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


                                    FORM 10-Q

[X] Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

For the period ended:            June 30, 2001

                                       or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

For the transition period from                    to
                              -------------------   -------------------

Commission File Number:              0-15905


                           BLUE DOLPHIN ENERGY COMPANY
             (Exact name of registrant as specified in its charter)

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

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

                                 (713) 227-7660
              (Registrant's telephone number, including area code)

              (Former name, former address and former fiscal year,
                         if changed since last report.)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                                 YES  X  NO
                                                     ---   ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock as of the latest practicable date.

6,020,051 shares of the Registrants' common stock, par value $.01 per share,
----------------------------------------------------------------------------
where outstanding at August 14, 2001.
-------------------------------------

                                       1



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                          PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

The condensed  consolidated  financial statements of Blue Dolphin Energy Company
and  subsidiaries  (the  "Company")  included  herein have been  prepared by the
Company,  without audit, pursuant to the rules and regulations of the Securities
and  Exchange  Commission  and,  in  the  opinion  of  management,  reflect  all
adjustments  necessary  to present a fair  statement  of  operations,  financial
position and cash flows.  The Company follows the full cost method of accounting
for  oil  and  gas  properties,  wherein  costs  incurred  in  the  acquisition,
exploration and development of oil and gas reserves are capitalized. The Company
believes that the disclosures are adequate and the information  presented is not
misleading,  although  certain  information  and footnote  disclosures  normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations.






                                       2




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                                        June 30,      December 31,
                                                           2001            2000
                                                      ------------    ------------
                                                       (Unaudited)
                                                                

                              ASSETS

Current Assets:
   Cash                                               $  3,753,378    $  2,071,682
   Trade accounts receivable                             1,377,477       2,406,751
   Funds escrowed for abandonment                           68,629       1,485,728
   Prepaid expenses                                        297,395         127,913
                                                      ------------    ------------
                         TOTAL CURRENT ASSETS            5,496,879       6,092,074

Property and Equipment, at cost:
   Oil and Gas properties, including $430,782 of
   unproved leasehold cost at June 30, 2001
   and December 31, 2000, respectively
   (full-cost method)                                   28,224,430      28,032,211
   Onshore separation and handling facilities            1,583,428       1,583,610
   Land                                                    850,000         930,500
   Pipelines                                             2,771,142       4,845,975
   Other property and equipment                            734,657         397,683
                                                      ------------    ------------
                                                        34,163,657      35,789,979
  Accumulated depletion, depreciation
    and amortization                                   (30,376,970)    (30,444,622)
                                                      ------------    ------------
                                                         3,786,687       5,345,357

Deferred federal income tax                                244,444         244,444
Acquisition and development costs - Petroport            1,934,729       1,885,219
Other assets                                               628,104         345,861
                                                      ------------    ------------

                         TOTAL ASSETS                 $ 12,090,843    $ 13,912,955
                                                      ============    ============

               LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Trade accounts payable                             $    975,043    $  1,557,850
   Current portion of long term debt                          --           218,412
   Notes payable - related parties                         100,000       2,000,000
   Accrued expenses and other liabilities                1,863,679         927,347
                                                      ------------    ------------
                         TOTAL CURRENT LIABILITIES       2,938,722       4,703,609

Other non-current liabilities                                 --           550,000
Minority interests                                       1,212,399       1,196,479

Common Stock                                                60,201          60,167
Additional Paid-in Capital                              25,768,727      25,775,417
Accumulated Deficit                                    (17,889,206)    (18,372,717)
                                                      ------------    ------------
                                                         7,939,722       7,462,867
                         TOTAL LIABILITES AND
                         STOCKHOLDERS EQUITY          $ 12,090,843    $ 13,912,955
                                                      ============    ============


See accompanying notes to consolidated financial statements.

                                       3





                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED

                                                                   Three Months
                                                                  Ended June 30,
                                                               2001           2000
                                                           -----------    -----------
                                                                    

Revenue from operations:
    Oil and gas sales                                      $ 1,462,015    $ 1,141,506
    Pipeline operations                                        231,878        588,236
    Operating  fees                                               --           78,188
                                                           -----------    -----------
                    REVENUE FROM OPERATIONS                  1,693,893      1,807,930

Cost of operations:
    Lease operating expenses                                   293,626        314,876
    Pipeline operating expenses                                118,210        265,252
    Depletion, depreciation, amortization and abandonment      424,646        454,502
    General and administrative                                 777,661        572,198
                                                           -----------    -----------
                    COST OF OPERATIONS                       1,614,143      1,606,828
                                                           -----------    -----------

                    INCOME  FROM OPERATIONS                     79,750        201,102

Other income (expense):
    Interest and other expense                                (164,402)       (32,586)
    Interest and other income                                   44,352         18,042
                                                           -----------    -----------

                    INCOME (LOSS) BEFORE MINORITY
                    INTEREST AND INCOME TAXES                  (40,300)       186,558

Minority interests                                             (29,106)       (35,861)

Provision for income taxes                                        --             --
                                                           -----------    -----------

Net income (loss)                                          $   (69,406)   $   150,697
                                                           ===========    ===========

Earnings (loss) per share-basic                            $     (0.01)   $      0.03
                                                           ===========    ===========

Earnings (loss) per share-diluted                          $     (0.01)   $      0.03
                                                           ===========    ===========

Weighted average number of common shares outstanding
      and potential dilutive common shares:
    Basic                                                    6,020,051      5,951,436
                                                           ===========    ===========
    Diluted                                                  6,020,051      6,002,072
                                                           ===========    ===========



See accompanying notes to consolidated financial statements.

                                       4






                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED


                                                                    Six Months
                                                                  Ended June 30,
                                                               2001           2000
                                                           -----------    -----------
                                                                    

Revenue from operations:
    Oil and gas sales                                      $ 3,252,867    $ 2,177,215
    Pipeline operations                                        554,076      1,059,082
    Operating  fees                                               --          156,414
                                                           -----------    -----------
                    REVENUE FROM OPERATIONS                  3,806,943      3,392,711

Cost of operations:
    Lease operating expenses                                   627,390        598,463
    Pipeline operating expenses                                268,948        506,245
    Gain on sale of assets                                  (1,417,626)          --
    Depletion, depreciation, amortization and abandonment    2,002,808        910,772
    General and administrative                               1,596,164      1,070,733
                                                           -----------    -----------
                    COST OF OPERATIONS                       3,077,684      3,086,213
                                                           -----------    -----------

                    INCOME FROM OPERATIONS                     729,259        306,498

Other income (expense):

    Interest and other expense                                (329,642)       (56,481)
    Interest and other income                                   97,473         21,164
                                                           -----------    -----------

                    INCOME BEFORE MINORITY
                    INTEREST AND INCOME TAXES                  497,090        271,181

Minority interests                                             (13,582)       (67,647)

Provision for income taxes                                        --             --
                                                           -----------    -----------

Net income                                                 $   483,508    $   203,534
                                                           ===========    ===========

Earnings per common share-basic                            $      0.08    $      0.03
                                                           ===========    ===========

Earnings per common share-diluted                          $      0.08    $      0.03
                                                           ===========    ===========

Weighted average number of common shares outstanding
      and potential dilutive common shares:
    Basic                                                    6,018,440      5,951,158
                                                           ===========    ===========
    Diluted                                                  6,037,458      6,001,794
                                                           ===========    ===========



See accompanying notes to consolidated financial statements.

                                       5






                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED

                                                                                         Six Months
                                                                                       Ended June 30,
                                                                                     2001           2000
                                                                                 -----------    -----------
                                                                                          

OPERATING ACTIVITIES
    Net income                                                                   $   483,508    $   203,534
    Adjustments to reconcile net income to net cash provided by
        operating activities:
               Depletion, depreciation, amortization and abandonment               2,002,808        910,772
               Minority interest                                                      13,582        (67,647)
               Gain on sale of assets                                             (1,417,626)          --
               Changes in operating assets and liabilities:
                    (Increase) decrease in trade accounts receivable                 957,069       (406,315)
                    (Increase) in prepaid expenses                                  (169,482)      (438,085)
                    Abandonment costs incurred                                    (1,473,960)          --
                    Increase in accounts payable and other current liabilities        51,013        331,420
                                                                                 -----------    -----------
                                          NET CASH PROVIDED BY
                                          OPERATING ACTIVITIES                       446,912        533,679


INVESTING ACTIVITIES
    Oil and gas prospect generation costs                                               --         (563,222)
    Reimbursement of oil and gas prospect generation costs                              --          563,222
    Purchases of property and equipment                                           (1,602,571)       (93,069)
    Exploration and development costs                                               (387,000)          --
    Net proceeds from sale of assets                                               4,625,000           --
    Funds escrowed for abandonment costs                                             (34,347)      (280,296)
    Release of escrowed funds for abandonment                                      1,451,446           --
    Development costs - Petroport                                                    (49,510)       (67,593)
    Development costs - New Avoca                                                   (158,497)      (111,411)
    Acquisition of additional interest in Drillmar, net of cash acquired            (270,529)          --
    Increase in other assets                                                        (214,140)       (42,355)
                                                                                 -----------    -----------
                                          NET CASH PROVIDED BY (USED IN)
                                          INVESTING ACTIVITIES                     3,359,852       (594,724)

FINANCING ACTIVITIES
    Net proceeds from borrowings                                                     100,000        200,000
    Payments on borrowings                                                        (2,218,412)      (100,633)
    Other                                                                             (6,656)        (5,645)
                                                                                 -----------    -----------
                                          NET CASH PROVIDED BY (USED IN)
                                          FINANCING ACTIVITIES                    (2,125,068)        93,722

                                          INCREASE  IN CASH                        1,681,696         32,677

CASH AT BEGINNING OF PERIOD                                                        2,071,682      1,166,730
                                                                                 -----------    -----------

CASH AT JUNE 30                                                                  $ 3,753,378    $ 1,199,407
                                                                                 ===========    ===========

SUPPLEMENTARY CASH FLOW INFORMATION

    Interest paid                                                                $    98,500    $    74,399
                                                                                 ===========    ===========

    Income taxes paid                                                            $     6,530    $     8,430
                                                                                 ===========    ===========


See accompanying notes to consolidated financial statements.

                                        6





                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED

                                  June 30, 2001
1. Related Party Transactions

In December 1999, the Company issued a $1,000,000 convertible promissory note to
Harris A. Kaffie, a director of the Company.  This  convertible  promissory note
originally due June 1, 2000 was extended to March 31, 2001, bore interest at 10%
per annum,  and was  convertible  into  common  stock at $6.00 per  share.  This
convertible promissory note and accrued interest of $64,361 were paid in January
2001.

The  Company  issued  three  convertible   promissory  notes  in  2000  totaling
$1,000,000;  two in the  principal  amount of $200,000  each on May 25, 2000 and
July 6,  2000,  issued to Ivar Siem,  Chairman  of the  Company,  and one in the
principal  amount  of  $600,000  on  November  30,  2000,   issued  to  TI  A/S,
beneficially  controlled by Ivar Siem.  These  convertible  promissory notes and
accrued  interest  of  $32,790  were  paid  in  January  2001.  The  convertible
promissory  notes were due March 31, 2001,  bore interest at the rate of 10% per
annum and were convertible into common stock at the rate of $6.00 per share.

At June 30,  2001,  Ivar  Siem  provided  Drillmar  $100,000  and was  issued an
unsecured  promissory  note due December 31, 2001,  bearing  interest at 10% per
annum. In July 2001,  Drillmar was provided $300,000 from Ivar Siem and $200,000
from Harris Kaffie and were issued  unsecured  promissory notes due December 31,
2001,  bearing  interest  at 10% per annum.  The  promissory  note due to Harris
Kaffie was paid on August 7, 2001. Accrued interest of $986 was also paid to Mr.
Kaffie in August 2001. The promissory  notes issued by Drillmar are non recourse
to the Company.

2. Contingencies

In December 1999,  American  Resources  Offshore,  Inc.  ("American  Resources")
received  approximately $4.5 million from Blue Dolphin  Exploration  Company for
American Resources common stock representing a 75% ownership interest, and $24.2
million from Fidelity Oil Holdings, Inc. ("Fidelity Oil") for an 80% interest in
its Gulf of Mexico assets.  American  Resources  senior secured debt was held by
Den norske Bank ("Den  norske").  Den norske sold the senior debt to the Company
for the  right to  receive a  possible  future  payment  if the  cumulative  net
revenues  received  by American  Resources  and  Fidelity  Oil  attributable  to
American  Resources  proved  oil and gas  reserves  in the Gulf of  Mexico as of
January 1, 1999,  exceed $30.0 million during the period January 1, 1999 through
December  31, 2001.  If that  occurs,  Den norske will be entitled to receive an
amount equal to 50% of the net revenues in excess of $30.0  million  during that
three-year  period. If any contingent amount becomes payable to Den norske,  80%
will be paid by  Fidelity  Oil and 20% will be paid by American  Resources.  The
payment,  if any, is due on March 15, 2002. American Resources estimates that it
is probable  that a payment to Den norske will be due based upon these terms and
current  market  conditions.  The Company has  provided  for a liability  to Den
norske in the amount of $850,000 at June 30, 2001.

                                       7



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                  (Continued)

On May 8, 2000,  American  Resources,  a 77% indirectly  owned subsidiary of the
Company, and its former Chief Financial Officer,  were named in a lawsuit in the
United  States  District  Court for the  Southern  District  of  Texas,  Houston
Division,  styled  H&N Gas and  Howard  Energy  Marketing,  L.L.C.  v.  American
Resources Offshore,  Inc. et al (Case No H-00-1371).  The lawsuit alleges, among
other  things,  that H&N Gas ("H&N") was  defrauded  by  American  Resources  in
connection with gas purchase  options and gas price swap contracts  entered into
from  February  1998 through  September  1999.  H&N alleges  unlawful  collusion
between  American  Resources'  prior  management  and the then president of H&N,
Richard Hale ("Hale"),  to the detriment of H&N. H&N generally alleges that Hale
directed H&N to purchase  illusory options from American  Resources that bore no
relation to any physical gas business and that  American  Resources did not have
the  financial  resources  and/or  sufficient  quantity of gas to  perform.  H&N
further  alleges that American  Resources and Hale colluded with respect to swap
transactions that were designed to benefit American  Resources at the expense of
H&N Gas. H&N further alleges civil conspiracy against all the defendants. H&N is
seeking  approximately  $6.2  million in actual  damages  plus  treble  damages,
punitive  damages,  prejudgment  interest and attorneys'  fees against  American
Resources directly. As a result of its conspiracy allegation,  H&N also contends
that all  defendants  are jointly and  severally  liable for over $62.0  million
dollars in actual damages plus treble  damages,  punitive  damages,  prejudgment
interest and attorneys' fees.  American  Resources  intends to vigorously defend
this claim.

As a result of the  decision  to cease  operating  activities  in the  Buccaneer
Field,  the Company's  leases in or on the Buccaneer Field terminated in January
2001. The Company must plug and abandon all remaining  wells and remove platform
facilities  within one year from the  termination  of the  leases.  In the first
quarter of 2001, the Company plugged and abandoned its remaining wells at a cost
of approximately $1.4 million. Removal of the platform facilities is expected to
take place in the second half of 2001 at an additional cost estimated to be $5.1
million.  The Company  increased its estimate of the cost of  abandonment of the
Buccaneer  Field by  approximately  $1.1  million from  December  31, 2000.  The
Company  used  $1.4  million  of funds  escrowed  to pay for well  plugging  and
abandonment costs.

The  Company is  involved  in various  claims and legal  actions  arising in the
ordinary  course  of  business.  In the  opinion  of  management,  the  ultimate
disposition  of these  matters will not have a material  effect on the Company's
financial position, results of operations or cash flows.

3. Acquisition of Drillmar Inc.

Effective  May 1, 2001 the Company  increased  its  ownership  in Drillmar  Inc.
("Drillmar") from 37.5% to 64%.  Consideration paid by the Company includes cash
of approximately $131,000, a contribution of services in the amount of $298,000,
and an undertaking to contribute an additional $136,000 of cash and/or services.
The  Company's  consolidated  income  for the six  months  ended  June 30,  2001
includes 37.5% of Drillmar's operations for the four months ended April 30, 2001
and 64% of Drillmar's operations for the two months ended June 30, 2001.

Certain amounts in the six month consolidated  statements of operations and cash
flows have been reclassified to reflect the consolidation of Drillmar  effective
January 1, 2001.

                                       8



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

4. Earnings Per Share

The  Company  applies  the  provisions  of  Statement  of  Financial  Accounting
Standards No. 128 ("SFAS No. 128"),  "Earnings per Share." SFAS No. 128 requires
the presentation of basic earnings per share ("EPS") which excludes dilution and
is  computed  by  dividing  income  available  to  common  stockholders  by  the
weighted-average  number of shares of common stock  outstanding  for the period.
SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face
of the income  statement and requires a  reconciliation  of the  numerators  and
denominators of basic EPS and diluted EPS.

The following table provides a reconciliation between basic and diluted earnings
per share:

                                                        Weighted
                                                        average
                                                     common shares
                                                       outstanding
                                                      and dilutive      Per
                                        Net Income     potential       share
                                          (Loss)     common shares     amount
                                        ---------    -------------   ---------
Six Months ended June 30, 2001
    Basic earnings per share            $ 483,508        6,018,440    $    0.08
    Effect of dilutive stock
        options                                             19,018
                                        ---------    -------------    ---------
    Diluted earnings per share          $ 483,508        6,037,458    $    0.08
                                        =========    =============    =========


Six Months ended June 30, 2000
    Basic earnings per share            $ 203,534        5,951,158    $    0.03
    Effect of dilutive stock
          options                                           50,636
                                        ---------    -------------    ---------
    Diluted earnings per share          $ 203,534        6,001,794    $    0.03
                                        =========    =============    =========

Quarter ended June 30, 2001
    Basic earnings (loss) per share     $ (69,406)       6,021,051    $   (0.01)
                                        ---------    -------------    ---------
    Diluted earnings (loss) per share   $ (69,406)       6,021,051    $   (0.01)
                                        =========    =============    =========


Quarter ended June 30, 2000
    Basic earnings per share            $ 150,697        5,951,436    $    0.03
    Effect of dilutive stock
          options                                           50,636
                                        ---------    -------------    ---------
    Diluted earnings per share          $ 150,697        6,002,072    $    0.03
                                        =========    =============    =========

                                       9



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

5. Recently Issued Accounting Pronouncements

Statement of Financial  Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was issued in June 1998 by the
Financial  Accounting  Standards Board.  SFAS 133 establishes new accounting and
reporting standards for derivative instruments and for hedging activities.  This
statement  requires an entity to  establish  at the  inception  of a hedge,  the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement  approach for  determining the ineffective  aspect of the hedge.
Those methods must be consistent  with the entity's  approach to managing  risk.
Certain provisions of SFAS 133 were amended by SFAS 138, "Accounting for Certain
Derivative  Instruments  and  Certain  Hedging  Activities  -  an  amendment  of
Statement  133".  SFAS 133, as amended,  is effective for all fiscal quarters of
fiscal  years  beginning  after June 15,  2000.  The  Company  adopted  SFAS 133
effective  January 1, 2001.  Adoption of SFAS 133,  as amended,  did not have an
impact on the  Company's  consolidated  financial  position  or the  results  of
operations.

In July 2001, the Financial  Accounting Standards Board issued Statement No. 141
("SFAS 141"),  "Business  Combinations,"  and  Statement No. 142,  "Goodwill and
Other  Intangible  Assets"  ("SFAS  142").  SFAS 141 requires  that the purchase
method of accounting be used for all business combinations  initiated after June
30, 2001.  SFAS 141 also  specifies  criteria  intangible  assets  acquired in a
purchase  method  business  combination  must meet to be recognized and reported
apart from goodwill.  SFAS 142 will require that goodwill and intangible  assets
with  indefinite  useful lives no longer be  amortized,  but instead  tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 will also  require  that  intangible  assets with  definite  useful lives be
amortized  over  their  respective  estimated  useful  lives to their  estimated
residual  values,  and  reviewed for  impairment  in  accordance  with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. As of the date of adoption,  the Company does not expect to have
unamortized goodwill,  unamortized  identifiable assets, or unamortized negative
goodwill.

In August 2001, the Financial  Accounting Standards Board approved Statement No.
143 ("SFAS 143") "Asset  Retirement  Obligations".  The Company has not assessed
the impact of SFAS 143 at this time.

6. Sale of Assets

On January 22,  2001,  the  Company  sold its 50%  interest in the Black  Marlin
Pipeline System to affiliates of the Williams Companies,  Inc. for approximately
$4.6  million.  The Black  Marlin  Pipeline  System  includes a 75-mile  gas and
condensate  gathering  line with related  shore  facilities  servicing  the High
Island Area, offshore Texas (the "Black Marlin Pipeline") and the 3-mile lateral
pipeline  constructed  in 2000,  extending  from  High  Island  Block  A-5 to an
interconnection  into the Black  Marlin  Pipeline in High Island  Block A-6 (the
"A-5 Lateral").

This  disposition  was  consummated,  in  part,  through  a  sale  of all of the
outstanding capital stock of Black Marlin Pipeline Company (formerly an indirect
wholly owned subsidiary of the Company) the owner of a 50% interest in the Black
Marlin  Pipeline,  pursuant to a Purchase and Sale  Agreement  dated January 12,
2001 (the "Stock  Purchase  Agreement")  among Black Marlin  Energy  Company,  a
wholly owned  subsidiary of the Company,  MCNIC  Offshore  Pipeline & Processing
Company ("MCNIC"), WBI Southern, Inc. ("WBI") and Williams Field Services Group,
Inc. The Company  received  $3.6 million for the  outstanding  capital  stock of
Black Marlin Pipeline Company and recorded a gain of $1,305,534.

                                       10





                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

The remaining part of this  disposition was consummated  through the sale of the
A-5  Lateral  owned  50% by Blue  Dolphin  Pipe  Line  Company,  a wholly  owned
subsidiary of the Company  ("BDPL"),  pursuant to a Purchase and Sale  Agreement
dated January 12, 2001,  among BDPL,  MCNIC,  WBI and Williams  Field Services -
Gulf Coast Company,  L.P. The Company  received $1.0 million for its interest in
the A-5 Lateral, and recorded a gain of $112,092.

7. Business Segment Information

The  Company's  income  producing  operations  are  conducted  in two  principal
business  segments:  oil  and  gas  exploration  and  production,  and  pipeline
operations. Intersegment revenues consist of transportation,  general processing
and storage fees charged by certain  subsidiaries to another for natural gas and
crude oil transported through the Blue Dolphin Pipeline System. The intercompany
revenues and expenses are eliminated in  consolidation.  Information  concerning
these  segments for the six months and three  months  ended June 30,  2001,  and
2000, and at June 30, 2001 and December 31, 2000 is as follow:



                                                                                                            Depletion,
                                                                                            Operating      depreciation,
                                                                          Intersegment        income     amortization, and
                                                           Revenues         revenues        (loss)(1)      abandonment(2)
                                                        -------------    -------------    -------------    -------------
                                                                                               

Six months ended June 30, 2001:
     Oil and gas exploration and
         production and operating fees                  $   3,252,867             --           (167,317)       1,896,995
     Pipeline operations                                      554,076             --          1,459,676           90,491
     Other                                                       --                            (563,100)          15,322
                                                        -------------                     -------------    -------------
     Consolidated                                           3,806,943             --            729,259        2,002,808
     Other income                                                                              (232,169)
                                                                                          -------------
     Income before minority interest and income taxes                                           497,090


Six months ended June 30, 2000:
     Oil and gas exploration and
     production and operating fees                      $   2,336,629          3,000            833,823          719,654
     Pipeline operations                                    1,070,337         11,255            303,039          176,454
     Other                                                    (14,255)                         (830,364)          14,664
                                                        -------------                     -------------    -------------
     Consolidated                                           3,392,711             --            306,498          910,772
     Other expense                                                                              (35,317)
                                                                                          -------------
     Income before minority interest and income taxes                                           271,181



                                       11




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)


                                                                                                            Depletion,
                                                                                            Operating      depreciation,
                                                                          Intersegment        income     amortization, and
                                                           Revenues         revenues        (loss)(1)      abandonment(2)
                                                        -------------    -------------    -------------    -------------
                                                                                               

Three months ended June 30, 2001:
     Oil and gas exploration and
         production and operating fees                  $   1,462,015             --            364,289          383,703
     Pipeline operations                                      231,878             --             10,307           36,684
     Other                                                       --                            (294,846)           4,259
                                                        -------------                     -------------    -------------
     Consolidated                                           1,693,893             --             79,750          424,646
     Other expense                                                                             (120,050)
                                                                                          -------------
     Loss before minority interest and income taxes                                             (40,300)


Three months ended June 30, 2000:
     Oil and gas exploration and
         production and operating fees                  $   1,221,194            1,500          434,293          358,667
     Pipeline operations                                      593,006            4,770          184,534           88,173
     Other                                                     (6,270)                         (417,725)           7,662
                                                        -------------                     -------------    -------------
     Consolidated                                           1,807,930             --            201,102          454,502
     Other expense                                                                              (14,544)
                                                                                          -------------
     Income before minority interest and income taxes                                           186,558




                                                    June 30,        December 31,
                                                      2001              2000
                                                  -----------       -----------
                  Identifiable assets:
                        Oil and gas exploration
                           and production         $ 3,993,445       $ 4,164,299
                       Pipeline operations          6,870,778         8,958,876
                       Other                        1,226,620           789,780
                                                  -----------       -----------
                       Consolidated                12,090,843        13,912,955


         1.       Consolidated  income from  operations  includes  $547,780  and
                  $801,445 in unallocated  general and administrative  expenses,
                  and unallocated  depletion,  depreciation  and amortization of
                  $15,322 and $14,664 for the six months ended June 30, 2001 and
                  2000, respectively.

                  Consolidated  income from  operations  includes  $290,587  and
                  $403,792 in unallocated  general and administrative  expenses,
                  and unallocated  depletion,  depreciation  and amortization of
                  $4,259  and $7,662 for the  quarters  ended June 30,  2001 and
                  2000, respectively.

         2.       Pipeline depletion,  depreciation and amortization  includes a
                  provision  for pipeline  abandonment  of $9,870 and $9,870 for
                  the six months ended June 30, 2001 and 2000, respectively. Oil
                  and gas depletion, depreciation,  amortization and abandonment
                  includes a provision  for  abandonment  costs of platforms and
                  wells of $11,925 for the six months  ended June 30,  2000.  In
                  addition,  the Company  recorded  an expense of  approximately
                  $1,100,000 for the six months ended June 30, 2001, as a result
                  of a change in the  estimation  of costs  associated  with the
                  Buccaneer Field abandonment.

                                       12




         3.       Pipeline depletion,  depreciation and amortization  includes a
                  provision  for pipeline  abandonment  of $4,935 and $4,935 for
                  the quarters ended June 30, 2001 and 2000,  respectively.  Oil
                  and gas depletion, depreciation,  amortization and abandonment
                  includes a provision  for  abandonment  costs of platforms and
                  wells of $5,430 for the quarter ended June 30, 2000.

                                       13





                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

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


              CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements  included  below,  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  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"
or the "Company")  cautions  readers that any such 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 that could cause actual results to vary from forward-looking  statements
are  discussed  in our  Registration  Statement  on  Form  S-3  filed  with  the
Securities  and Exchange  Commission on January 11, 2001 under the caption "Risk
Factors".   The  Risk  Factors  section  of  this   Registration   Statement  is
incorporated  by reference into this report.  Readers are cautioned not to place
undue reliance on these  forward-looking  statements  which speak only as of the
date hereof.  The Company  undertakes  no duty to update  these  forward-looking
statements.  Readers  are urged to  carefully  review and  consider  the various
disclosures  made by the Company which attempt to advise  interested  parties of
the additional  factors which may affect the Company's  business,  including the
disclosures  made under the caption  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations" in this report.

The  following is a review of certain  aspects of the  financial  condition  and
results of operations of the Company and should be read in conjunction  with the
Condensed Consolidated Financial Statements included in Item 1. of this report.

RECENT DEVELOPMENTS
-------------------

The Company previously  announced a gas discovery in High Island Area Block A-7,
in the Gulf of Mexico.  The Company acquired the block in 1995, and owns an 8.9%
reversionary  working  interest  after  lease-wide  payout  is  first  achieved.
Production from the first well in the block began in September  2000.  Currently
there are three wells producing at a combined rate of  approximately  60 Mmcf of
gas per day. A fourth well is  currently  being  drilled.  Before the Company is
assigned its working interest,  the initial working interest owners must achieve
lease-wide  payout of their  investment.  The Company expects payout to occur in
the fourth quarter 2001 or first quarter 2002,  however, if additional wells are
drilled, payout may not occur until later in 2002.

Effective May 1, 2001 the Company  increased its ownership in Drillmar Inc. from
37.5% to 64%.  Consideration  paid by the Company includes cash of approximately
$131,000,  a  contribution  of  services  in  the  amount  of  $298,000,  and an
undertaking  to contribute an additional  $136,000 of cash and/or  services.  At
June 30, 2001, Ivar Siem provided  Drillmar $100,000 and was issued an unsecured
promissory  note due December 31, 2001,  bearing  interest at 10% per annum.  In
July 2001,  Drillmar was  provided  $300,000  from Ivar Siem and  $200,000  from
Harris Kaffie and were issued unsecured  promissory notes due December 31, 2001,
bearing  interest at 10% per annum. The promissory note due to Harris Kaffie was
paid on August 7, 2001.  Accrued interest of $986 was also paid to Mr. Kaffie in
August  2001.  The  promissory  notes issued by Drillmar are non recourse to the
Company.

                                       14



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

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

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The following table summarizes the Company's financial position at June 30, 2001
and December 31, 2000 (amounts in thousands):


                                 June 30, 2001            December 31, 2000
                                 -------------             ---------------
                                Amount      %              Amount      %
                                ------   ------            ------   ------

Working capital                 $2,558       28            $1,388       15
Property and equipment, net      3,787       41             5,345       58
Other noncurrent assets          2,807       31             2,476       27
                                ------   ------            ------   ------
Total                           $9,152      100            $9,209      100
                                ======   ======            ======   ======



Other non-current liabilities   $ --       --              $  550        6
Minority interest                1,212       13             1,196       13
Stockholders' equity             7,940       87             7,463       81
                                ------   ------            ------   ------
Total                           $9,152      100            $9,209      100
                                ======   ======            ======   ======

The change in the  Company's  financial  position from December 31, 2000 to June
30, 2001, was primarily due to the sale of its' 50% interest in the Black Marlin
Pipeline System.

Historically,  the Company has relied on the proceeds from financing  activities
and the sale of assets to supplement its capital requirements. In the six months
ended June 30, 2001  ("current  period"),  the Company  financed its  activities
through both the sale of assets and operating activities.

The Company's future cash flows are subject to a number of variables,  including
the level of production, utilization of its pipeline systems, utilization of the
Company's  services by third  parties and  commodity  prices among  others.  The
Company believes that it will have sufficient cash flow from operations, private
equity  or  debt  financing  activities  and  the  sale of  assets  to meet  its
obligations  and  operating  needs for the current  year.  However,  the Company
cannot be assured that operations and other capital  resources will provide cash
in sufficient  amounts to maintain planned levels of capital  expenditures.  The
net  cash  provided  by or  used  in  our  operating,  investing  and  financing
activities is summarized below (amounts in thousands):

                                                               Six Months Ended
                                                               ----------------
                                                                  June 30
                                                                  -------
                                                             2001       2000
                                                             -------    -------
       Net cash provided by (used in):
       Operating activities                                  $   447    $   534
       Investing activities                                    3,360       (595)
       Financing activities                                   (2,125)        94
                                                             -------    -------
            Net increase in cash                             $ 1,682    $    33
                                                             =======    =======


The Company's cash flow from operating  activities  decreased by $0.1 million in
the current  period  compared to the six months  ended June 30, 2000  ("previous
period"),  due  primarily  to the decrease in cash flow from  abandonment  costs
offset in part by the increased cash flow generated from the Company's  American
Resources oil and gas properties.

                                       15



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

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

Cash flow provided by investing  activities  during the current period  included
the  proceeds  from the  sale of the  Company's  interest  in the  Black  Marlin
Pipeline  System of  approximately  $4.6  million.  Cash flow used in  investing
activities  included the  construction of a new offshore  platform  installed to
operate the Blue Dolphin  Pipeline of  approximately  $1.5  million,  investment
costs associated with Drillmar of approximately $0.2 million and exploration and
development costs associated with an American  Resources oil and gas property of
approximately $0.3 million.

Cash flow used in financing  activities  during the current period  consisted of
the payment of promissory notes in the principal  amount of  approximately  $2.2
million, see Item 1., Note 1., Related Party Transactions.

On January 22, 2001, the Company and its partners sold the Black Marlin Pipeline
System for $7.3 million,  and the High Island Block A-5 lateral  constructed  in
2000 for $2.0  million,  to  Williams  Field  Services;  $3.6  million  and $1.0
million,  respectively,  net to the Company's interest.  The Black Marlin System
accounted for 15% of the Company's revenues in the previous period.

In November  2000,  the Company  elected to abandon the  Buccaneer  Field due to
adverse  developments in the field.  The Company reached an agreement with Tetra
to plug and abandon the wells in the field.  In the current period the remaining
wells in the Buccaneer Field were plugged and abandoned for  approximately  $1.4
million.  The Company used its escrow fund for  abandonment  obligations to fund
the plugging of the Buccaneer Field wells. In addition, Maritech Resources, Inc.
("Maritech")  an affiliate of Tetra,  purchased an adjacent  lease for which the
Company provided production operating services. In December 2000, as a result of
the Company's  plans to abandon the Buccaneer  Field  platform  facilities,  the
Company and Maritech  terminated  the  operating  agreement.  A new platform was
installed in the current  period in Galveston  Block 288 to operate and maintain
the  Blue  Dolphin  Pipeline  System.  The  Blue  Dolphin  Pipeline  System  was
previously  tied into and  operated  from the  Buccaneer  Field  platforms.  The
installation of the new platform and its connection to the Blue Dolphin Pipeline
System cost approximately $1.5 million net to the Company's 50% interest.

In August  2001,  the  Company  reached  an  agreement  with Tetra to remove the
Buccaneer Field platforms for a cost of approximately $2.6 million. In addition,
Tetra extended  payment terms,  whereby the Company will pay 20% upon completion
and 5% per  month for  twelve  months,  with the  remaining  balance  due in the
thirteenth month. To provide security for the extended  payment,  the Company is
providing  Tetra with a first lien on its interest in the Blue Dolphin  Pipeline
System.  The Company will continue to seek  extended  payment  arrangements  for
certain of its remaining abandonment costs estimated to be $2.5 million.

In December  1999,  the Company  entered into an agreement  with Fidelity Oil to
manage  their  interest in the oil and gas  properties  acquired  from  American
Resources  for $40,000  per month.  This amount was  intended to  reimburse  the
Company for the cost of the services provided. The agreement expired in December
2000 and provided  for  continuation  thereafter  on a year to year basis unless
terminated by either party.  Fidelity Oil terminated  this  agreement  effective
January 31, 2001.

                                       16



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

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


The  Company's  reserves and future net  revenues  reported at December 31, 2000
reflect capital expenditures  totaling $898,900 for the year ending December 31,
2001. Management will continue to evaluate its capital expenditure program based
on, among other things,  field reservoir  performance,  availability and cost of
drilling  and  workover  equipment,  and demand and  prices  obtainable  for the
Company's production, as well as availability of capital resources. There can be
no assurance that reserves will be developed as currently  planned.  At June 30,
2001,  the Company  incurred  capital  expenditures  totaling  387,000 which was
associated  with the  development  of its  interest in the  American  Resources'
Galveston  Block 418  property.  The Company  currently  believes  that  capital
expenditures for the second half of 2001 will be $753,000.

In December 1999, American Resources was paid approximately $4.5 million by Blue
Dolphin  Exploration  for American  Resources  common stock,  representing a 75%
ownership  interest,  and $24.2  million by Fidelity  Oil for an 80% interest in
its' Gulf of Mexico  assets.  The  proceeds  were used by American  Resources to
retire certain indebtedness. The indebtedness included American Resources senior
secured  debt  totaling  approximately  $51.2  million to Den norske  bank ("Den
norske").  Den norske  sold the senior debt for $27.0  million and a  contingent
future payment if the cumulative net revenues received by American Resources and
Fidelity Oil  attributable to American  Resources proved oil and gas reserves in
the Gulf of Mexico as of January 1, 1999, exceed $30.0 million during the period
January 1, 1999,  through  December 31, 2001.  If that occurs Den norske will be
entitled  to receive  an amount  equal to 50% of the net  revenues  in excess of
$30.0 million during that three-year  period.  If any contingent  amount becomes
payable to Den norske,  80% will be paid by Fidelity Oil and 20% will be paid by
American  Resources.  The payment,  if any, is due on March 15,  2002.  American
Resources estimates that it is probable that a payment to Den norske will be due
based upon current market  conditions.  The Company has provided for a liability
to Den norske in the amount of $850,000 at June 30, 2001.

The Company believes that it has, or can obtain, adequate capital to continue to
meet  its  anticipated  capital   requirements.   In  the  past,  the  Company's
requirements  have been  financed  by the  disposition  of certain  assets,  for
example,  interests in its  pipelines,  by  borrowings  from a commercial  bank,
private  placements of its equity and debt  securities,  and  investments by its
directors.  However,  there can be no assurance that the Company will be able to
continue to obtain  financing from these sources or sell assets on  commercially
acceptable  terms. The Company's  inability to finance its capital  requirements
may  adversely  affect its'  results of  operations,  timing for major  pipeline
expansions, growth in oil and gas prospect generation activities,  developmental
midstream projects and other projects.

RESULTS OF OPERATIONS
---------------------

The  Company  reported  net  income  for the six  months  ended  June 30,  2001,
("current period") of $483,508,  compared to net income of $203,534 reported for
the six months ended June 30, 2000  ("previous  period").  The difference in net
income is  primarily  due to the gain on the sale of the Black  Marlin  Pipeline
System  of  $1,417,626  offset  in  part by a  current  period  increase  to the
Company's Buccaneer Field abandonment obligations of approximately $1,100,000.

For the quarter ended June 30, 2001 ("current  quarter") the Company  reported a
net loss of $69,406  compared  to net income of $150,697  for the quarter  ended
June 30,  2000  ("previous  quarter").  The  reduction  is due to  decreases  in
pipeline  transportation  revenues in the current  quarter  from the sale of the
Black Marlin Pipeline System in January 2001 and the  consolidation  of Drillmar
Inc. which had an operating loss of $61,968,  (net of minority interest) for the
quarter ended June 30, 2001.

                                       17


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

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


Revenues:

First Half 2001 vs. First Half 2000.  Current  period  revenues from oil and gas
sales increased by $1,075,652,  from those of the previous period. Revenues from
American  Resources  properties  increased by $1,308,090  in the current  period
compared to the previous  period due to a 60% increase in commodity  prices on a
million cubic feet of gas  equivalent  basis  ("Mmcfe"),  resulting in increased
revenues of $1,222,620  and an increase in production  volumes of 8% on an Mmcfe
basis, resulting in a $155,760 increase in revenues. The increase in oil and gas
sales in the current  period was  partially  offset by loss of revenues from the
Buccaneer Field, which were $233,759 in the previous period.

Current period  revenues from pipeline  operations  decreased by $505,006 or 48%
from the previous  period.  The decrease was due to the sale of the Black Marlin
Pipeline  System on January 22, 2001. The Black Marlin  Pipeline System provided
revenues of $568,776 for the previous period compared to $49,640 for the current
period.

The Company did not have current period  revenues from operating fees due to the
termination of the operating agreement with Maritech in December 2000.

Second Quarter 2001 vs. Second Quarter 2000.  Current quarter  revenues from oil
and gas  sales  increased  by  $320,509,  from  those of the  previous  quarter.
Revenues from American Resources properties increased by $443,877 in the current
quarter  compared to the  previous  quarter due to a 62% increase in gas prices.
The increase in oil and gas sales in the current quarter was partially offset by
loss of revenues from the Buccaneer  Field,  which were $123,368 in the previous
quarter.

Current quarter revenues from pipeline  operations  decreased by $356,358 or 61%
from the previous  quarter.  The decrease was  primarily  due to the sale of the
Black  Marlin  Pipeline  System on January 22, 2001.  The Black Marlin  Pipeline
System provided  revenues of $337,327 for the second quarter of 2000 compared to
no revenues for the current quarter.

The Company did not have current quarter revenues from operating fees due to the
termination of the operating agreement with Maritech in December 2000.

Costs and Expenses:

First Half 2001 vs. First Half 2000.  Current period pipeline operating expenses
decreased  by  $237,297  or 47% from  the  previous  period.  The  decrease  was
primarily due to the sale of Black Marlin  Pipeline  System on January 22, 2001.
Black Marlin Pipeline System  operating  expenses were $244,474 for the previous
period compared to $33,462 for the current period.

                                       18



                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

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


Current period depletion,  depreciation,  amortization and abandonment increased
$1,092,036 from the previous  period.  The increase was due to an 8% increase in
production volumes resulting in increased depletion of $68,103 offset in part by
a decrease  of $83,223,  resulting  from the sale of the Black  Marlin  Pipeline
System. The Company recorded depletion expense of $33,916 in the previous period
for the Buccaneer Field. The Company recorded an increase in the estimated costs
associated with the Buccaneer Field  abandonment of approximately  $1,100,000 in
the current period. During the current period, the Company plugged and abandoned
the  remaining  Buccaneer  Field  wells for a total cost of  approximately  $1.4
million.  In addition,  the Company estimates cost of $5.1 million to remove the
Buccaneer Field  platforms.  At December 31, 2000, the provision for abandonment
was approximately  $5.4 million,  thus the Company has recorded an adjustment to
the  estimated  abandonment  cost of  approximately  $1,100,000  in the  current
period.

General and  administrative  expenses for the current period increased  $525,431
from the previous  period.  The increase was due in part to an increase in legal
expense  associated  with  the H&N  lawsuit  of  approximately  $74,000  and the
termination  of the  Management  Services  Agreement  between  the  Company  and
Fidelity Oil, whereby the Company managed Fidelity Oil's interest in the oil and
gas assets it acquired from American Resources in December 1999, resulting in an
increase of approximately  $200,000.  The management fees received from Fidelity
Oil had been recorded as a reduction to general and administrative  expenses. In
addition,  general and administrative  expenses of $299,472 were recorded in the
current period as a result of the consolidation of Drillmar.

Interest and other  expense  increased  $273,161 in the current  period due to a
$300,000  increase in the  provision  for the  contingent  payment to Den norske
Bank.

Second Quarter 2001 vs. Second Quarter 2000.  Current quarter pipeline operating
expenses  decreased by $147,042 or 55% from the previous  quarter.  The decrease
was primarily due to the sale of the Black Marlin Pipeline System on January 22,
2001.

Current quarter depletion,  depreciation and amortization decreased $29,856 from
the previous  quarter.  The decrease was  primarily  due to decrease of $49,934,
resulting from the sale of the Black Marlin Pipeline System.

General and  administrative  expenses for the current quarter increased $205,463
from the  previous  quarter.  The  increase  was  primarily  due to  expenses of
$110,538  recorded in the  current  quarter  associated  with  Drillmar  and the
termination  of the  Management  Services  Agreement  between  the  Company  and
Fidelity Oil, whereby the Company managed Fidelity Oil's interest in the oil and
gas assets it acquired from American Resources in December 1999, resulting in an
increase of approximately  $120,000.  The management fees received from Fidelity
Oil had been recorded as a reduction to general and administrative expenses.

Interest and other expense  increased  $131,816 in the current  quarter due to a
$150,000  increase in the  provision  for the  contingent  payment to Den norske
Bank.

                                       19




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE

The Company is exposed to market risk,  including  adverse  changes in commodity
prices and interest rates as discussed below.

Commodity Price Risk- The Company produces and sells natural gas, crude oil, and
natural  gas  liquids.  As a result,  the  Company's  financial  results  can be
significantly affected if these commodity prices fluctuate widely in response to
changing market forces.  The Company does not use derivative  products to manage
commodity price risk.

Interest Rate Risk- The Company  currently  has no short-term or long-term  debt
with  floating  interest  rates,  and is not  subject to risk of  interest  rate
changes.

                                       20





                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES


                           PART II. OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

On May 8, 2000,  American  Resources,  a 77% indirectly  owned subsidiary of the
Company, and its former Chief Financial Officer,  were named in a lawsuit in the
United  States  District  Court for the  Southern  District  of  Texas,  Houston
Division,  styled  H&N Gas and  Howard  Energy  Marketing,  L.L.C.  v.  American
Resources Offshore,  Inc. et al (Case No H-00-1371).  The lawsuit alleges, among
other  things,  that H&N Gas ("H&N") was  defrauded  by  American  Resources  in
connection with gas purchase  options and gas price swap contracts  entered into
from  February  1998 through  September  1999.  H&N alleges  unlawful  collusion
between  American  Resources'  prior  management  and the then president of H&N,
Richard Hale ("Hale"),  to the detriment of H&N. H&N generally alleges that Hale
directed H&N to purchase  illusory options from American  Resources that bore no
relation to any physical gas business and that  American  Resources did not have
the  financial  resources  and/or  sufficient  quantity of gas to  perform.  H&N
further  alleges that American  Resources and Hale colluded with respect to swap
transactions that were designed to benefit American  Resources at the expense of
H&N Gas. H&N further alleges civil conspiracy against all the defendants. H&N is
seeking  approximately  $6.2  million in actual  damages  plus  treble  damages,
punitive  damages,  prejudgment  interest and attorneys'  fees against  American
Resources directly. As a result of its conspiracy allegation,  H&N also contends
that all  defendants  are jointly and  severally  liable for over $62.0  million
dollars in actual damages plus treble  damages,  punitive  damages,  prejudgment
interest and attorneys' fees.  American  Resources  intends to vigorously defend
this claim.

ITEM 5.     OTHER INFORMATION

During the second quarter of 2000, American Resources' Board of Directors formed
a special  committee for the purpose of evaluating the possible exchange of its'
outstanding  common stock and preferred  stock for shares of the common stock of
the Company.  The special committee is made up of American Resources'  directors
who are not affiliated with the Company.

On August 6, 2001,  the Company and American  Resources  reached an agreement in
principle  for the  Company  to  acquire  by merger  all  outstanding  shares of
American  Resources'  common stock not owned by the Company and all  outstanding
shares of American  Resources'  Series 1993 8% Convertible  Preferred Stock. The
agreements  in  principle  calls for the holders of American  Resources'  common
stock to receive one share of Blue Dolphin  common stock for each 36.2 shares of
American  Resources  common  stock owned and for holders of American  Resources'
preferred  stock to receive one share of Blue Dolphin common stock for each 33.2
shares of American  Resources  preferred  stock owned. If the proposed merger is
completed,  American  Resources  will become a  wholly-owned  subsidiary  of the
Company and former  stockholders of American Resources will become  stockholders
of the Company. The proposed merger is subject to, among other things, execution
of a  definitive  merger  agreement  and  approval  of the  merger  by  American
Resources' stockholders.

ITEM 6.     EXHIBITS AND REPORT ON FORM 8-K

                  A)       No Exhibits

                  B)       Form 8-K - None

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                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                           By: BLUE DOLPHIN ENERGY COMPANY



Date:    August 20, 2001                     /s/ Michael J. Jacobson
                                           -------------------------------
                                           Michael J. Jacobson
                                           President and Chief Executive Officer



                                             /s/ G. Brian Lloyd
                                           -------------------------------
                                           G. Brian Lloyd
                                           Vice President, Treasurer



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