Summary of BLUE DOLPHIN ENERGY CO

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

Cautionary Statements
Certain of the statements included in this quarterly report on Form 10-Q, including those regarding future financial performance or results or that are not historical facts, are "forward-looking" statements as that term is defined in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended. The words "expect," "plan," "believe," "anticipate," "project," "estimate," and similar expressions are intended to identify forward-looking statements. Blue Dolphin Energy Company (referred to herein, with its predecessors and subsidiaries, as "Blue Dolphin," "we," "us" and "our") cautions readers that these statements are not guarantees of future performance or events and such statements involve risks and uncertainties that may cause actual results and outcomes to differ materially from those indicated in forward-looking statements. Some of the important factors, risks and uncertainties that could cause actual results to vary from forward-looking statements include:
§ the level of utilization of our pipelines;

§ availability and cost of capital;

§ actions or inactions of third party operators for properties where we have an interest;

§ the risks associated with exploration;

§ the level of production from our oil and gas properties;

§ oil and gas price volatility;

§ uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures;

§ regulatory developments; and

§ general economic conditions.

Additional factors that could cause actual results to differ materially from those indicated in the forward-looking statements are discussed under the caption "Risk Factors" in our annual report on Form 10-KSB for the year ended December 31, 2007 and Item 1A of Part II of this quarterly report. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date thereof. We undertake no duty to update these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the additional factors which may affect our business, including the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this quarterly report. Executive Summary
We are engaged in two lines of business: (i) provision of pipeline transportation services to producer/shippers, and (ii) oil and gas exploration and production. Our assets are located offshore and onshore in the Texas Gulf Coast area. Our goal is to create greater long-term value for our stockholders by increasing the utilization of our existing pipeline assets and acquiring additional strategic assets that diversify our asset base, improve our competitive position and are accretive to earnings. Although we are primarily focused on acquisitions of pipeline assets, we also continue to review and evaluate opportunities to further develop our existing oil and gas properties and acquire additional oil and gas properties.
During 2007, we benefited from an increase in revenues from our pipeline operations resulting from the commencement of deliveries of production from shippers on both the Blue Dolphin Pipeline System and the GA 350 Pipeline. On the Blue Dolphin Pipeline System, one shipper commenced deliveries in July 2007 from two wells. Currently, the Blue Dolphin Pipeline System is transporting an aggregate of approximately 24 MMcf of gas per day representing production from ten wells from eight shippers.
The GA 350 Pipeline throughput has also increased from the addition of two shippers in 2007. It is currently transporting an aggregate of approximately 24 MMcf of gas per day representing production from six wells from five shippers.

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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations In our oil and gas exploration and production business, we continue to see a decline in production and resulting revenues from our interests in wells in the High Island area. High Island Block 37 is currently not producing due to damage to third party onshore facilities resulting from Hurricane Ike. We expect production to resume late in the fourth quarter of 2008 or early in the first quarter of 2009. In early 2008, we elected to participate in an exploratory well in High Island Block 37 at our 2.8% working interest. Drilling of the well commenced in mid April 2008. The well was determined to be non-commercial and was plugged and abandoned in the third quarter.
During the second quarter of 2007, a well in High Island Block 115 in which we had previously earned a 2.5% working interest was re-entered and successfully sidetracked. Production from this well commenced in late-November 2007. The well is currently not producing due to damage to third party onshore facilities resulting from Hurricane Ike. We expect production to resume late in the fourth quarter of 2008 or early in the first quarter of 2009.
Despite gains in throughput in recent years, the level of throughput has decreased and our pipeline assets remain significantly underutilized. The Blue Dolphin Pipeline System is currently operating at approximately 15% of capacity, the GA 350 Pipeline is currently operating at approximately 37% of capacity and the Omega Pipeline is inactive. Production declines, temporary stoppages or cessations of production from wells tied into our pipelines or from our High Island area wells could have a material adverse effect on our cash flows and liquidity if the resulting revenue declines are not offset by increases in revenues from our interests in oil and gas properties or revenues from other sources. Due to our geographically concentrated asset base and limited capital resources, any negative event has the potential to have a material adverse impact on our financial condition. We are continuing our efforts to increase the utilization of our existing assets and acquire additional assets that will diversify the risks to our cash flows and be accretive to earnings. Liquidity and Capital Resources
At September 30, 2008, our available working capital was approximately $4.4 million, a decrease of $1.2 million from approximately $5.6 million at December 31 and September 30, 2007. The decrease in working capital was due primarily to the property insurance renewal and payments for the drilling of an exploratory well in High Island Block 37. Due to the low utilization of our pipeline assets, and without the revenues and resulting cash inflows we receive from oil and gas sales, we have used our available cash and cash equivalents to cover our operating and general and administrative expenses.
The following table summarizes our financial position at September 30, 2008 and December 31, 2007 (in thousands):

                                           September 30,           December 31,
                                                2008                   2007
                                          Amount        %        Amount        %
           Working capital               $  4,412        48 %   $  5,598        55 %
           Property and equipment, net      4,789        52 %      4,504        45 %
           Other noncurrent assets              9         -           11         -


           Total                         $  9,210       100 %   $ 10,113       100 %


           Long-term liabilities         $  1,845        20 %   $  1,883        19 %
           Stockholders' equity             7,365        80 %      8,230        81 %


           Total                         $  9,210       100 %   $ 10,113       100 %

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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Our financial condition continues to be adversely affected by the low utilization of our pipeline assets. The Blue Dolphin Pipeline System is currently transporting approximately 24 MMcf of gas per day. The GA 350 Pipeline is currently transporting approximately 24 MMcf of gas per day. This time last year, the Blue Dolphin Pipeline System was transporting approximately 27 MMcf of gas per day and the GA 350 Pipeline was transporting an aggregate of 35 MMcf of gas per day.
During the first nine months of 2008, revenues from pipeline operations were $1,804,390 compared to $1,808,693 in 2007. Throughput on the Blue Dolphin Pipeline System averaged 21.8 MMcf and 22.4 MMcf of gas per day during the first nine months of 2008 and 2007, respectively. Throughput on the GA 350 Pipeline averaged 24.2 MMcf and 20.3 MMcf of gas per day during the first nine months of 2008 and 2007, respectively.
We have significant available capacity on the Blue Dolphin Pipeline System, the GA 350 Pipeline and the inactive Omega Pipeline. We believe that the pipelines are in geographic market areas that are of interest to oil and gas operators. This assessment is based on leasing activity and information obtained directly from the operators of properties near our pipelines.
Ultimately, the future utilization of our pipelines and related facilities will depend upon the success of drilling programs around our pipelines, as well as attraction and retention of producers/shippers to the pipeline systems. The recent decline in commodity prices and economic downturn could decrease the level of exploration and production activity in the areas around our pipelines and have a significant impact on our ability to attract additional shippers. If we are successful in our efforts to attract additional shippers to our pipelines, we would gain additional throughput resulting in additional revenues. Additional throughput will be required to offset the natural decline in throughput from existing wells as reserves are depleted.
We recognized gross oil and gas sales revenues of $544,381 and $452,818 for the nine months ended September 30, 2008 and 2007, respectively. We believe that the recent decline in commodity prices could have a significant impact on our revenue from oil and gas sales.
Revenues from our working interest in High Island Block 37 have declined primarily due to normal production decline. High Island Block 37 production averaged approximately 5.4 MMcf of gas per day in 2007. The A-2 well experienced production problems in April 2007 and was shut in for approximately eight months. The well began producing again in December 2007, and is currently not producing due to damage to third party onshore facilities resulting from Hurricane Ike. We expect production to resume late in the fourth quarter of 2008 or early in the first quarter of 2009. We believe that the A-2 well could continue to produce through 2009. However, the well could deplete faster than currently anticipated or could develop production problems resulting in the cessation of production. The B-1 well went off production in January 2008. Production from that well has not yet been re-established. At this time last year, the B-1 well was producing approximately 2.5 MMcf of gas per day. In early 2008, we elected to participate in an exploratory well in High Island Block 37, at our 2.8% working interest. Drilling of the well commenced in mid-April 2008. The well was determined to be non-commercial and was plugged and abandoned in the third quarter of 2008.
During the second quarter of 2007, a well in High Island Block 115 in which we had previously earned a 2.5% working interest was re-entered and successfully sidetracked. The well commenced production in late November 2007 and produced at an average rate of approximately 6.3 MMcf of gas per day during the remainder of 2007. The well is currently not producing due to damage to third party onshore facilities resulting from Hurricane Ike. We expect production to resume late in the fourth quarter of 2008 or early in the first quarter of 2009.

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                   BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES
   Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
The following table summarizes certain of our contractual obligations and other
commercial commitments at September 30, 2008 (in thousands):

                                                                Payments Due by Period
                                                     1 Year                                               5 Years
                                      Total         or Less          1-3 Years          3-5 Years         or More
Operating leases                     $   306        $    106        $       200        $         -        $      -
Employment agreement                     277             175                102                  -               -
Asset retirement obligations           2,161             342                 34                  -           1,785
Other long-term liabilities               52              26                 26                  -               -


Total contractual obligations
and other commercial
commitments                          $ 2,796        $    649        $       362        $         -        $  1,785

Results of Operations
For the three months ended September 30, 2008 (the "current quarter"), we reported a net loss of $442,737 compared to a net loss of $238,148 for the three months ended September 30, 2007 (the "previous quarter"). For the nine months ended September 30, 2008 (the "current period"), we reported a net loss of $1,143,590 compared to a net loss of $1,341,821 for the nine months ended September 30, 2007 (the "previous period").
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Revenue from Pipeline Operations. Revenues from pipeline operations decreased by $155,947, or 22%, in the current quarter to $561,171. Revenues in the current quarter from the Blue Dolphin System decreased to approximately $468,000 compared to approximately $612,000 in the previous quarter due to decreased throughput from existing shippers. Daily gas volumes transported on the Blue Dolphin System averaged 22.9 MMcf of gas per day in the current quarter, down from 24.9 MMcf of gas per day in the previous quarter. Revenues on the GA 350 Pipeline decreased by approximately $12,000 in the current quarter due to a decrease in average daily gas volumes transported to 21.7 MMcf of gas per day in the current quarter from 23.4 MMcf of gas per day in the previous quarter. Revenue from Oil and Gas Sales. Revenues from oil and gas sales increased by $51,638, or 75%, to $120,108 in the current quarter primarily due to production from High Island Block 115, which commenced in November 2007. Revenue breakdown for the current quarter by field was $79,730 for High Island Block 115 and $40,378 for High Island Block 37. The sales mix by product was 93% gas and 7% condensate. Our average realized gas price per Mcf in the current quarter was $9.97 compared to $6.32 in the previous quarter. Our average realized price per barrel of condensate was $140.34 compared to $70.82 in the previous quarter. Pipeline Operating Expenses. Pipeline operating expenses in the current quarter increased by $66,288 to $415,581 due to increases in storage tank repairs of approximately $65,000.
Lease Operating Expenses. Lease operating expenses decreased in the current quarter by $50,492 to $40,710. The decrease was primarily due to the cessation of production at High Island Block A-7 during the previous quarter. General and Administrative Expenses. General and administrative expenses increased by $21,367 to $501,564 in the current quarter primarily due to an increase in stock option expense of approximately $21,000 from the previous quarter.
Depletion, Depreciation and Amortization. Depletion, depreciation and amortization increased in the current quarter by $30,648 to $164,689 due to costs associated with drilling an exploratory well at High Island Block 37.

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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Interest and Other Income. Interest income decreased by $36,505 to $24,884 in the current quarter due to decreases in both the amount of available funds and the interest rate earned on those funds.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Revenue from Pipeline Operations. Revenues from pipeline operations were $1,804,390 in the current period. Revenues in the current period from the Blue Dolphin Pipeline System decreased to approximately $1,494,000 compared to approximately $1,548,000 in the previous period due to decreased throughput from existing shippers. Daily gas volumes transported on the Blue Dolphin System averaged 21.8 MMcf of gas per day in the current period compared to 22.4 MMcf of gas per day in the previous period. Revenues on the GA 350 Pipeline increased by approximately $49,000 in the current period due to an increase in average daily gas volumes transported to 24.2 MMcf of gas per day in the current period from
20.3 MMcf of gas per day in the previous period. Revenue from Oil and Gas Sales. Revenues from oil and gas sales increased by $91,563, or 20%, to $544,381 in the current period primarily due to production from High Island Block 115, which commenced in November 2007. Revenue breakdown for the current period by field was $296,334 for High Island Block 115 and $248,047 for High Island Block 37. The sales mix by product was 97% gas and 3% condensate. Our average realized gas price per Mcf in the current period was $11.83 compared to $6.63 in the previous period. Our average realized price per barrel of condensate was $118.40 in the current period compared to $56.01 in the previous period. Pipeline Operating Expenses. Pipeline operating expenses in the current period decreased by $194,523 to $1,233,633 due to decreases in pipeline repair costs of approximately $176,000, compressor repair expense of approximately $123,000, legal costs of approximately $81,000 and plant site maintenance expense of approximately $49,000. The decrease was partially offset by increases in property insurance of approximately $103,000 and storage tank repairs of approximately $114,000. Lease Operating Expenses. Lease operating expenses decreased in the current period by $75,007 to $173,977 due primarily to the cessation of production at High Island Block A-7 during the previous period. General and Administrative Expenses. General and administrative expenses increased by $96,532 to $1,696,921 in the current period due to increases in employee related costs of approximately $175,000, which includes an increase of approximately $166,000 of stock option expense, and office rent of approximately $23,000. The increase was partially offset by decreases in other accounting fees of approximately $29,000, legal costs of approximately $30,000 and office expense of approximately $31,000. Interest and Other Income. Interest income decreased by $81,239 to $107,552 in the current period due to a decrease in both the amount of available funds and the interest rate earned on those funds. Recent Accounting Developments
See Note 1 in Item 1.
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BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES