnel on acceptable terms due to the competition for experienced personnel from other companies in the industry.

Compliance with environmental and other government regulations could be costly and could negatively impact our operations.

Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may:

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The recent trend toward stricter standards in environmental legislation and regulation is likely to continue. The enactment of stricter legislation or the adoption of stricter regulations could have a significant impact on our operating costs, as well as on the oil and gas industry in general.

Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. We could also be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred which could have a material adverse effect on our financial condition and results of operations. We maintain insurance coverage for our operations, including limited coverage for sudden and accidental environmental damages. However, we do not believe that insurance coverage for all environmental damages that occur over time or complete coverage for sudden and accidental environmental damages is available at a reasonable cost. Accordingly, we may be subject to liability or may lose the privilege to continue to operate our properties if certain environmental damages occur.

The EPA imposes a variety of regulations on “responsible parties” related to the prevention of oil spills. The implementation of new, or the modification of existing, environmental laws or regulations, including regulations promulgated pursuant to the EPA, could have a material adverse impact on us.

Regulation of greenhouse gas emissions could increase our operational costs and reduce demand for our products.

Continued political attention to issues concerning climate change, the role of human activity in it, and potential mitigation through regulation could have a material impact on our operations and financial results.

International agreements and national or regional legislation and regulatory measures to limit greenhouse emissions are currently in various stages of discussion or implementation. These and other greenhouse gas emissions-related laws, policies and regulations may result in substantial capital, compliance, operating and maintenance costs. The level of expenditure required to comply with these laws and regulations is uncertain and is expected to vary depending on the laws enacted in each jurisdiction, our activities in the particular jurisdiction and market conditions. Greenhouse gas emissions that could be regulated include those arising from the conversion of crude oil into refined products, the transportation of crude oil and natural gas, and the exploration and production of crude oil and natural gas. Some matters related to these activities, such as actions taken by our competitors in response to such laws and regulations, are beyond our control.

The effect of regulation on our financial performance will depend on a number of factors including, among others, the sectors covered, the greenhouse gas emissions reductions required by law, the extent to which we would be entitled to receive emission allowance allocations or would need to purchase compliance instruments on the open market or through auctions, the price and availability of emission allowances and credits and the impact of legislation or other regulation on our ability to recover the costs incurred through the pricing of our products. Material price increases or incentives to conserve or use alternative energy sources could also reduce demand for products we currently sell and adversely affect our sales volumes, revenues and margins.

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None.

Information appearing in “Item 1. Business” describing our business activities is incorporated herein by reference.

Our principal executive office, which is leased, is located at 801 Travis Street, Suite 2100, Houston, Texas 77002.

Pursuant to a Settlement Agreement and Mutual Release by and among Blue Dolphin, LEH and Lazarus Louisiana Refinery II, LLC (“LLRII”) effective February 15, 2012, the parties agreed to settle and compromise all disputes between them in connection with closing of the Acquisition. LEH has agreed to file a non-suit with prejudice of all pending claims against Blue Dolphin under Cause No. 210-32561, styled Blue Dolphin Energy Company v. Lazarus Energy Holdings, L.L.C. and Lazarus Louisiana Refinery II, L.L.C., in the 129^th District Court of Harris County, Texas (the “Lawsuit”). Blue Dolphin has agreed that it will not execute or attempt to execute on an order that was signed on May 16, 2011 in the Lawsuit severing LEH’s counterclaims into Cause No. 2010-32561-A, which resulted in a Partial Summary Judgment becoming a final judgment in Blue Dolphin’s favor.

Not applicable.

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PART II

Market Price for Common Stock

Our Common Stock is quoted on the OTCQX U.S. Premier tier under the ticker symbol “BDCO.” As of March 30, 2012, we had 292 record holders of our Common Stock. Based on the record date for our 2011 annual meeting of stockholders, which was held on January 27, 2012, we had approximately 3,000 beneficial holders of our Common Stock.

The following table sets forth, for the periods indicated, the high and low prices for our Common Stock as reported by the Nasdaq and the OTC Markets. The quotations reflect inter-dealer prices, without adjustment for retail mark-ups, markdowns or commissions and may not represent actual transactions.

Simultaneous with the delisting of our Common Stock from the Nasdaq Capital Market on February 28, 2012, our Common Stock began trading on the OTCQX U.S. Premier tier of the OTC Markets under the ticker symbol “BDCO” See “Recent Developments” in “Part I, Item 1. Business” of this report for additional information related to Nasdaq’s decision to delist our Common Stock.

Dividend Policy

We have not declared or paid any dividends on our Common Stock since our incorporation. We currently intend to retain earnings for our capital needs and expansion of our business and do not anticipate paying cash dividends on the Common Stock in the foreseeable future. We expect that any loan agreements we enter into in the future will likely contain restrictions on the payment of dividends on our Common Stock. Future policy with respect to dividends will be determined by the Board based upon our earnings and financial condition, capital requirements and other considerations. We are a holding company that conducts substantially all of our operations through our subsidiaries. As a result, our ability to pay dividends on the Common Stock will also be dependent upon the cash flow of our subsidiaries.

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Equity Compensation Plan Information

The following table provides information for all equity compensation plans as of the fiscal year ended December 31, 2011, under which our equity securities were authorized for issuance:

Securities Authorized for Issuance under Equity Compensation Plans

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The following is a review of certain aspects of our financial condition and results of operations and should be read in conjunction with “Item 1, Business” and “Item 8, Financial Statements and Supplementary Data,” as well as the “Notes to Consolidated Financial Statements.”

Executive Summary

As of December 31, 2011, we operated two lines of business through our subsidiaries: (i) pipeline transportation services to producers/shippers, and (ii) oil and gas exploration and production. Our pipeline assets are located primarily offshore in the Texas Gulf Coast area and our leasehold interests in properties are located in the U.S. Gulf of Mexico and the North Sumatra Basin offshore Indonesia.

Pipeline Operations.

Exploration and Production.

In recent years, throughput volumes on our pipelines and production rates from our leasehold properties in the U.S. Gulf of Mexico have continued to decline as a result of decreased activity in the Gulf of Mexico and depleting reserves. Following the April 2010 Deepwater Horizon explosion and oil spill, regulators have moved slowly to issue new drilling permits in the Gulf of Mexico. This has negatively impacted our ability to attract new producers/shippers to our pipelines and to acquire additional leasehold interests. Although our U.S. Gulf of Mexico oil and gas properties may continue to operate over the next twelve to eighteen months, we expect the operating costs to exceed gross revenues based on current reserves and net cash flow estimates making these properties uneconomic. As a result of the Acquisition, we anticipate that our core focus going forward will be crude oil and condensate processing.

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Results of Operations

For the year ended December 31, 2011 (the “current period”), we reported net income of $617,935 compared to a net loss of $1,022,895 for the year ended December 31, 2010 (the “previous period”). For the three months ended December 31, 2011 (the “current quarter”), we reported a net loss of $1,059,577 compared to a net loss of $58,122 for the three months ended December 31, 2010 (the “previous quarter”).

2011 Compared to 2010

Revenue from Pipeline Operations. Revenue from pipeline operations decreased by $947,386, or 50%, in the current period to $931,500. Revenue in the current period from the BDPS totaled approximately $659,500 compared to approximately $1,538,000 in the previous period primarily due to lower volumes of transported gas. Daily gas volumes transported through the BDPS averaged approximately 5 MMcf of gas per day in the current period compared to approximately 14 MMcf of gas per day in the previous period. Revenue on the GA 350 decreased by approximately $69,000 to approximately $272,000 in the current period primarily due to natural production declines. Daily gas volumes transported through the GA 350 decreased to approximately 14 MMcf of gas per day in the current period from approximately 17 MMcf of gas per day in the previous period.

Revenue from Oil and Gas Sales. Revenue from oil and gas sales increased by $480,033, or 56%, to $1,342,718 in the current period primarily due to production from the North Sumatra Basin-Langsa Field.

Our average realized gas price per Mcf in the current period was $3.71 compared to $3.85 in the previous period. The sales mix by product was 93% oil and 7% gas. Our average realized price per barrel of oil was $118.59 in the current period compared to $88.14 in the previous period.

Revenue breakdown for the current period by field was approximately $1,222,400 for the North Sumatra Basin-Langsa Field, $84,200 for High Island Block 115, $26,900 for Galveston Area Block 321 and $9,200 for High Island Block 37. Revenue breakdown for the previous period by field was approximately $720,300 for the North Sumatra Basin-Langsa Field, $48,900 for High Island Block 115, $48,200 for Galveston Area Block 321 and $45,300 for High Island Block 37.

Pipeline Operating Expenses. Pipeline operating expenses decreased by $89,738, or 8%, to $1,008,859 in the current period. The decrease was primarily due to decreases in insurance expense, chemicals, saltwater disposal transportation costs, property taxes and other operating expenses. The decreases were partially offset by an increase in legal expenses, related to the sale of the Buccaneer Pipeline.

Lease Operating Expenses. Lease operating expenses increased $500,484, or 74%, in the current period to $1,174,252 primarily due to expenses from the North Sumatra Basin-Langsa Field. Lease operating costs associated with North Sumatra Basin-Langsa Field totaled approximately $1,098,500 for the current period.

Depletion, Depreciation and Amortization. Depletion, depreciation and amortization decreased by $27,402, or 4%, in the current period to $591,927 primarily due to lower depletion of the North Sumatra Basin-Langsa Field.

Impairment of Oil and Gas Properties. We utilize the full cost method of accounting to account for our oil and natural gas exploration and development activities. Under this 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 for the current period was

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calculated using domestic prices of $96.04 per barrel of oil and $4.18 per Mcf of gas and an international price of $114.95 per barrel of oil. At December 31, 2011, our costs exceeded our ceiling limitation, resulting in a write-down of our U.S. Gulf of Mexico oil and gas properties of $252,706. Our ceiling for the previous period was calculated using prices of $79.61 per barrel of oil and $4.33 per Mcf of gas.

General and Administrative Expenses and Stock Based Compensation. General and administrative expenses and stock based compensation expenses increased by $146,561, or 10%, in the current period to $1,574,364 primarily due to increases in franchise tax, employee bonuses, employee insurance, shareholder reporting expenses and software maintenance fees. The increases were partially offset by decreases in officer salaries, consulting and audit expense.

Gain on Sale of Property and Equipment. During the current period, BDPL sold its eighty-three and one-third percent (83 ¹/3%) undivided interest in the Buccaneer Pipeline to Sunoco for proceeds of approximately $3.6 million in cash. The gain on the sale was approximately $3.1 million

Recovery of Allowance for Doubtful Loan Receivable. Recovery for allowance for doubtful loan receivable reduced by $201,000 in the current period primarily due to the addition of a disposal well, with a fair market value of $201,000, which was recorded as a recovery of a bad debt expense on an outstanding loan receivable, net of credited and recovered amounts in the previous period.

Three Months Ended December 31, 2011 Compared to Three Months Ended December 31, 2010

Revenue from Pipeline Operations. Revenue from pipeline operations decreased by $382,549, or 79%, in the current quarter to $102,489 primarily due to the decrease in oil volumes transported. Revenue in the current quarter from the BDPS decreased to approximately $34,700 compared to approximately $397,500 in the previous quarter. Daily gas volumes transported on the BDPS averaged 1 MMcf of gas per day in the current quarter compared to 12 MMcf of gas per day in the previous quarter. Revenue on the GA 350 decreased to approximately $67,800 compared to approximately $87,500 in the previous quarter due to a decrease in average daily gas volumes transported of 13 MMcf of gas per day in the current quarter from 17 MMcf of gas per day in the previous quarter.

Revenue from Oil and Gas Sales. Revenue from oil and gas sales decreased by $245,945, or 42% to $338,570 in the current quarter primarily due to a reduction in production from the North Sumatra Basin-Langsa Field and High Island Block 115 in the same period.

Pipeline Operating Expenses. Pipeline operating expenses in the current quarter decreased by $233,193, or 96%, to $9,562 due to certain costs in the current quarter associated with the sale of the Buccaneer Pipeline and related assets to Sunoco that occurred in third quarter of 2011. Excluding this, pipeline operating expenses in the current quarter decreased $47,176, or 19%, due to decreases in pipeline repairs and maintenance costs, property taxes, saltwater disposal transportation costs and contract labor, which was offset by an increase in legal expenses.

Lease Operating Expenses. Lease operating expenses decreased in the current quarter by $66,203, or 15%, to $357,534 primarily as a result of decreased production from the North Sumatra Basin-Langsa Field.

Depletion, Depreciation and Amortization. Depletion, depreciation and amortization increased by $29,513, or 19%, in the current quarter to $185,036 primarily due to additional depletion on the domestic oil and gas properties.

General and Administrative Expenses and Stock Based Compensation. General and administrative expenses and stock based compensation expenses increased by $174,895, or 62%, to $458,161 in the current quarter primarily due to increases in shareholder reporting expenses, franchise tax, employee insurance, software maintenance fees and employee bonuses. The increases were partially offset by decreases in consulting expense.

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Impairment of Oil and Gas Properties. During the fourth quarter of the current period we recorded a full cost ceiling impairment of $252,706 on our U.S. Gulf of Mexico oil and gas properties.

Liquidity and Capital Resources

Sources and Uses of Cash. Our primary source of cash is cash flow from operations and cash on hand. During 2011, we had positive cash flow from operations of approximately $1,686,797 mainly due to the sale of the Buccaneer Pipeline and related assets to Sunoco for proceeds of approximately $3.6 million in cash.

The Nixon Facility will provide Blue Dolphin with positive cash flow. We expect to fund our operations, any additional capital expenditures related to the Nixon Facility and the potential acquisition of LED with the proceeds from the sale of refined products. Further, we expect our overall liquidity to increase in 2012 due to the revenue generated by the Nixon Facility.

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. At December 31, 2011, our current available cash was $1,941,221.