BLUE DOLPHIN ENERGY CO - Annual Report: 2015 (Form 10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		73-1268729
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

801 Travis Street, Suite 2100 Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		OTCQX

(Title of class)

Number of shares of common stock, par value $0.01 per share outstanding as of March 30, 2016:  10,453,802

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Atmospheric gas oil (“AGO”). The heaviest product boiled by a crude distillation unit operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. In-blends atmospheric gas oil, usually serves as the premium quality component used to lift lesser streams to the standards of saleable furnace oil or diesel engine fuel. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock. Barrel (“Bbl”). One stock tank barrel, or 42 U.S. gallons of liquid volume, used in reference to oil or other liquid hydrocarbons. Blending. The physical mixture of a number of different liquid hydrocarbons to produce a finished product with certain desired characteristics. Products can be blended in-line through a manifold system, or batch blended in tanks and vessels. In-line blending of gasoline, distillates, jet fuel and kerosene is accomplished by injecting proportionate amounts of each component into the main stream where turbulence promotes thorough mixing. Additives, including octane enhancers, metal deactivators, anti-oxidants, anti-knock agents, gum and rust inhibitors, and detergents, are added during and/or after blending to result in specifically desired properties not inherent in hydrocarbons. Barrels per Day (“Bpd”). A measure of oil output, represented by the number of barrels of oil produced in a single day. Based on operating days. Capacity utilization rate. A percentage measure that indicates the amount of available capacity that is being used at a facility. Complexity. A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude oil distillation unit. The higher a refinery’s complexity, the greater the refinery’s capital investment and number of operating units used to separate feedstock into fractions, improve their quality, and increase the production of higher-valued products. Refinery complexities range from the relatively simple crude oil distillation unit (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0. Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Condensate is chemically more complex than liquefied petroleum gas. Although condensate is sometimes similar to crude oil, it is usually lighter. Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before these chemicals and compounds can be used as fuels or converted to more valuable products. Crude oil distillation unit. The refinery processing unit where initial crude oil distillation takes place. See also definition of topping unit. Cut. One or more crude oil compounds that vaporize and are extracted within a certain temperature range during the crude distillation process. Depropanizer unit. A distillation column that is used to isolate propane from a mixture containing butane and other heavy components. Desalting. Removal of salt from crude oil. Desalting is preferably performed prior to commercialization of the crude; must be performed prior to refining.

Distillates. The result of crude distillation and therefore any refined oil product. Distillate is more commonly used as an abbreviated form of middle distillate. There are mainly four (4) types of distillates: (i) very light oils or light distillates (e.g., natural gasoline, kerosene, and light and heavy naphtha), (ii) light oils or middle distillates (e.g., kerosene, light and heavy diesel), (iii) medium oils, and (iv) heavy fuel oils, such as our heavy oil-based mud blendstock (“HOBM”). Distillation. The first step in the refining process whereby crude oil and condensate is heated at atmospheric pressure in the base of a distillation tower. As the temperature increases, the various compounds vaporize in succession at their various boiling points and then rise to prescribed levels within the tower according to their densities, from lightest to heaviest. They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at other points in the refining process to remove impurities. Lighter products produced in this process can be further refined in a catalytic cracking unit or reforming unit. Heavier products, which cannot be vaporized and separated in this process, can be further distilled in a vacuum distillation unit or coker. Distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components distilled by means of distillation trays. Exchanger (heat exchanger). A device used to transfer heat from one process liquid to another. Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, that are used as basic input materials in a refining process. Feedstocks are transformed into one or more finished products. Fractionation. The separation of crude oil and condensate into its more valuable and usable components through distillation. 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. Finished petroleum products. Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use. Heat exchanger. See definition for exchanger. Intermediate petroleum products. A petroleum product that might require further processing before it is saleable to the ultimate consumer. This further processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company that will process it further. Jet fuel. A high-quality kerosene product primarily used in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between about 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between about 5 and 15 carbon atoms per molecule. Jet fuel is a white product, so-called because it is transparent. Kerosene. A middle distillate fraction of crude oil that is produced at higher temperatures than naphtha and lower temperatures than gas oil. It is usually used as jet turbine fuel and sometimes for domestic cooking, heating, and lighting.

 

 

Leasehold interest. The interest of a lessee under an oil and gas lease. Light crude. A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high API gravity due to the presence of a high proportion of light hydrocarbon fractions. Liquefied petroleum gas (“LPG”). Manufactured during the refining of crude oil and condensate; burns relatively cleanly with no soot and very few sulfur emissions. Low sulfur diesel. Not to be confused with ultra low sulfur diesel, low sulfur diesel contains a maximum 500 ppm sulfur. MMcf. One million cubic feet; a measurement of gas volume only. Naphtha. A refined or partly refined light distillate fraction of crude oil. Blended further or mixed with other materials it can make high-grade motor gasoline or jet fuel. It is also a generic term applied to the lightest and most volatile petroleum fractions. Net revenue interest. The percentage of production to which the owner of a working interest is entitled. Non-road, locomotive and marine diesel (“NRLM”). Used in locomotive, marine and non-road diesel engines and equipment, such as farm or construction equipment. Commonly referred to as “off-road” diesel. In the U.S., the EPA fuel standard for “off-road” vehicles was progressively lowered from low sulfur diesel (500 ppm sulfur) to ultra low sulfur diesel (15 ppm sulfur). 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. Petroleum. A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds. The name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil. Parts per Million “(ppm”). Represents the mass of a chemical or contaminate per unit volume of water. Product slate. The type of refined petroleum products produced by the refining process. Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquefied petroleum gases. The others include butane, propylene, butadiene, butylene, isobutylene and mixtures thereof. See definition of liquefied petroleum gas. Recommissioning. While commissioning of a new plant facility or refinery helps ensure correct operation of its major systems when first installed, recommissioning helps to restore an existing plant facility or refinery to its originally intended operating performance or capacity. Both processes comprise the integrated application of a set of engineering techniques and procedures to check, inspect and test every operational component of the project, from individual functions such as instruments and equipment, up to complex amalgamations, such as modules, subsystems and systems.

Refined petroleum products. Refined petroleum products are derived from crude oil and condensate that have been processed through various refining methods. The resulting products include gasoline, home heating oil, jet fuel, diesel, lubricants and the raw materials for fertilizer, chemicals, and pharmaceuticals. Following the refining process, the products are transported to terminals or local distribution centers for sale to various end-users and consumers. Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil and condensate is separated and transformed into marketable refined petroleum products. Separation. The separation of the different hydrocarbons present in crude oil and condensate depending on their respective boiling ranges. This process takes place in a distillation column. Sour crude. Crude oil containing sulfur content of more than 0.5%. Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane from a product. Sweet crude. Crude oil containing sulfur content of less than 0.5%. Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also produced as a byproduct of removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized according to their sulfur content, with lower sulfur fuels usually selling at a higher, premium price and higher sulfur fuels selling at a lower, or discounted, price. Topping unit. A type of petroleum refinery that engages in only the first step of the refining process -- crude distillation. A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0. Throughput. The volume processed through a unit or a refinery or transported through a pipeline. Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit is taken offline for a week or more for comprehensive revamp and renewal. Ultra low sulfur diesel (“ULSD”). A cleaner-burning diesel fuel containing a maximum 15 ppm sulfur. Primarily used for highway vehicles. Commonly referred to as “on-road” diesel. 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 and in which the interests of the parties are not specified whether by percentage or portion of the property. West Texas Intermediate (“WTI”). A grade of crude oil used as a benchmark in oil pricing. Described as intermediate because of its relative mid-range density and mid-range sulfur content. 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. Yield. The percentage of refined petroleum products that is produced from crude oil and other feedstocks.

 

 

 

 

·	Lazarus Energy, LLC, a Delaware limited liability company (“LE”);

·	Lazarus Refining & Marketing, LLC, a Delaware limited liability company (“LRM”);

·	Blue Dolphin Pipe Line Company, a Delaware corporation;

·	Blue Dolphin Petroleum Company, a Delaware corporation; and

·	Blue Dolphin Services Co., a Texas corporation.

 

 

 

·	generating additional revenue from leasing product and crude storage to third parties;

·	having crude and product storage to support refinery throughput and future expansion of up to 30,000 bbls per day; and

·	increasing the processing capacity and complexity of the Nixon Facility.

(i)	completed refurbishment of the naphtha stabilizer and depropanizer units, which improve the overall quality of the naphtha that we produce and help increase the capacity utilization rate of the Nixon Facility;

(ii)	purchased idle refinery equipment, including, among others, a Merox unit, vacuum tower, prefrac tower unit, and LPG fractionator, which may, over time, be refurbished for use at the Nixon Facility;

(iii)

continued debottlenecking efforts, which improve production and efficiency;

 

(iv)	completed construction of an additional 100,000 bbls of petroleum storage tanks at the Nixon Facility; and

 

(v)	made smaller, impactful capital improvements to the Nixon Facility, including refurbishment of the wastewater system, and construction of a new parking area, new access roads, drainage, and tank firewalls.

 

We are currently constructing an additional 700,000 bbls of petroleum storage capacity at the Nixon Facility. When construction is complete, total crude oil, condensate, and refined petroleum product storage capacity at the Nixon Facility will exceed 1,000,000 bbls.

 

 

 

 

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Step 1 (January 2, 2011 – June 30, 2011).  Only stationary sources then subject to the PSD permitting program (i.e., those that are newly-constructed or modified in a way that significantly increases emissions of a pollutant other than GHGs) were subject to permitting requirements for their GHG emissions under PSD. Similarly for the Title V permitting program, only stationary sources then subject to the program (i.e., newly constructed or existing major stationary sources for a pollutant other than GHGs) were subject to Title V permitting requirements for GHG. During this time, no stationary sources were subject to CAA permitting requirements due solely to GHG emissions.

 

 

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Step 2 (July 1, 2011 to June 30, 2013).  Step 2 built on Step 1. In this phase, PSD permitting requirements covered for the first time new construction projects that emit GHG emissions of at least 100,000 tons per year even if they did not exceed the permitting thresholds for any other pollutant. Modifications at existing facilities that increased GHG emissions by at least 75,000 tons per year were subject to permitting requirements, even if they did not significantly increase emissions of any other pollutant. In Step 2, operating permit requirements did, for the first time, apply to stationary sources based on their GHG emissions even if they did not apply based on emissions of any other pollutant. Facilities that emitted at least 100,000 tons per year carbon dioxide equivalent were subject to Title V permitting requirements.

 

 

 

 

·	Personnel serving in capacities equivalent to the capacities of corporate executive officers, including Chief Executive Officer and Chief Financial Officer, as well as general manager and environmental, health and safety personnel; and

·	Personnel providing administrative and professional services, including accounting, human resources, insurance, and regulatory compliance.

 

 

 

 

 

●	changes in foreign, domestic, and local economic conditions;

●	foreign and domestic demand for fuel products;

●	worldwide political conditions, particularly in significant oil producing regions;

●	foreign and domestic production levels of crude oil, other feedstocks, and refined petroleum products and the volume of crude oil, feedstocks, and refined petroleum products imported into the U.S.;

●	availability of and access to transportation infrastructure;

●	capacity utilization rates of refineries in the U.S.;

 

●	development and marketing of alternative and competing fuels;

 

●	commodities speculation;

●	natural disasters (such as hurricanes and tornadoes), accidents, interruptions in transportation, inclement weather or other events that can cause unscheduled shutdowns or otherwise adversely affect our refineries;

●	federal and state governmental regulations and taxes; and

●	local factors, including market conditions, weather conditions and the level of operations of other refineries and pipelines in our markets.

 

 

 

 

 

Property		Operating Subsidiary		Description		Business Segment		Owned / Leased		Location
Nixon  Facility (56 acres)		Lazarus Energy, LLC Lazarus Refining & Marketing, LLC		Petroleum Processing Petroleum Storage and Terminaling		Refinery Operations		Owned		Nixon, Texas
Freeport Facility (193 acres)		Blue Dolphin Pipe Line Company		Pipeline Operations		Pipeline Transportation		Owned		Freeport, Texas
Pipelines, Oil and Gas Assets		Blue Dolphin Pipe Line Company Blue Dolphin Petroleum Company		Exploration and Production		Pipeline Transportation		Owned/ Leasehold Interests		Gulf of Mexico
Corporate Headquarters		Blue Dolphin Services Co.		Administrative Services		Corporate and Other		Leased		Houston, Texas

 

 

 

 

(1)	Currently inactive.

(2)	Currently abandoned in place.

 

·	Blue Dolphin Pipeline – The Blue Dolphin Pipeline consists of 16-inch and 20-inch offshore pipeline segments, including a trunk line and lateral lines, that run from an offshore anchor platform in Galveston Area Block 288 to our Freeport Facility;

·	GA 350 Pipeline – The GA 350 Pipeline is an 8-inch offshore pipeline extending from Galveston Area Block 350 to a subsea interconnect and tie-in with a transmission pipeline in Galveston Area Block 391; and

·	Omega Pipeline – The Omega Pipeline is a 12-inch offshore pipeline that originates in the High Island Area, East Addition Block A-173 and extends to West Cameron Block 342, where it was previously connected to the High Island Offshore System.

 

 

BLUE DOLPHIN ENERGY COMPANY

2015 FORM 10-K

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

 

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We are entitled to receive weekly payments to cover direct expenses in operating the Nixon Facility (the “Operations Payments”) in an amount not to exceed $750,000 per month plus the amount of any accounting fees, if incurred, not to exceed $50,000 per month.  We assigned our rights to weekly payments and reimbursement of accounting fees under the Joint Marketing Agreement to LEH pursuant to the Operating Agreement. If Gross Profits are insufficient to cover Operations Payments, then GEL may: (i) reduce Operations Payments by an amount representing the difference between the Operations Payments and the Gross Profits for such monthly period, or (ii) provide the Operations Payments with such Operations Payments being considered deficit amounts owing to GEL.  If Gross Profits are negative, then we are not entitled to receive Operations Payments and GEL may recoup any losses sustained by a special allocation of 80% of Gross Profits until such losses are covered in full, after which the prevailing Gross Profits allocation shall be reinstated; and

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GEL is entitled to receive an administrative fee in the amount of $150,000 per month relating to the performance of its obligations under the Joint Marketing Agreement (the “Performance Fee”). GEL shall be paid 30% of the remaining Gross Profit up to $600,000 (the “Threshold Amount”) as the GEL Profit Share and we shall be paid 70% of the remaining Gross Profit as our Profit Share. Any amount of remaining Gross Profit that exceeds the Threshold Amount for such calendar month shall be paid to GEL and us in the following manner: (i) GEL shall be paid 20% of the remaining Gross Profits over the Threshold Amount as the GEL Profit Share and (ii) we shall be paid 80% of the remaining Gross Profits over the Threshold Amount as the our Profit Share.  The GEL Profit Share plus the Performance Fee are collectively referred to in this Annual Report as the Joint Marketing Agreement Profit Share (the “JMA Profit Share”).

 

 

 

 

·	definitions of key financial performance measures used by management;

 

·	consolidated results, which include our Pipeline Transportation business segment;

 

·	non-GAAP financial results; and

 

·	Refinery Operations business segment results.

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Earnings Before Interest, Income Taxes and Depreciation (“EBITDA”). Reflects EBITDA excluding the JMA Profit Share.   - Refinery Operations Adjusted EBITDA. Reflects adjusted EBITDA for our refinery operations business segment.   - Total Adjusted EBITDA. Reflects adjusted EBITDA for our refinery operations and pipeline transportation business segments, as well as corporate and other.   Capacity Utilization Rate. A percentage measure that indicates the amount of available capacity being used at the Nixon Facility. The rate is calculated by dividing total refinery throughput on a bpd basis or total refinery production on a bpd basis by the total capacity of the Nixon Facility, which is currently 15,000 bpd. Cost of Refined Products Sold. Primarily includes purchased crude oil and condensate costs, as well as transportation, freight and storage costs.   Depletion, Depreciation and Amortization. Represents property and equipment, as well as intangible assets that are depreciated or amortized based on the straight-line method over the estimated useful life of the related asset.   Downtime. Scheduled or unscheduled periods in which the Nixon Facility is not operable. Downtime may be required for a variety of reasons, including maintenance, inspection and equipment repair, voluntary regulatory compliance measures, and cessation or suspension by regulatory authorities. Easement, Interest and Other Income. Reflects income related to:   (i) FLNG Master Easement Agreement. An easement agreement with FLNG Land II, Inc., a Delaware corporation (“FLNG”), which is recorded as land easement revenue and recognized monthly as earned, and   (ii) Grynberg Matter. A nearly two decades-old case involving Jack J. Grynberg and several defendants in the oil and gas industry, including Blue Dolphin Pipe Line Company (the “Grynberg Matter”), which was recorded as other non-recurring income.

EBITDA. Reflects earnings before: (i) interest income (expense), (ii) income taxes, and (iii) depreciation and amortization.   - Refinery Operations EBITDA. Reflects EBITDA for our refinery operations business segment.   - Total EBITDA. Reflects EBITDA for our refinery operations and pipeline transportation business segments, as well as corporate and other.   General and Administrative Expenses. Primarily include corporate costs, such as accounting and legal fees, office lease expenses, and administrative expenses.   Income Tax Expense. Includes federal and state taxes, as well as deferred taxes, arising from temporary differences between income for financial reporting and income tax purposes.   JMA Profit Share. Represents the GEL Profit Share plus the Performance Fee for the period pursuant to the Joint Marketing Agreement; is an indirect operating expense.   Net Income. Represents total revenue from operations less total cost of operations, total other expense, and income tax expense.   Operating Days. The number of days in a period in which the Nixon Facility operated. Downtime is excluded from operating days. Refinery Operating Expenses. Reflect the direct operating expenses of the Nixon Facility, including direct costs of labor, maintenance materials and services, chemicals and catalysts and utilities. Represent fees paid to LEH to manage and operate the Nixon Facility pursuant to the Operating Agreement.   Refinery Operating Income. Reflects refined petroleum product sales less direct operating costs (including cost of refined products sold and refinery operating expenses) and the JMA profit share. Revenue from Operations. Primarily consists of refined petroleum product sales, but also includes tank rental and pipeline transportation revenue. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue. Total Refinery Production. Refers to the volume processed as output through the Nixon Facility. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as LPG, naphtha, HOBM and AGO. Total Refinery Throughput. Refers to the volume processed as input through the Nixon Facility. Refinery throughput includes crude oil and condensate and other feedstocks.

 

 

 

 

 

 

 

 

 

 

 

 

(1)	Operation cost within the Refinery Operations and Pipeline Transportation segments includes related general, administrative, and accretion expenses.  Operation cost within Corporate and Other includes general and administrative expenses associated with corporate maintenance costs, such as accounting fees, director fees, and legal expense.
(2)	Other non-interest income reflects FLNG easement revenue and the Grynberg Matter.  See “Part II, Item 8. Financial Statements and Supplementary Data - Note (20) Commitments and Contingencies – FLNG Master Easement Agreement and Grynberg Settlement Agreement” of this Annual Report for further discussion related to FLNG and Grynberg.
(3)	The JMA Profit Share represents the GEL Profit Share plus the Performance Fee for the period pursuant to the Joint Marketing Agreement.  See “Part II, Item 8. Financial Statements and Supplementary Data - Note (20) Commitments and Contingencies” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Relationship with Genesis” of this Annual Report for further discussion of the Joint Marketing Agreement.

 

 

 

 

 

Note:

The difference between total refinery throughput (volume processed as input) and total refinery production (volume processed as output) represents refinery fuel and energy use.

 

Total Refinery Production. For the Current Year, the Nixon Facility produced 4,091,203 bbls, or 11,998 bpd, of refined petroleum products compared to 3,788,710 bbls, or 11,378 bpd, of refined petroleum products for the Prior Year. Total refinery production increased 302,493 bbls, or approximately 8%, for the Current Year compared to the Prior Year, which represented an increase of 620 bpd. Total refinery production increased as a result of: (i) less downtime in the Current Year compared to the Prior Year, (ii) debottlenecking efforts in the Current Year, and (iii) completion of refurbishment of key components of the naphtha stabilizer and depropanizer units late in the Current Year, all of which contributed to an increase in average refinery production for the Current Year.

 

 

 

·	generating additional revenue from leasing product and crude storage to third parties;

·	having crude and product storage to support refinery throughput and future expansion of up to 30,000 bbls per day; and

·	increasing the processing capacity and complexity of the Nixon Facility.

 

(i)	completed refurbishment of the naphtha stabilizer and depropanizer units, which improve the overall quality of the naphtha that we produce and help increase the capacity utilization rate of the Nixon Facility;

(ii)	purchased idle refinery equipment, including, among others, a Merox unit, vacuum tower, prefrac tower unit, and LPG fractionator, which may, over time, be refurbished for use at the Nixon Facility;

(iii)

continued debottlenecking efforts, which improve production and efficiency;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BLUE DOLPHIN ENERGY COMPANY

2015 FORM 10-K