Blue Dolphin Energy: management report and internal controls

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS

Management's Discussion and Analysis is our analysis of our financial
performance, financial condition, and significant trends that may affect future
performance. All statements in this section, other than statements of historical
fact, are forward-looking statements that are inherently uncertain. See
"Important Information Regarding Forward-Looking Statements" for a discussion of
the factors that could cause actual results to differ materially from those
projected in these statements. You should read the following discussion together
with the financial statements and the related notes included elsewhere in this
Quarterly Report, as well as with the business strategy, risk factors, and
financial statements and related notes included thereto in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2020.

Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf
Coast region of the United States. Our subsidiaries operate a light sweet-crude,
15,000-bpd crude distillation tower with approximately 1.2 million bbls of
petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986
as a Delaware corporation and is traded on the OTCQX under the ticker symbol
"BDCO".

Our assets are primarily organized in two segments: refinery operations (owned
by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries
that are reflected in corporate and other include BDPL (inactive pipeline and
facilities assets), BDPC (inactive leasehold interests in oil and gas wells),
and BDSC (administrative services). For more information related to our business
segments, see "Part I, Item 1. Financial Statements - Note (4)".

Affiliates

Affiliates controlled approximately 82% of the voting power of our Common Stock
as of the filing date of this report. An Affiliate operates and manages all Blue
Dolphin properties and funds working capital requirements during periods of
working capital deficits, and an Affiliate is a significant customer of our
refined products. Blue Dolphin and certain of its subsidiaries are currently
parties to a variety of agreements with Affiliates. See "Part I, Item 1.
Financial Statements - Note (3)" for additional disclosures related to Affiliate
agreements, arrangements, and risks associated with working capital deficits.

Business Operations Update
In 2020, the outbreak of the COVID-19 pandemic negatively impacted worldwide
economic and commercial activity and financial markets, as well as global demand
for petroleum products. As a result of commodity price volatility and decreased
demand for our products, our business results and cash flows were significantly
adversely impacted by the COVID-19 pandemic in 2020 and throughout the first
quarter of 2021. As vaccine rollouts ramp up around the world, travel
restrictions are pared back, and OPEC and other producer countries re-balance
inventories, we are cautiously optimistic that the global economy, oil demand,
and commodity prices will recover from the impact of the pandemic.

In the wake of the COVID-19 pandemic, we continue to take measures to lessen the
impact on our operations and limit the spread of the virus among personnel. We
operate the Nixon facility at reduced rates based on market conditions and
staffing levels, and we adjust the facility's operating rate in response to
market and other conditions. We careful evaluate projects and, as a result, have
limited or postponed projects and other non-essential work. We have also planned
capital expenditures at a level we believe will satisfy all required safety,
environmental, and regulatory requirements. With regard to personnel, we have
adopted remote working where possible. Where on-site operations are required,
personnel are required to wear masks and practice social distancing. We also
implemented other site-specific precautionary measures to reduce the risk of
exposure and have restricted non-essential business travel. Personnel,
customers, and partners are also encouraged to collaborate virtually.

The duration of the impact of the COVID-19 pandemic and related market
developments is unknown. The continued negative impact of these events on our
business and operations will depend on the ongoing severity, location and
duration of the effects and spread of COVID-19, the effectiveness of vaccine
programs, other actions undertaken by federal, state, and local governments and
health officials to contain the virus or treat its effects, and how quickly and
to what extent economic conditions improve and normal business and operating
conditions resume in 2021 or thereafter. Non-compliance with applicable
environmental and safety requirements, including as a result of reduced staff
due to an outbreak of the virus at one of our locations, may impair our
operations, subject us to fines or penalties assessed by governmental
authorities, and/or result in an environmental or safety incident. We may also
be subject to liability as a result of claims against us by impacted workers or
third parties. The foregoing and other continued disruptions to our business as
a result of the COVID-19 pandemic could result in a material adverse effect on
our business, result of operations, financial condition, cash flows, and our
ability to service our indebtedness and other obligations. There can also be no
assurance that our liquidity, business, financial condition, and results of
operations will revert to pre-2020 levels once the impacts of the COVID-19
pandemic cease.


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Management discussion and analysis and internal controls



Going Concern
Management has determined that certain factors raise substantial doubt about our
ability to continue as a going concern. As discussed more fully below, these
factors include inadequate liquidity to sustain operations due to defaults under
our secured loan agreements, margin deterioration and volatility, and historic
net losses and working capital deficits. Our consolidated financial statements
assume we will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty. Our ability to continue
as a going concern depends on sustained positive operating margins and having
working capital for, amongst other requirements, purchasing crude oil and
condensate and making payments on long-term debt. Without positive operating
margins and working capital, our business will be jeopardized, and we may not be
able to continue. If we are unable to make required debt payments, we would
likely have to consider other options, such as selling assets, raising
additional debt or equity capital, cutting costs or otherwise reducing our cash
requirements, or negotiating with our creditors to restructure our applicable
obligations, including a potential bankruptcy filing.

Defaults Under Secured Loan Agreements. We are currently in default under
certain of our secured loan agreements with third parties and related parties.
As a result, the debt associated with these obligations was classified within
the current portion of long-term debt on our consolidated balance sheets at
March 31, 2021 and December 31, 2020. See "Part I, Item 1. Financial Statements
- Notes (1), (3), (10), and (11)" for additional disclosures related to
third-party and related-party debt, defaults on such debt, and the potential
effects of such defaults on our business, financial condition, and results
of
operations.

Third-Party Defaults

?
Veritex Loans - Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due
2034 permit Veritex to declare the amounts owed under these loan agreements
immediately due and payable, exercise its rights with respect to collateral
securing obligors' obligations under these loan agreements, and/or exercise any
other rights and remedies available. Any exercise by Veritex of its rights and
remedies under our secured loan agreements would have a material adverse effect
on our business operations, including crude oil and condensate procurement and
our customer relationships; financial condition; and results of operations.
Veritex exercising its rights would also adversely impact the trading price of
our common stock and the value of an investment in our common stock, which could
lead to holders of our common stock losing their investment in its entirety. We
can provide no assurance that: (i) our assets or cash flow will be sufficient to
fully repay borrowings under our secured loan agreements with Veritex, either
upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or
restructure the payments of the debt, and/or (iii) Veritex, as first lien
holder, will provide future default waivers. The borrowers continue in active
dialogue with Veritex. As of the filing date of this report, payments under the
Veritex loans were current, but other defaults remained outstanding.

?
Amended Pilot Line of Credit - Upon maturity of the Pilot Line of Credit in May
2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a
guarantor and collectively guarantors, a notice demanding the immediate payment
of the unpaid principal amount and all interest accrued and unpaid, and all
other amounts owing or payable (the "Payment Obligations"). Pursuant to the
Amended Pilot Line of Credit, commencing on May 4, 2020, the Payment Obligations
began to accrue interest at a default rate of fourteen percent (14%) per annum.
Failure of the borrower or any guarantor of paying the past due Payment
Obligations constituted an event of default. Pilot expressly retained and
reserved all its rights and remedies available to it at any time, including
without limitation, the right to exercise all rights and remedies available to
Pilot under the Amended Pilot Line of Credit or applicable law or equity.

Pursuant to a June 1, 2020 notice, Pilot began applying Pilot's payment
obligations to NPS under each of (a) the Terminal Services Agreement (covering
Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between NPS and
Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as
of June 1, 2019, between NPS and Pilot, against NPS' payment obligations to
Pilot under the Amended Pilot Line of Credit. Such tank lease setoff amounts
only partially satisfy NPS' obligations under the Amended Pilot Line of Credit,
and Pilot expressly retained and reserved all its rights and remedies available
to it at any time, including, without limitation, the right to exercise all
rights and remedies available to Pilot under the Amended Pilot Line of Credit or
applicable law or equity. For the three-month periods ended March 31, 2021 and
2020, the tank lease setoff amounts totaled $0.6 million and $0, respectively.
For the three-month periods ended March 31, 2021 and 2020, the amount of
interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3
million and $0.4 million, respectively.

On November 23, 2020, NPS and guarantors received notice from Pilot that the
entry into the SBA EIDLs was a breach of the Amended Pilot Line of Credit and
Pilot demanded full repayment of the Payment Obligations, including through use
of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens
securing the SBA EIDLs are junior to those securing the Payment Obligations.
While the SBA acknowledged this point and indicated a willingness to subordinate
the SBA EIDLs, no further action has been taken by Pilot as of the filing date
of this report.

Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of
Credit would have a material adverse effect on our business operations,
including crude oil and condensate procurement and our customer relationships;
financial condition; and results of operations. NPS and guarantors continue in
active dialogue with Pilot to reach a negotiated settlement, and we believe that
Pilot hopes to continue working with NPS to settle the Payment Obligations. NPS
and guarantors are also working on the possible refinance of amounts owing and
payable under the Amended Pilot Line of Credit. However, progress with potential
lenders has been slow due to the ongoing COVID-19 pandemic. NPS's ability to
repay, refinance, replace or otherwise extend this credit facility is dependent
on, among other things, business conditions, our financial performance, and the
general condition of the financial markets. Given the current financial markets,
we could be forced to undertake alternate financings, including a sale of
additional common stock, negotiate for an extension of the maturity, or sell
assets and delay capital expenditures in order to generate proceeds that could
be used to repay such indebtedness. We can provide no assurance that we will be
able to consummate any such transaction on terms that are commercially
reasonable, on terms acceptable to us or at all. If new debt or other
liabilities are added to the Company's current consolidated debt levels, the
related risks that it now faces could intensify. In the event we are
unsuccessful in such endeavors, NPS may be unable to pay the amounts outstanding
under the Amended Pilot Line of Credit, which may require us to seek protection
under bankruptcy laws. In such a case, the trading price of our common stock and
the value of an investment in our common stock could significantly decrease,
which could lead to holders of our common stock losing their investment in our
common stock in its entirety.


Blue Dolphin Energy Company March 31, 2021 | Page 40

Management discussion and analysis and internal controls



?
Notre Dame Debt - Pursuant to a 2015 subordination agreement, the holder of the
Notre Dame Debt agreed to subordinate their right to payments, as well as any
security interest and liens on the Nixon facility's business assets, in favor of
Veritex as holder of the LE Term Loan Due 2034. To date, no payments have been
made under the subordinated Notre Dame Debt and the holder of the Notre Dame
Debt has taken no action as a result of the non-payment.

Our financial health could be materially and adversely affected by defaults in
our secured loan agreements, margin deterioration and volatility, historic net
losses and working capital deficits, as well as termination of the crude supply
agreement or terminal services agreement with Pilot, which could impact our
ability to acquire crude oil and condensate. In addition, sustained periods of
low crude oil prices due to market volatility associated with the COVID-19
pandemic has resulted in significant financial constraints on producers, which
in turn has resulted in long term crude oil supply constraints and increased
transportation costs. A failure to acquire crude oil and condensate when needed
will have a material effect on our business results and operations. During the
three-month period ended March 31, 2021, our refinery experienced 1 day of
downtime as a result of lack of crude due to cash constraints.

Related-Party Defaults
Affiliates controlled approximately 82% of the voting power of our Common Stock
as of the filing date of this report, an Affiliate operates and manages all Blue
Dolphin properties, an Affiliate is a significant customer of our refined
products, and we borrow from Affiliates during periods of working capital
deficits.

Margin Deterioration and Volatility. Our refining margins generally improve in
an environment of higher crude oil and refined product prices, and where the
spread between crude oil prices and refined product prices widen. In 2020, steps
taken early on to address the COVID-19 pandemic globally and nationally,
including government-imposed temporary business closures and voluntary
shelter-at-home directives, caused oil prices to decline sharply. In addition,
actions by members of the OPEC and other producer countries with respect to oil
production and pricing significantly impacted supply and demand in global oil
and gas markets. As COVID-19 vaccinations increase, global economic activity
rises, and the OPEC and partner countries limit crude oil production, there is
cautious optimism that the economy will improve in the short-term. However, oil
and refined product prices and demand are expected to remain volatile for the
foreseeable future, despite signs of recovery during the first quarter of 2021.
We cannot predict when prices and demand will stabilize, and we are currently
unable to estimate the impact these events will have on our future financial
position and results of operations. Accordingly, we expect that these events
will continue to have a material adverse effect on our financial position and
results of operations throughout 2021.

Historic Net Losses and Working Capital Deficits.
Net Losses
Net loss for the three months ended March 31, 2021 was $3.4 million, or a loss
of $0.27 per share, compared to a net loss of $3.3 million, or a loss of $0.27
per share, for the three months ended March 31, 2020. Net losses in both periods
were the result of unfavorable refining margins per bbl. The net loss during the
three months ended March 31, 2021 was also due to 10 days of refinery downtime
associated with Winter Storm Uri.

Working Capital Deficits
We had a working capital deficit of $74.3 million and $72.3 million at March 31,
2021 and December 31, 2020, respectively. Excluding the current portion of
long-term debt, we had a working capital deficit of $24.2 million and $22.6
million at March 31, 2021 and December 31, 2020, respectively. Cash and cash
equivalents, restricted cash (current portion), and restricted cash, noncurrent
were as follow:


                                  March 31, December 31,


                                  2021      2020


                                   (in thousands)




Cash and cash equivalents          $521      $549
Restricted cash (current portion)  48        48
Restricted cash, noncurrent        -         514
Total                              $569      $1,111


See “Part I, Point 1. Financial statements – Note (1)” concerning the going concern factors and the associated risks.

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Management discussion and analysis and internal controls



Operating Risks
Successful execution of our business strategy depends on several key factors,
including, having adequate working capital to meet operational needs and
regulatory requirements, maintaining safe and reliable operations at the Nixon
facility, meeting contractual obligations, and having favorable margins on
refined products. As discussed under "Part I, Item 1. Financial Statements -
Note (1)" under "Going Concern" and throughout this report, we are currently
unable to estimate the impact the COVID-19 pandemic will have on our future
financial position and results of operations. Under earlier state and federal
mandates that regulated business closures, our business was deemed as an
essential business and, as such, remained open. As U.S. federal, state, and
local officials roll out COVID-19 vaccines, we expect to continue operating. Any
governmental mandates, while necessary to address the virus, will result in
further business and operational disruptions, including demand destruction,
liquidity strains, supply chain challenges, travel restrictions, controls on
in-person gathering, and workforce availability.

Management believes that it has taken all prudent steps to mitigate risk, avoid
business disruptions, manage cash flow, and remain competitive in a low oil
price environment. We are managing cash flow by optimizing receivables and
payables by prioritizing payments, managing inventory to avoid buildup,
monitoring discretionary spending, and delaying capital expenditures. At the
Nixon facility, we adjust throughput and production based on prevailing market
conditions. With regard to personnel, we have adopted remote working where
possible. Where on-site operations are required, personnel are required to wear
masks and practice social distancing. We also implemented other site-specific
precautionary measures to reduce the risk of exposure and have restricted
non-essential business travel. Personnel, customers, and partners are also
encouraged to collaborate virtually.

There can be no assurance that our business strategy will be successful, that
Affiliates will continue to fund our working capital needs when we experience
working capital deficits, that we will meet regulatory requirements to provide
additional financial assurance (supplemental pipeline bonds) and decommission
offshore pipelines and platform assets, that we will be able to obtain
additional financing on commercially reasonable terms or at all, or that margins
on our refined products will be favorable. Further, if Veritex and/or Pilot
exercise their rights and remedies under our secured loan agreements, our
business, financial condition, and results of operations will be materially
adversely affected.

Business Strategy
Our primary business objective is to improve our financial profile by executing
the below strategies, modified as necessary, to reflect changing economic
conditions and other circumstances:


Optimizing        ? Operating safely and enhancing health, safety, and
Existing          environmental systems.
Asset Base        ? Planning and managing turnarounds and downtime.


Improving         ? Reducing or streamlining variable costs incurred in production.
Operational       ? Increasing throughput capacity and optimizing product slate.
Efficiencies      ? Increasing tolling and terminaling revenue.


Seizing           ? Leveraging existing infrastructure to engage in renewable
Market            energy projects.
Opportunities     ? Taking advantage of market opportunities as they arise.




Under the Biden Administration, the focus on cleaner energy sources and
technology to decarbonize resource-intensive industries continues to accelerate.
This focus is steering government policy to incentivize clean energy sources and
carbon capture technologies, as well as supporting new industry-wide investment
in areas like renewables, green hydrogen, and carbon capture, utilization, and
storage. During the first quarter of 2021, we announced a pivot to explore
renewable energy opportunities through an affiliate, Lazarus Energy Alternative
Fuels LLC ("LEAF"). LEAF will explore potential opportunities to position Blue
Dolphin in the global transition to cleaner, lower-carbon alternatives from
traditional fossil fuels. These opportunities may include technology,
development, or commercial partnerships, as well as the repurposing of assets
and facilities, for the production, storage, transportation and sale of
alternative fuels and other low-carbon products.

Successful execution of our business strategy depends on several key factors,
including, having adequate working capital to meet operational needs and
regulatory requirements, maintaining safe and reliable operations at the Nixon
facility, meeting contractual obligations, having favorable margins on refined
products, and collaborating with new partners to develop and finance clean
energy projects. There can be no assurance that our business strategy will be
successful, including a pivot to renewables through LEAF, that Affiliates will
continue to fund our working capital needs when we experience working capital
deficits, that we will meet regulatory requirements to provide additional
financial assurance (supplemental pipeline bonds) and decommission offshore
pipelines and platform assets, that we will be able to obtain additional
financing on commercially reasonable terms or at all, or that margins on our
refined products will be favorable. Further, if Veritex and/or Pilot exercise
their rights and remedies under our secured loan agreements, our business,
financial condition, and results of operations will be materially adversely
affected.


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Management discussion and analysis and internal controls



We regularly engage in discussions with third parties regarding possible joint
ventures, asset sales, mergers, and other potential business combinations.
However, we do not anticipate any material activities in the foreseeable future.
Management has determined that conditions exist that raise substantial doubt
about our ability to continue as a going concern due to defaults under our
secured loan agreements, margin deterioration and volatility, and historic net
losses and working capital deficits. A 'going concern' opinion could impair our
ability to finance our operations through the sale of equity, incurring debt, or
other financing alternatives. Our ability to continue as a going concern will
depend on sustained positive operating margins and working capital to sustain
operations, including the purchase of crude oil and condensate and payments on
long-term debt. If we are unable to achieve these goals, our business would be
jeopardized, we may not be able to continue operating, and we may have to seek
bankruptcy protection.

Refinery Operations
Our refinery operations segment consists of the following assets and operations:

                                    Key Products       Operating
Property                            Handled            Subsidiary     Location

Nixon facility                      Crude Oil          LE             Nixon, Texas
? Crude distillation tower          Refined Products
(15,000 bpd)
? Petroleum storage tanks
? Loading and unloading
facilities
? Land (56 acres)



Crude Oil and Condensate Supply.  Operation of the Nixon refinery depends on our
ability to purchase adequate amounts of crude oil and condensate. We have a
long-term crude supply agreement in place with Pilot. The crude supply
agreement, the initial term of which is volume based, expires when Pilot sells
us 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement
automatically renews for successive one-year terms (each such term, a "Renewal
Term") unless either party provides the other with notice of nonrenewal at least
60 days prior to expiration of any Renewal Term. Total volume billed under the
crude supply agreement totaled approximately 5.8 million bbls as of March 31,
2021. Effective March 1, 2020, Pilot assigned its rights, title, interest, and
obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate.
Sustained periods of low crude oil prices due to market volatility associated
with the COVID-19 pandemic has resulted in significant financial constraints on
producers, which in turn has resulted in long term crude oil supply constraints
and increased transportation costs. A failure to acquire crude oil and
condensate when needed will have a material effect on our business results and
operations. During the three-month periods ended March 31, 2021 and 2020, our
refinery experienced 1 day and no days, respectively, of downtime as a result of
lack of crude due to cash constraints.

Pilot also stores crude oil at the Nixon facility under two terminal services
agreements. Under the terminal services agreements, Pilot stores crude oil at
the Nixon facility at a specified rate per bbl of the storage tank's shell
capacity. Although the initial term of the terminal services agreement expired
April 30, 2020, the agreement renewed on a one-year evergreen basis. Either
party may terminate the terminal services agreement by providing the other party
60 days prior written notice. However, the terminal services agreement will
automatically terminate upon expiration or termination of the crude supply
agreement.

Products and markets. Our market is Gulf Coast region of we, which is represented by the EIA as Petroleum administration for PADD 3. We mainly sell our products in the we in PADD 3. Occasionally we sell refined products to customers who export to Mexico.

The Nixon refinery's product slate is moderately adjusted based on market
demand. We currently produce a single finished product - jet fuel - and several
intermediate products, including naphtha, HOBM, and AGO.  Our jet fuel is sold
to an Affiliate, which is HUBZone certified. The product sales agreement with
the Affiliate has a 1-year term expiring the earliest to occur of March 31, 2022
plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our
intermediate products are primarily sold in nearby markets to wholesalers and
refiners as a feedstock for further blending and processing.

Customers. Customers for our refined products include distributors, wholesalers
and refineries primarily in the lower portion of the Texas Triangle (the Houston
- San Antonio - Dallas/Fort Worth area). We have bulk term contracts in place
with most of our customers, including month-to-month, six months, and up to
one-year terms. Certain of our contracts require our customers to prepay and us
to sell fixed quantities and/or minimum quantities of finished and intermediate
petroleum products. Many of these arrangements are subject to periodic
renegotiation on a forward-looking basis, which could result in higher or lower
relative prices on future sales of our refined products.

Competition. Many of our competitors are substantially larger than us and are
engaged on a national or international level in many segments of the oil and gas
industry, including exploration and production, gathering and transportation,
and marketing. These competitors may have greater flexibility in responding to
or absorbing market changes occurring in one or more of these business segments.
We compete primarily based on cost. Due to the low complexity of our simple
"topping unit" refinery, we can be relatively nimble in adjusting our refined
products slate because of changing commodity prices, market demand, and refinery
operating costs.


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Management discussion and analysis and internal controls



Safety and Downtime. Our refinery operations are operated in a manner materially
consistent with industry safe practices and standards. These operations are
subject to regulations under OSHA, the EPA, and comparable state and local
requirements. Together, these regulations are designed for personnel safety,
process safety management, and risk management, as well as to prevent or
minimize the probability and consequences of an accidental release of toxic,
reactive, flammable, or explosive chemicals. Storage tanks used for refinery
operations are designed for crude oil and condensate and refined products, and
most are equipped with appropriate controls that minimize emissions and promote
safety. Our refinery operations have response and control plans, spill
prevention and other programs to respond to emergencies.

The Nixon refinery periodically experiences planned and unplanned temporary
shutdowns. Planned turnarounds are used to repair, restore, refurbish, or
replace refinery equipment. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures, cessation or
suspension by regulatory authorities, disabled equipment, or lack of crude due
to cash constraints. However, in Texas the most typical reason is excessive heat
or power outages from high winds and thunderstorms. The Nixon refinery did not
incur significant damage as a result of Winter Storm Uri in February 2021.
However, the facility was down for approximately 10 days as a result of lost
external power.

We are particularly vulnerable to disruptions in our operations because all our
refining operations are conducted at a single facility. Any scheduled or
unscheduled downtime will result in lost margin opportunity, potential increased
maintenance expense, and a reduction of refined products inventory, which could
reduce our ability to meet our payment obligations.

Tolling and Terminaling Operations
Our tolling and terminaling segment consists of the following assets and
operations:

                                     Key Products       Operating
Property                             Handled            Subsidiary     Location

Nixon facility                       Crude Oil          LRM, NPS       Nixon, Texas
? Petroleum storage tanks            Refined Products

? Loading and unloading facilities



Products and Customers. The Nixon facility's petroleum storage tanks and
infrastructure are primarily suited for crude oil and condensate and refined
products, such as naphtha, jet fuel, diesel, and fuel oil. Storage customers are
typically refiners in the lower portion of the Texas Triangle (the Houston - San
Antonio - Dallas/Fort Worth area). Shipments are received and redelivered from
within the Nixon facility via pipeline or from third parties via truck. Contract
terms range from month-to-month to three years.

Operations Safety. Our tolling and terminal operations are operated in a manner
materially consistent with industry safe practices and standards. These
operations are subject to regulations under OSHA and comparable state and local
regulations. Storage tanks used for terminal operations are designed for crude
oil and condensate and refined products, and most are equipped with appropriate
controls that minimize emissions and promote safety. Our terminal operations
have response and control plans, spill prevention and other programs to respond
to emergencies.

Inactive Operations
We own certain other pipeline and facilities assets and have leasehold interests
in oil and gas properties. These assets, which are shown below and included in
corporate and other, are not operational and are fully impaired. We fully
impaired our pipeline assets in 2016 and our oil and gas leasehold interests in
2011. Our pipeline assets and oil and gas leasehold interests had no revenue
during the three months ended March 31, 2021 and 2020. See "Part I, Item 1.
Financial Statements - Note (16)" related to pipelines and platform
decommissioning requirements and related risks.

                                                   Operating
Property                                           Subsidiary        Location

Freeport facility                                  BDPL              Freeport, Texas
? Crude oil and natural gas separation and
dehydration
? Natural gas processing, treating, and
redelivery
? Vapor recovery unit
? Two onshore pipelines
? Land (162 acres)
Offshore Pipelines (Trunk Line and Lateral         BDPL              Gulf of Mexico
Lines)
Oil and Gas Leasehold Interests                    BDPC              Gulf of Mexico





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Management discussion and analysis and internal controls



Pipeline and Facilities Safety.
Although our pipeline and facility assets are inactive, they require upkeep and
maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE,
and comparable state and local regulations. We have response and control plans,
spill prevention and other programs to respond to emergencies related to these
assets.

 Results of Operations
A discussion and analysis of the factors contributing to our consolidated
financial results of operations is presented below and should be in read in
conjunction with our financial statements in "Part I, Item 1. Financial
Statements". The financial statements, together with the following information,
are intended to provide investors with a reasonable basis for assessing our
historical operations, but they should not serve as the only criteria for
predicting future performance.

Major Influences on Results of Operations. Our results of operations and
liquidity are highly dependent upon the margins that we receive for our refined
products. The dollar per bbl price difference between crude oil and condensate
(input) and refined products (output) is the most significant driver of refining
margins, and they have historically been subject to wide fluctuations. In 2020,
steps taken early on to address the COVID-19 pandemic globally and nationally,
including government-imposed temporary business closures and voluntary
shelter-at-home directives, caused oil prices to decline sharply. In addition,
actions by members of the OPEC and other producer countries with respect to oil
production and pricing significantly impacted supply and demand in global oil
and gas markets. As COVID-19 vaccinations increase, global economic activity
rises, and the OPEC and partner countries limit crude oil production, there is
cautious optimism that the economy will improve in the short-term. However, oil
and refined product prices and demand are expected to remain volatile for the
foreseeable future, despite signs of recovery during the first quarter of 2021.
We cannot predict when prices and demand will stabilize, and we are currently
unable to estimate the impact these events will have on our future financial
position and results of operations. Accordingly, we expect that these events
will continue to have a material adverse effect on our financial position and
results of operations throughout 2021.

How We Evaluate Our Operations. Management uses certain financial and operating
measures to analyze segment performance. These measures are significant factors
in assessing our operating results and profitability and include: segment
contribution margin (deficit), refining gross profit (deficit) per bbl, tank
rental revenue, operation costs and expenses, refinery throughput and production
data, and refinery downtime. Segment contribution margin (deficit) and refining
gross profit (deficit) per bbl are non-GAAP measures.

Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per
Bbl
Segment contribution margin (deficit) is used to evaluate both refinery
operations and tolling and terminaling while refining gross profit (deficit) per
bbl is a refinery operations benchmark. Both measures supplement our financial
information presented in accordance with U.S. GAAP. Management uses these
non-GAAP measures to analyze our results of operations, assess internal
performance against budgeted and forecasted amounts, and evaluate future impacts
to our financial performance as a result of capital investments. Non-GAAP
measures have important limitations as analytical tools. These non-GAAP
measures, which are defined in our glossary of terms, should not be considered a
substitute for GAAP financial measures. We believe these measures may help
investors, analysts, lenders, and ratings agencies analyze our results of
operations and liquidity in conjunction with our U.S. GAAP results. See
"Non-GAAP Reconciliations" within this Results of Operations and the financial
statements within "Part I, Item 1. Financial Statements" for a reconciliation of
Non-GAAP measures to U.S. GAAP.

Tank Rental Revenue
Tolling and terminaling revenue primarily represents tank rental storage fees
associated with customer tank rental agreements. As a result, tank rental
revenue is one of the measures management uses to evaluate the performance of
our tolling and terminaling business segment.

Operation Costs and Expenses
We manage operating expenses in tandem with meeting environmental and safety
requirements and objectives and maintaining the integrity of our assets.
Operating expenses are comprised primarily of labor expenses, repairs and other
maintenance costs, and utility costs. Expenses for refinery operations generally
remain stable across broad ranges of throughput volumes, but they can fluctuate
from period to period depending on the mix of activities performed during that
period and the timing of those expenses. Operation costs for tolling and
terminaling operations are relatively fixed.

Refinery Throughput and Production Data
The amount of revenue we generate from our refinery operations business segment
primarily depends on the volumes of crude oil and refined products that we
handle through our processing assets and the volume sold to customers. These
volumes are affected by the supply and demand of, and demand for, crude oil and
refined products in the markets served directly or indirectly by our assets, as
well as refinery downtime.

Refinery Downtime
The Nixon refinery periodically experiences planned and unplanned temporary
shutdowns. Any scheduled or unscheduled downtime will result in lost margin
opportunity, potential increased maintenance expense, and a reduction of refined
products inventory, which could reduce our ability to meet our payment
obligations.


Blue Dolphin Energy Company   March 31, 2021 |Page 45




Management discussion and analysis and internal controls



Consolidated Results. Our consolidated results of operations include certain
other unallocated corporate activities and the elimination of intercompany
transactions and therefore do not equal the sum of the operating results of our
refinery operations and tolling and terminaling business segments.

Three months ended March 31, 2021 Against March 31, 2020 (Q1 2021 compared to Q1

                                     2020)

Overview. Net loss for Q1 2021 was $3.2   General and Administrative
million, or a loss of $0.25 per share,    Expenses. General and administrative
compared to a net loss of $3.3 million,   expenses increased approximately 2% to
or a loss of $0.27 per share, in Q1       $0.7 million in Q1 2021 from $0.6
2020. Net losses in both periods were     million in Q1 2020. The increase
the result of unfavorable refining        primarily related to rising insurance
margins per bbl. The net loss in Q1       premiums.
2021 was also due to 10 days of
refinery downtime associated with         Depletion, Depreciation and
Winter Storm Uri.                         Amortization. Depletion, 

depreciation,

                                          and amortization expenses for Q1 

2021

Total Revenue from Operations. Total      totaled approximately $0.7 million
revenue from operations decreased         compared to approximately $0.6 million
approximately 4% to $59.4 million for     in Q1 2020. The nearly 10% increase
Q1 2021 from $62.0 million for Q1 2020.   primarily related to placing a
Although refined product prices           petroleum storage tank in 

a service.

improved in Q1 2021, refinery
operations revenue decreased due to       Total Other Income (Expense). Total
lower sales volumes. Tolling and          other expense in Q1 2021 was $1.4
terminaling revenue decreased as a        million compared to total other expense
result of lower tank rental fees.         of $1.8 million in Q1 2020,
                                          representing a decrease of
Total Cost of Goods Sold. Total cost of   approximately $0.4 million. Total other
goods sold decreased approximately 4%     expense in Q1 2021 primarily related to
to $59.6 million for Q1 2021 from $62.1   interest expense associated with
million for Q1 2020. The decrease         secured loan agreements with Veritex,
related to lower throughput due to        related-party debt, and the line of
refinery downtime.                        credit with Pilot.

Gross Deficit. Gross deficit was $0.2
million for Q1 2021 compared to gross
deficit of $0.1 million for Q1 2020.
Refinery margins were adversely
affected by lower margins and refinery
downtime primarily associated with
Winter Storm Uri.



Blue Dolphin Energy Company March 31, 2021 | Page 46

Management discussion and analysis and internal controls



Refinery Operations. Our refinery operations business segment is owned by LE.
Assets within this segment consist of a light sweet-crude, 15,000-bpd crude
distillation tower, petroleum storage tanks, loading and unloading facilities,
and approximately 56 acres of land. Refinery operations revenue is derived
from
refined product sales.


                               Three Months Ended


                               March 31,


                               2021       2020


                               (in thousands)




Refined product sales           $58,483    $60,897
Less: Total cost of goods sold  (59,623)   (62,088)
Gross deficit                   (1,140)    (1,191)

Sales (Bbls)                    948        1,141

Gross Deficit per Bbl           $(1.20)    $(1.04)




                             Three Months Ended


                             March 31,


                             2021      2020


                             (in thousands)

Net revenue (1)               $58,483   $60,897
Intercompany fees and sales   (566)     (617)
Operation costs and expenses  (59,289)  (61,833)
Segment Contribution Deficit  $(1,372)  $(1,553)



Q1 2021 Versus Q1 2020
?
deficit per bbl was $1.20 for Q1 2021 compared to gross deficit per bbl of $1.04
in Q1 2020, representing a decline of $0.16 per bbl. The deficit in both periods
related to lower margins and market fluctuations associated with the COVID-19
pandemic. Refinery downtime associated with Winter Storm Uri also caused an
increase in gross deficit per bbl in Q1 2021.
?
deficit improved slightly in Q1 2021 compared to Q1 2020.
?
downtime increased significantly to 11 days in Q1 2021 compared to 3 days in Q1
2020. Refinery downtime in Q1 2021 primarily related to power outages during
Winter Storm Uri.

Tolling and Terminaling. Our tolling and terminaling business segment is owned
by LRM and NPS. Assets within this segment include petroleum storage tanks and
loading and unloading facilities. Tolling and terminaling revenue is derived
from tank storage rental fees, tolling and reservation fees for use of the
naphtha stabilizer, and fees collected for ancillary services, such as in-tank
blending.


                             Three Months Ended


                             March 31,


                             2021      2020


                             (in thousands)

Net revenue (1)               $930      $1,103
Intercompany fees and sales   566       617
Operation costs and expenses  (334)     (255)
Segment Contribution Margin   $1,162    $1,465



Q1 2021 Versus Q1 2020
?
Tolling and terminaling net revenue decreased nearly 16% in Q1 2021 compared to
Q1 2020 primarily as a result of lower tank rental revenue.
?
Intercompany fees and sales, which reflect fees associated with an intercompany
tolling agreement tied to naphtha volumes, decreased in Q1 2021 compared to Q1
2020. Naphtha sales volumes decreased between the periods.
?
Segment contribution margin in Q1 2021 decreased 20% to $1.2 million compared to
$1.5 million Q1 2020. The decrease related to lower revenue and intercompany
fees tied to naphtha volumes.



Blue Dolphin Energy Company March 31, 2021 | Page 47

Management discussion and analysis and internal controls

Reconciliations not in accordance with GAAP.

Reconciliation of the sector contribution margin (deficit)





                 Three Months Ended March 31,


                 2021       2020       2021         2020         2021       2020       2021      2020


                 Refinery Operations   Tolling and Terminaling   Corporate and Other
                                                                                       Total
                   (in thousands)



Segment
contribution

margin (deficit) ($ 1,372) ($ 1,553) $ 1,162 $ 1,465 (54)

  $(59)      $(264)    $(147)
General and
administrative
expenses(1)       (301)      (304)      (68)         (68)         (413)      (419)      (782)     (791)
Depreciation and
amortization      (302)      (288)      (340)        (294)        (51)       (51)       (693)     (633)
Interest and
other
non-operating
income
(expenses), net   (598)      (741)      (452)        (770)        (385)      (243)      (1,435)   (1,754)
Income (loss)
before income
taxes             (2,573)    (2,886)    302          333          (903)      (772)      (3,174)   (3,325)
Income tax
expense           -          -          -            -            -          (15)       -         (15)
Income (loss)
before income
taxes             $(2,573)   $(2,886)   $302         $333         $(903)     $(787)     $(3,174)  $(3,340)



(1)

General and administrative costs of refining operations include LEH operating costs.

Capital Resources and Liquidity
We had a working capital deficit of $74.3 million and $72.3 million at March 31,
2021 and December 31, 2020, respectively. Excluding the current portion of
long-term debt, we had a working capital deficit of $24.2 million and $22.6
million at March 31, 2021 and December 31, 2020, respectively. Although in place
pre-pandemic, we have further tightened our cash conservation program to manage
cash flow and remain competitive in a low oil price environment. This includes
optimizing receivables and payables by prioritizing payments, managing inventory
to avoid buildup, monitoring discretionary spending, and delaying capital
expenditures. Despite this focus, management is keeping in mind the overall
safety of our operations and personnel, as well as the impact to our business
over the long-term.

Considering this recent period of extreme economic disruption, combined with the
weaker commodity price environment, we remain focused on the safe and reliable
operation of the Nixon facility and cash conservation. Our primary cash
requirements relate to: (i) purchasing crude oil and condensate for the
operation of the Nixon refinery, (ii) reimbursing LEH for direct operating
expenses and paying the LEH operating fee under the Amended and Restated
Operating Agreement and (iii) servicing debt. In instances where we experience a
working capital deficit, we have historically relied on Affiliates to meet our
liquidity needs. We are actively exploring additional financing; however, we
currently have no arrangements for additional capital and no assurances can be
given that we will be able to raise sufficient capital when needed, on
acceptable terms, or at all. If we are unable to raise sufficient additional
capital in the very near term, we may further default on our payment obligations
under certain of our existing debt obligations. Without additional financing, it
remains unclear whether we will have or can obtain sufficient liquidity to
withstand further disruptions to our business.

How long and to what extent COVID-19 and related market developments will affect
our business and operations is unknown. The overall impact of these events will
depend on the actions of federal, state, and local government and health
officials to contain and treat the virus, including deployment of vaccines, and
how quickly economic conditions improve thereafter. A sustained period of low
crude oil prices due to market volatility associated with the COVID-19 pandemic
may also result in significant financial constraints on producers, which could
result in long term crude oil supply constraints and increased transportation
costs. A failure to acquire crude oil and condensate when needed will have a
material effect on our business results and operations. As a result, we may have
to seek protection under bankruptcy laws. In such a case, the trading price of
our common stock and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common stock losing
their investment in our common stock in its entirety.


Blue Dolphin Energy Company   March 31, 2021 |Page 48




Management discussion and analysis and internal controls

Debt overview.

Total debt and accrued interest




                                             March 31, December 31,


                                             2021      2020


                                             (in thousands)



Veritex Loans
LE Term Loan Due 2034 (in default)            $23,104   $22,840
LRM Term Loan Due 2034 (in default)           9,601     9,473

Modified pilot line of credit (default) 7272 8145 Notre-Dame debt (default)

                  9,613     9,413
Related-Party Debt
BDPL Loan Agreement (in default)              6,974     6,814
March Ingleside Note (in default)             1,031     1,013
March Carroll Note (in default)               1,732     1,551
June LEH Note (in default)                    9,588     9,446
LE Term Loan Due 2050                         153       152
NPS Term Loan Due 2050                        153       152
Equipment Loan Due 2025                       65        71
Total Debt                                    69,286    69,070

Less: current portion of long-term debt, net (57,244) (57,744) Less: unamortized debt issuance costs

            (1,718)   (1,749)

Less: Accrued interest payable (in the event of default) (9.975) (9222)

                                              $349      $355



Net cash used in financing activities totaled $0.9 million in Q1 2021 compared
to $0.7 million provided by financing activities in Q1 2020. Principal payments
on long-term debt totaled $0.9 million in Q1 2021 compared to $0.7 million in Q1
2020. As of the filing date of this report, LE and LRM were in default with
respect to required monthly payments under secured loan agreements with Veritex.
NPS is making partial monthly payments to Pilot under the Amended Pilot Line of
Credit as a tank lease setoff using amounts Pilot owed to NPS under two tank
lease agreements. No payments have been made under the subordinated Notre Dame
Debt.

Debt Defaults. The majority of our debt is in default. Defaults under our
secured loan agreements with third parties include: (1) Veritex financial
covenant violations, failure to make monthly payments, and failure to replenish
a payment reserve account; (2) Pilot event of default and debt acceleration; and
(3) Notre Dame Debt event of default. We also have defaults under secured and
unsecured related-party debt. See "Part I, Item 1. Financial Statements - Notes
(1), (3), (10), and (11)" for additional disclosures related to Affiliate and
third-party debt agreements, including debt guarantees, and defaults in our debt
obligations.

Concentration of Customers Risk. We routinely assess the financial strength of
our customers and have not experienced significant write-downs in accounts
receivable balances. We believe that our accounts receivable credit risk
exposure is limited.


                                                                           Portion of
                                                                % Total    Accounts
                                                    Number      Revenue    Receivable
                                                    Significant from       at March
                                                    Customers   Operations 31,




March 31, 2021                                       4           90%        $0


                                                                           $0.6
                                                                           million
March 31, 2020                                       4           94%



One of our significant customers is LEH, an Affiliate. The Affiliate purchases
our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts
under preferential pricing terms due to a HUBZone certification. The Affiliate
accounted for 27% and 29% of total revenue from operations in 2021 and 2020,
respectively. The Affiliate represented $0 in accounts receivable at both March
31, 2021 and 2020, respectively. Amounts outstanding relating to the Jet Fuel
Sales Agreement can significantly vary period to period based on the timing of
the related sales and payments received. Amounts we owed to LEH under various
long-term debt, related-party agreements totaled $16.6 million and $16.3 million
at March 31, 2021 and December 31, 2020, respectively. See "Part I, Item 1.
Financial Statements - Notes (3) and (16)" for additional disclosures related to
Affiliate agreements, arrangements, and risk.


Blue Dolphin Energy Company   March 31, 2021 |Page 49




Management discussion and analysis and internal controls



Contractual Obligations.
Related-Party Debt

Agreement/Transaction    Parties          Type    Effective Date Interest Rate Key Terms
Amended and Restated     Jonathan Carroll Debt    04/01/2017     2.00%     
   Tied to payoff of LE
Guaranty Fee Agreement   - LE                                                  $25 million Veritex
                                                                               loan; payments 50%
                                                                               cash, 50% Common
                                                                               Stock

Jonathan Carroll Debt Amended and Updated 01/04/2017 2.00%

    Tied to payoff of
Guaranty Fee Agreement   - LRM                                             
   LRM $10 million
                                                                               Veritex loan;
                                                                               payments 50% cash,
                                                                               50% Common Stock
March Carroll Note (in   Jonathan Carroll Debt    03/31/2017     8.00%         Blue Dolphin working
default)                 - Blue Dolphin                                    
   capital; matured
                                                                               01/01/2019; interest
                                                                               still accruing
March Ingleside Note (in Ingleside - Blue Debt    03/31/2017     8.00%         Blue Dolphin working
default)                 Dolphin                                               capital; reflects
                                                                               amounts owed to
                                                                               Ingleside under
                                                                               previous Amended and
                                                                               Restated Tank Lease
                                                                               Agreement; matured
                                                                               01/01/2019; interest
                                                                               still accruing
June LEH Note (in        LEH - Blue       Debt    03/31/2017     8.00%         Blue Dolphin working
default)                 Dolphin                                           
   capital; reflects
                                                                               amounts owed to LEH
                                                                               under the Amended
                                                                               and Restated
                                                                               Operating Agreement;
                                                                               reflects amounts
                                                                               owed to Jonathan
                                                                               Carroll under
                                                                               guaranty fee
                                                                               agreements; matured
                                                                               01/01/2019; interest
                                                                               still accruing
BDPL-LEH Loan Agreement  LEH - BDPL       Debt    08/15/2016     16.00%    
   2-year term; $4.0
(in default)                                                                   million principal
                                                                               amount; $0.5 million
                                                                               annual payment;
                                                                               proceeds used for
                                                                               working capital; no
                                                                               financial
                                                                               maintenance
                                                                               covenants; secured
                                                                               by certain BDPL
                                                                               property



Related-Party Defaults
Loan Description      Event(s) of Default                  Covenant Violations
March Carroll Note    Failure of borrower to pay past due  --
(in default)          obligations; loan matured January
                      2019
March Ingleside Note  Failure of borrower to pay past due  ---
(in default)          obligations; loan matured January
                      2019
June LEH Note (in     Failure of borrower to pay past due  ---
default)              obligations; loan matured January
                      2019
BDPL-LEH Loan         Failure of borrower to pay past due  ---
Agreement (in         obligations; loan matured August
default)              2018




Blue Dolphin Energy Company   March 31, 2021 |Page 50





Management discussion and analysis and internal controls


Third-Party Debt

                                    Original
                                    Principal               Monthly
                                    Amount    Maturity Date Principal
Loan Description     Parties        (in                     and Interest Interest    Loan Purpose
                                    millions)               Payment      Rate
Veritex Loans(1)
LE Term Loan Due     LE-Veritex     $25.0     Jun 2034      $0.2 million WSJ Prime + Refinance loan;
2034 (in default)                                                        2.75%       capital
                                                                                     improvements
LRM Term Loan Due    LRM-Veritex    $10.0     Dec 2034      $0.1 million WSJ Prime + Refinance bridge
2034 (in default)                                                        2.75%       loan; capital
                                                                                     improvements
Notre Dame Debt (in  LE-Kissick     $11.7     Jan 2018      No payments  16.00%      Working capital;
default)(2)(3)                                              to date;                 reduced balance
                                                            payment                  of GEL
                                                            rights                   arbitration
                                                            subordinated             award
Amended Pilot Line   NPS-Pilot      $13.0     May 2020      ---          14.00%      GEL settlement
of Credit (in                                                                        payment, NPS
default)                                                                             purchase of
                                                                                     crude oil from
                                                                                     Pilot, and
                                                                                     working capital
SBA EIDLs
LE Term Loan Due     LE-SBA         $0.15     Aug 2050      $0.0007      3.75%       Working capital
2050(4)                                                     million

NPS Term Loan Due NPS-SBA $ 0.15 August 2050 0.0007 USD 3.75% Working capital 2050 (4)

                                                     million
Equipment Loan Due   LE-Texas First $0.07     Oct 2025      $0.0013      4.50%       Equipment Lease
2025                                                        million                  Conversion


(1)
Proceeds were placed in a disbursement account whereby Veritex makes payments
for construction related expenses. Amounts held in the disbursement account are
reflected on our consolidated balance sheets as restricted cash (current
portion) and restricted cash, noncurrent. At March 31, 2021, restricted cash
(current portion) was $0.05 million and restricted cash, noncurrent was $0.
December 31, 2020, restricted cash (current portion) was $0.05 million and
restricted cash, noncurrent was $0.5 million.
(2)
LE originally entered into a loan agreement with Notre Dame Investors, Inc. in
the principal amount of $8.0 million. The debt is currently held by John
Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to
increase the principal amount by $3.7 million; the additional principal was used
to reduce the arbitration award with GEL by $3.6 million.
(3)
Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt
agreed to subordinate their right to payments, as well as any security interest
and liens on the Nixon facility's business assets, in favor of Veritex as holder
of the LE Term Loan Due 2034.
(4)
Payments are deferred for the first twelve (12) months of the loan; the first
payment is due August 2021; interest accrues during the deferral period. SBA
EIDLs are not forgivable.


Blue Dolphin Energy Company   March 31, 2021 |Page 51




Management discussion and analysis and internal controls

Third Party Defaults

Loan Description      Event(s) of Default       Covenant Violations
Veritex Loans
LE Term Loan Due 2034 Failure to make required  Financial covenants:
(in default)          monthly payments; failure ?
                      to replenish $1.0 million debt service coverage ratio,
                      payment reserve account;  current ratio, and debt to net
                      events of default under   worth ratio
                      other secured loan
                      agreements with Veritex
LRM Term Loan Due     Events of default under   Financial covenants:
2034 (in default)     other secured loan        ?
                      agreements with Veritex   debt service coverage ratio,
                                                current ratio, and debt to net
                                                worth ratio
Amended Pilot Line of Failure of borrower or    ---
Credit (in default)   any guarantor to pay past
                      due obligations; loan
                      matured May 2020
Notre Dame Debt (in   Failure of borrower to    ---
default)              pay past due obligations;
                      loan matured January 2019



BOEM Additional Financial Insurance (Additional Pipeline Obligations)

To cover the various obligations of lessees and rights-of-way holders operating
in federal waters of the Gulf of Mexico, BOEM evaluates an operator's financial
ability to carry out present and future obligations to determine whether the
operator must provide additional security beyond the statutory bonding
requirements. Such obligations include the cost of plugging and abandoning wells
and decommissioning pipelines and platforms at the end of production or service
activities. Once plugging and abandonment work has been completed, the
collateral backing the financial assurance is released by BOEM.

BDPL has historically maintained $0.9 million in financial assurance to BOEM for
the decommissioning of its trunk pipeline offshore in federal waters. Following
an agency restructuring of the financial assurance program, in March 2018 BOEM
ordered BDPL to provide additional financial assurance totaling approximately
$4.8 million for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that
failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted
multiple extension requests that extended BDPL's deadline for filing a statement
of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering BDPL's August
2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until
August 2020. The Office of the Solicitor of the U.S. Department of the Interior
was agreeable to a 10-day extension while it conferred with BOEM on BDPL's stay
request. In late October 2019, BDPL filed a motion to request the 10-day
extension, which motion was subsequently granted by the IBLA. The solicitor's
office consented to an additional 14-day extension for BDPL to file its reply,
and BDPL filed a motion to request the 14-day extension in November 2019. The
solicitor's office indicated that BOEM would not consent to further extensions.
However, the solicitor's office signaled that BDPL's adherence to the milestones
identified in an August 15, 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning of these
assets will significantly reduce or eliminate the amount of financial assurance
required by BOEM, which may serve to partially or fully resolve the INCs.
Although we planned to decommission the offshore pipelines and platform assets
during 2020, decommissioning of these assets has been delayed due to cash
constraints associated with the ongoing impact of COVID-19 and winter being the
offseason for dive operations in the U.S. Gulf of Mexico. We cannot currently
estimate when decommissioning may occur. In the interim, BDPL provides BOEM and
BSEE with updates regarding the project's status.

BDPL's pending appeal of the BOEM INCs does not relieve BDPL of its obligations
to provide additional financial assurance or of BOEM's authority to impose
financial penalties. There can be no assurance that we will be able to meet
additional financial assurance (supplemental pipeline bond) requirements. If
BDPL is required by BOEM to provide significant additional financial assurance
(supplemental pipeline bonds) or is assessed significant penalties under the
INCs, we will experience a significant and material adverse effect on our
operations, liquidity, and financial condition.

We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we
have not recorded a liability on our consolidated balance sheet as of March 31,
2021. At both March 31, 2021 and December 31, 2020, BDPL maintained
approximately $0.9 million in credit and cash-backed pipeline rights-of-way
bonds issued to BOEM.


Blue Dolphin Energy Company March 31, 2021 | Page 52

Management discussion and analysis and internal controls



BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE's idle iron
regulations. Idle iron regulations mandate lessees and rights-of-way holders to
permanently abandon and/or remove platforms and other structures when they are
no longer useful for operations. Until such structures are abandoned or removed,
lessees and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.

In December 2018, BSEE issued an INC to BDPL for failure to flush and fill
Pipeline Segment No. 13101. Management met with BSEE on August 15, 2019 to
address BDPL's plans with respect to decommissioning its offshore pipelines and
platform assets. BSEE proposed that BDPL re-submit permit applications for
pipeline and platform decommissioning, along with a safe boarding plan for the
platform, within six (6) months (no later than February 15, 2020), and develop
and implement a safe boarding plan for submission with such permit applications.
Further, BSEE proposed that BDPL complete approved, permitted work within twelve
(12) months (no later than August 15, 2020). BDPL timely submitted permit
applications for decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25, 2020. In April
2020, BSEE issued another INC to BDPL for failure to perform the required
structural surveys for the GA-288C Platform. BDPL requested an extension to the
INC related to the structural platform surveys, and BSEE approved BDPL's
extension request. The required platform surveys were completed, and the INC was
resolved in June 2020.
Although we planned to decommission the offshore pipelines and platform assets
during 2020, decommissioning of these assets has been delayed due to cash
constraints associated with the ongoing impact of COVID-19 and winter being the
offseason for dive operations in the U.S. Gulf of Mexico. We cannot currently
estimate when decommissioning may occur. In the interim, BDPL provides BSEE with
updates regarding the project's status.

Lack of permit approvals does not relieve BDPL of its obligations to remedy the
BSEE INCs or of BSEE's authority to impose financial penalties. If BDPL fails to
complete decommissioning of the offshore pipelines and platform assets and/or
remedy the INCs within a timeframe determined to be prudent by BSEE, BDPL could
be subject to regulatory oversight and enforcement, including but not limited to
failure to correct an INC, civil penalties, and revocation of BDPL's operator
designation, which could have a material adverse effect on our earnings, cash
flows and liquidity.

We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we
have not recorded a liability on our consolidated balance sheet as of March 31,
2021. At both March 31, 2021 and December 31, 2020, BDPL maintained $2.4 million
in AROs related to abandonment of these assets.

Sources and Use of Cash.

Components of Cash Flows




                                                 Three Months Ended


                                                 March 31,


                                                 2021      2020


                                                 (in thousands)



Cash Flows Provided By (Used In):
Operating activities                              $373      $(259)
Investing activities                              -         (198)
Financing activities                              (915)     654

Increase (decrease) in cash and cash equivalents (542) $ $ 197



Cash Flow Q1 2021 Compared to Q1 2020
We had cash flow from operations of approximately $0.3 million for Q1 2021
compared to a cash flow deficit of approximately $0.3 million for Q1 2020. Cash
frow from operations for Q1 2021 was due to the timing of crude oil purchases.
The cash flow deficit for Q1 2020 primarily related to loss from operations.

Capital Expenditures
During Q1 2021, capital expenditures totaled $0 compared to $0.2 million during
Q1 2020. Capital expenditures in Q1 2020 primarily related to completion of a
petroleum storage tank. In view of the uncertainty surrounding the COVID-19
pandemic, combined with the weaker commodity price environment, we anticipate
new capital expenditures to be minimal in 2021.

We account for our capital expenditures in accordance with GAAP. We also
classify capital expenditures as 'maintenance' if the expenditure maintains
capacity or throughput or as 'expansion' if the expenditure increases capacity
or throughput capabilities. Although classification is generally a
straightforward process, in certain circumstances the determination is a matter
of management judgment and discretion.


Blue Dolphin Energy Company   March 31, 2021 |Page 53




Management discussion and analysis and internal controls



We budget for maintenance capital expenditures throughout the year on a
project-by-project basis. Projects are determined based on maintaining safe and
efficient operations, meeting customer needs, complying with operating policies
and applicable law, and producing economic benefits, such as increasing
efficiency and/or lowering future expenses.

Off-balance sheet arrangements. Nothing.

Accounting standards.

Critical Accounting Policies and Estimates
Our significant accounting policies and recent accounting developments are
described in "Part I, Item 1. Financial Statements - Note (2)". The ongoing
COVID-19 pandemic and related governmental responses, volatility in commodity
prices, and severe weather resulting from climate change have impacted and
likely will continue to impact our business. Under earlier state and federal
mandates that regulated business closures, our business was deemed as an
essential business and, as such, remained open. As U.S. federal, state, and
local officials roll out COVID-19 vaccines, we expect to continue operating. We
have instituted various initiatives throughout the company as part of our
business continuity programs, and we are working to mitigate risk when
disruptions occur. The uncertainty around the availability and prices of crude
oil, the prices and demand for our refined products, and the general business
environment is expected to continue through 2021 and beyond.

The nature of our business requires that we make estimates and assumptions in
accordance with U.S. GAAP. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. The ongoing
COVID-19 pandemic has impacted these estimates and assumptions and will continue
to do so.

We assessed certain accounting matters that generally require consideration of
forecasted financial information in context with the information reasonably
available to us and the unknown future impacts of COVID-19 as of March 31, 2021
and through the filing date of this report. The accounting matters assessed
included, but were not limited to, our allowance for doubtful accounts,
inventory and related reserves, and the carrying value of long-lived assets.

New accounting standards and information to be provided The new accounting standards and information to be provided are dealt with in “Part I, Point 1. Financial statements – Note (2)”.

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