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:          September 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.

6,023,725  shares of the  Registrants'  common stock,  par value $.01 per share,
--------------------------------------------------------------------------------
where outstanding at November 8, 2001.
--------------------------------------



                  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 ("SEC") 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.

The  accompanying  condensed  consolidated  financial  statements of the Company
should be read in conjunction  with the  consolidated  financial  statements and
notes  thereto  included  in the  Annual  Report on Form 10-K for the year ended
December 31, 2000.










                                       2




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                                                                           September 30,   December 31,
                                                                                                2001            2000
                                                                                           ------------    ------------
                                                                                           (Unaudited)
                                                                                                     
                                 ASSETS

Current Assets:
   Cash and cash equivalents                                                               $  3,136,835    $  2,071,682
   Trade accounts receivable                                                                  1,299,661       2,406,751
   Funds escrowed for abandonment                                                                69,604       1,485,728
   Prepaid expenses                                                                             261,966         127,913
                                                                                           ------------    ------------
                         TOTAL CURRENT ASSETS                                                 4,768,066       6,092,074

Property and Equipment at cost:
   Oil and Gas properties, including $430,782
   of unproved leasehold cost at September 30, 2001
   and December 31, 2000, respectively
   (full-cost method)                                                                        28,562,867      28,032,211
   Onshore separation and handling facilities                                                 1,583,428       1,583,610
   Land                                                                                         850,000         930,500
   Pipelines                                                                                  2,950,621       4,845,975
   Other property and equipment                                                                 402,994         397,683
                                                                                           ------------    ------------
                                                                                             34,349,910      35,789,979
  Accumulated depletion, depreciation and amortization                                      (30,285,969)    (30,444,622)
                                                                                           ------------    ------------
                                                                                              4,063,941       5,345,357

Deferred federal income tax                                                                     244,444         244,444
Investment in Petroport                                                                       1,935,862       1,885,219
Other assets                                                                                    841,660         345,861
                                                                                           ------------    ------------

                         TOTAL ASSETS                                                      $ 11,853,973    $ 13,912,955
                                                                                           ============    ============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Trade accounts payable                                                                  $  1,545,922    $  1,557,850
   Current portion of long term debt                                                               --           218,412
   Notes payable - related parties                                                                 --         2,000,000
   Accrued expenses and other liabilities                                                     1,673,151         927,347
                                                                                           ------------    ------------
                         TOTAL CURRENT LIABILITIES                                            3,219,073       4,703,609

Other non-current liabilities                                                                      --           550,000
Minority interests                                                                            1,133,634       1,196,479

Contingencies

Common Stock, (10,000,000 shares authorized, 6,022,875 shares issued and outstanding
   at September 30, 2001, 6,016,718 shares issued and outstanding at December 31, 2000.)         60,229          60,167
Additional Paid-in Capital                                                                   25,749,549      25,775,417
Accumulated Deficit                                                                         (18,308,512)    (18,372,717)
                                                                                           ------------    ------------
                                                                                              7,501,266       7,462,867
                         TOTAL LIABILITES AND
                         STOCKHOLDERS' EQUITY                                              $ 11,853,973    $ 13,912,955
                                                                                           ============    ============


See accompanying notes to the condensed consolidated financial statements.


                                       3




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

                                                                        Nine Months
                                                                     Ended September 30,
                                                                    2001            2000
                                                               ------------    ------------
                                                                         
Revenue from operations:
    Oil and gas sales                                          $  4,099,606    $  3,810,333
    Pipeline operations                                             784,003       1,716,102
    Operating  fees                                                    --           234,338
                                                               ------------    ------------
                                                                  4,883,609       5,760,773
                                                               ------------    ------------

Cost of operations:
    Lease operating expenses                                        888,805         951,068
    Pipeline operating expenses                                     425,852         753,726
    Gain on sale of assets                                       (1,417,626)           --
    Depletion, depreciation, amortization and abandonment         2,379,402       1,441,694
    Impairment of oil and gas properties                               --        10,654,976
    General and administrative                                    2,138,475       1,583,151
                                                               ------------    ------------
                                                                  4,414,908      15,384,615
                                                               ------------    ------------

                    OPERATING PROFIT (LOSS)                         468,701      (9,623,842)

Other income (expense):

    Interest and other expense                                     (356,868)       (140,405)
    Interest and other income                                       125,013          77,418
                                                               ------------    ------------

                    INCOME (LOSS) BEFORE MINORITY INTERESTS,
                    AND INCOME TAXES                                236,846      (9,686,829)

Minority interests                                                 (172,641)       (219,223)

Income taxes                                                           --              --
                                                               ------------    ------------

Net income (loss)                                              $     64,205    $ (9,906,052)
                                                               ============    ============

Earnings (loss) per common share-basic                         $       0.01    $      (1.66)
                                                               ============    ============

Earnings (loss) per common share-diluted                       $       0.01    $      (1.66)
                                                               ============    ============

Weighted average number of common shares outstanding
      and potential dilutive common shares:
    Basic                                                         6,019,463       5,955,645
                                                               ============    ============
    Diluted                                                       6,035,216       5,955,645
                                                               ============    ============



See accompanying notes to the condensed consolidated financial statements.


                                       4




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

                                                                        Three Months
                                                                     Ended September 30,
                                                                    2001            2000
                                                               ------------    ------------
                                                                         
Revenue from operations:
    Oil and gas sales                                          $    846,739    $  1,633,118
    Pipeline operations                                             229,927         657,020
    Operating  fees                                                    --            77,924
                                                               ------------    ------------
                                                                  1,076,666       2,368,062
                                                               ------------    ------------

Cost of operations:
    Lease operating expenses                                        261,413         352,605
    Pipeline operating expenses                                     156,904         247,481
    Depletion, depreciation, amortization and abandonment           376,594         530,921
    Impairment of oil and gas properties                               --        10,654,976
    General and administrative                                      708,965         512,418
                                                               ------------    ------------
                                                                  1,503,876      12,298,401
                                                               ------------    ------------

                    OPERATING LOSS                                 (427,210)     (9,930,339)

Other income (expense):
    Interest and other expense                                      (27,225)        (54,824)
    Interest and other income                                        27,540          27,154
                                                               ------------    ------------

                    INCOME (LOSS) BEFORE MINORITY INTERESTS,
                    AND INCOME TAXES                               (426,895)     (9,958,009)

Minority interests                                                    7,595        (151,576)

Income taxes                                                           --              --
                                                               ------------    ------------

Net loss                                                       $   (419,300)   $(10,109,585)
                                                               ============    ============

Loss per common share-basic and diluted                        $      (0.07)   $      (1.69)
                                                               ============    ============

Weighted average number of common shares outstanding
      and potential dilutive common shares:
    Basic                                                         6,021,463       5,964,521
                                                               ============    ============
    Diluted                                                       6,021,463       5,964,521
                                                               ============    ============



See accompanying notes to the condensed consolidated financial statements.


                                       5




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
                                                                                           Nine Months
                                                                                       Ended September 30,
                                                                                      2001            2000
                                                                                 ------------    ------------
                                                                                           

OPERATING ACTIVITIES
    Net income (loss)                                                            $     64,205    $ (9,906,052)
    Adjustments to reconcile net income (loss) to net cash provided by
        operating activities:
               Depletion, depreciation, amortization, abandonment and
               impairment                                                           2,379,402      12,096,670
               Minority interests                                                     172,641            --
               Gain on sale of assets                                              (1,417,626)           --
               Changes in operating assets and liabilities:
                    (Increase) decrease in trade accounts receivable                1,107,090        (634,071)
                    Increase in prepaid expenses                                     (134,053)       (613,739)
                    Abandonment costs incurred                                     (2,061,525)           --
                    Increase in accounts payable and other current liabilities        183,876       2,254,121
                                                                                 ------------    ------------
                              NET CASH PROVIDED BY
                              OPERATING ACTIVITIES                                    294,010       3,196,929
                                                                                 ------------    ------------

INVESTING ACTIVITIES
    Oil and gas prospect generation costs                                                --          (811,555)
    Reimbursement of oil and gas prospect generation costs                               --           811,555
    Purchases of property and equipment                                            (1,737,331)     (1,113,088)
    Exploration and development costs                                                (503,459)     (1,254,952)
    Net proceeds from sale of assets                                                4,625,000         144,999
    Funds escrowed for abandonment costs                                              (31,358)       (298,293)
    Release of escrowed funds for abandonment                                       1,447,482            --
    Investment in Petroport                                                           (53,688)       (138,855)
    Investment in New Avoca                                                          (119,414)        (60,475)
    Investment in Drillmar                                                           (373,885)           --
    Increase in other assets                                                           (2,500)        (32,261)
                                                                                 ------------    ------------
                              NET CASH PROVIDED BY (USED IN)
                              INVESTING ACTIVITIES                                  3,250,847      (2,752,925)
                                                                                 ------------    ------------

FINANCING ACTIVITIES
    Net proceeds from borrowings                                                         --           400,000
    Net proceeds from the sale of stock                                               (25,806)         85,117
    Payments on borrowings                                                         (2,218,412)       (100,633)
    Dividends paid by subsidiary                                                     (235,486)           --
    Other                                                                                --          (123,936)
                                                                                 ------------    ------------
                              NET CASH PROVIDED BY (USED IN)
                              FINANCING ACTIVITIES                                 (2,479,704)        260,548
                                                                                 ------------    ------------

                              INCREASE  IN CASH AND CASH EQUIVALENTS                1,065,153         704,552

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

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $  3,136,835    $  1,871,282
                                                                                 ============    ============

SUPPLEMENTARY CASH FLOW INFORMATION

    Interest paid                                                                $     98,500    $     75,062
                                                                                 ============    ============

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



See accompanying notes to the condensed consolidated financial statements.


                                       6


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED


1. Related Party Transactions

In  December  1999,  the Company  issued a $1.0  million  unsecured  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 unsecured convertible promissory notes in 2000 totaling
$1.0 million;  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. 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.  These convertible  promissory
notes and accrued interest of $32,790 were paid in January 2001.

At June 30,  2001,  Ivar Siem  loaned  Drillmar,  Inc.,  a Delaware  corporation
("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 loaned
$300,000  from Ivar Siem and  $200,000  from Harris  Kaffie and they were issued
unsecured  promissory  notes due December 31, 2001,  bearing interest at 10% per
annum. The promissory note and accrued interest of $986 due to Harris Kaffie was
paid in August 2001. In August 2001, Drillmar was loaned $125,000 from Ivar Siem
and $125,000 from Harris Kaffie and they where issued unsecured promissory notes
due December 31, 2001, bearing interest at 10% per annum. In October 2001 Harris
Kaffie  loaned an additional  $200,000 to Drillmar  under the same terms and due
date. The promissory notes issued by Drillmar are non-recourse to the Company.

2. Contingencies

The Company has  previously  announced a gas discovery in High Island Area Block
A-7,  in the Gulf of  Mexico.  The  Company  owns an 8.9%  reversionary  working
interest in this  field.  The Company  will begin to receive  revenues  from its
reversionary  interest after "payout" occurs. Payout is scheduled to occur after
all of the other working interest owners have recovered their costs and expenses
associated with developing the field from sales of production from the field. At
the beginning of the third quarter of 2001,  there were three wells producing in
this field at a combined  rate of  approximately  60 Mmcf of natural gas per day
and a fourth  (exploratory)  well was being drilled.  However,  two of the three
wells have stopped  producing  and the  remaining  well is  currently  producing
approximately 28 Mmcf of natural gas per day. Additionally, the exploratory well
that was being drilled was  unsuccessful.  The Company  believes that one of the
non-producing wells will be worked-over and the other plugged and abandoned.  As
a result of these  occurrences the Company expects to begin to receive  revenues
from its  reversionary  working  interest in this field in the third  quarter of
2002.


                                       7


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

Prior to the  decrease  in  production  in the High  Island  A-7  field  and the
corresponding  delay in the Company's  receipt of payments from its reversionary
working interest in this field, the Company believed that it would have adequate
capital to meet its obligations and operating needs for the current fiscal year.

However,  due to this delay the Company now believes  that it will need to raise
between $4.5 to $7.0 million of capital to meet its  obligations  and  operating
needs.  The Company will need to seek external  financing  and/or sell assets to
raise the necessary capital.  There can be no assurance that the Company will be
able to obtain  financing or sell assets on commercially  reasonable  terms. The
Company's  inability to raise capital may have a material  adverse effect on its
financial  condition,  ability to meet its  obligations  and operating needs and
results of operations.

In December 1999, Blue Dolphin Exploration Company, a wholly owned subsidiary of
the Company,  purchased shares of American Resources  Offshore,  Inc. ("American
Resources") common stock representing a 75% ownership interest for approximately
$4.5 million, and concurrently with this transaction American Resources received
$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").  In connection with this transaction
Den norske sold the senior debt and all related security  interests and liens 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 this  agreement
and current market  conditions.  The Company has provided for a liability to Den
norske in the amount of $900,000 at September 30, 2001.

On May 8, 2000, American Resources,  a majority 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.

                                       8


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

As a result of the  decision  to cease  operating  activities  in the  Buccaneer
Field,  the  Company's  leases in or around the  Buccaneer  Field  terminated in
January 2001.  The Company must plug and abandon all remaining  wells and remove
platform  facilities.  The  rules and  regulations  of the  Material  Management
Service ("MMS")  requires that the Company complete the plugging and abandonment
within one year after  termination  of the lease.  In the first quarter of 2001,
the Company plugged and abandoned the remaining wells at a cost of approximately
$1.4 million.  Work to remove the two platform  facilities  began in August 2001
with $216,000  cost incurred as of September 30, 2001.  The removal was expected
to be  completed  in  December  2001.  However,  the Company  has  requested  an
extension  from the  Minerals  Management  Service  ("MMS")  until  mid-2002  to
complete the site  clearance  when weather  conditions in the Gulf of Mexico are
typically more favorable.  The Company  received an extension from the MMS until
the second  quarter of 2002 to begin site  clearance  at one  platform  facility
location  and  expects  to  receive a  comparable  extension  for the  remaining
platform  facility  location.  The Company still believes that its provision for
total abandonment costs of $4.9 million at September 30, 2001 is adequate.

Petroport,  Inc.  ("Petroport")  submitted  a  proposal  for  development  of  a
deepwater port in the Gulf of Mexico, south of Sabine Pass, Texas, to a group of
area  refiners in  September,  2001.  The  refiners are seeking  proposals  from
qualified  parties with the intent of evaluating  the proposals and developing a
consensus  on  which  proposal  best  meets  the  objectives  of the  individual
refiners.  The Company met with the  refiners in October,  2001,  to discuss its
proposal.  No specific  timetable  has been set for a decision  by the  refiners
however it is anticipated that an indication of the project's  viability will be
known by year-end.  It is possible  that the refiners may not reach a consensus,
or that the  Company  is not  selected  to  participate  in the  project  by the
individual  refiners even if a consensus is reached.  If this should occur,  the
Company's  investment in deepwater port project development would likely have no
or limited future value.

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 from 37.5%
to  64%.  Consideration  paid by the  Company  included  cash  of  approximately
$131,000, a contribution of services in the amount of $434,000.

Effective as of September 30, 2001, Drillmar entered into a merger agreement and
merged with Zephyr Drilling Ltd. ("Zephyr").  Prior to the merger,  Zephyr was a
limited  partnership  in which Drillmar was the general  partner.  Zephyr owns a
semi-submersible  drilling  rig that is being  retrofitted  into a  semi-tender.
Accordingly,  Drillmar and Zephyr were  considered to be related  parties at the
time of the transaction.  As a result of the merger,  the Company's  interest in
Drillmar  decreased from 64% to 12.8%.  Prior to the merger, the Company entered
into an agreement with Drillmar whereby it agreed to provide

                                       9


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

office space and certain  administrative  services to Drillmar for approximately
$40,000 per month. Historically the Company has used the payments it is entitled
to receive under this agreement to fund its

investment  in Drillmar.  In connection  with the merger the Company  received a
partial  payment  under the  services  agreement  in October 2001 and expects to
receive full payments beginning in November 2001.

The  Company  records its  investment  in  Drillmar  using the equity  method of
accounting.  Under the equity method,  investments are recorded at cost plus the
Company's  equity  in  undistributed  earnings  and  losses  after  acquisition.
Intercompany gains and losses are eliminated.

4. Earnings Per Share

The  Company  applies  the  provisions  of  Statement  of  Financial  Accounting
Standards  No. 128 ("SFAS  128"),  "Earnings  per Share".  SFAS 128 requires the
presentation of basic earnings per share ("EPS") which excludes  dilution and is
computed by dividing income (loss) available to common stockholders by

the  weighted-average  number  of shares of  common  stock  outstanding  for the
period.  SFAS 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 Number
                                                      of Common Shares
                                                        Outstanding
                                                       and Potential     Per
                                        Net Income        Dilutive      Share
                                          (Loss)       Common Shares    Amount
                                          ------       -------------    ------
Nine Months ended September 30, 2001
    Basic earnings per share           $     64,205       6,019,463    $   0.01
    Effect of dilutive stock options           --            15,753        --
                                       ------------    ------------    --------
    Diluted earnings per share         $     64,205       6,035,216    $   0.01
                                       ============    ============    ========

Nine Months ended September 30, 2000
    Basic and diluted loss per share   ($ 9,906,052)      5,955,645    ($  1.66)
                                       ============    ============    ========
Quarter ended September 30, 2001
    Basic and diluted loss per share   ($   419,300)      6,021,463    ($  0.07)
                                       ============    ============    ========
Quarter ended September 30, 2000
    Basic and diluted loss per share   ($10,109,585)      5,964,521    ($  1.69)
                                       ============    ============    ========


                                       10


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

5. 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.

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 $1.3 million.

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.

6. 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 nine months and three months ended  September  30, 2001,
and 2000, and at September 30, 2001 and December 31, 2000 are as follows:




                                       11




                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

                                                                                                         Depletion,
                                                                                                        Depreciation,
                                                                                         Operating      Amortization,
                                                                        Intersegment       Income     Abandonment, and
                                                           Revenues       Revenues       (Loss)(1)    Impairment(2)(3)
                                                          -----------    -----------    -----------   ----------------
                                                                                          
Nine months ended September 30, 2001:
     Oil and gas exploration and
        production and operating fees                     $ 4,099,606           --          257,813      2,231,354
     Pipeline operations                                      784,003           --        1,510,597        127,175
     Other                                                       --                      (1,299,709)        20,873
                                                          -----------                   -----------    -----------
     Consolidated                                           4,883,609           --          468,701      2,379,402
                                                          -----------                                  -----------
     Other expense                                                                         (231,855)
                                                                                        -----------
     Income before minority interests, and income taxes                                     236,846
                                                                                        -----------

Nine months ended September 30, 2000:
       Oil and gas exploration and
          production and operating fees                   $ 4,049,171          4,500     (9,410,110)    11,806,953
       Pipeline operations                                  1,729,102         13,000        408,648        267,272
       Other                                                  (17,500)                     (622,380)        22,445
                                                          -----------                   -----------    -----------
       Consolidated                                         5,760,773           --       (9,623,842)    12,096,670
                                                          -----------                                  -----------
       Other expense                                                                        (62,987)
                                                                                        -----------
       Loss before minority interests, and income taxes                                  (9,686,829)
                                                                                        -----------

Three months ended September 30, 2001:
     Oil and gas exploration and
        production and operating fees                     $   846,739           --          163,887        334,359
     Pipeline operations                                      229,927           --           12,693         36,684
     Other expense                                               --                        (603,790)         5,551
                                                          -----------                   -----------    -----------
     Consolidated                                           1,076,666           --         (427,210)       376,594
                                                          -----------                                  -----------
     Other income                                                                               315
                                                                                        -----------
     Loss before minority interests, and income taxes                                      (426,895)
                                                                                        -----------

Three months ended September 30, 2000:
     Oil and gas exploration and
        production and operating fees                     $ 1,712,542          1,500     (9,967,164)    11,087,298
     Pipeline operations                                      658,765          1,745        228,218         90,819
     Other                                                     (3,425)          --         (191,393)         7,780
                                                          -----------                   -----------    -----------
     Consolidated                                           2,367,882           --       (9,930,339)    11,185,897
                                                          -----------                                  -----------
     Other expense                                                                          (27,670)
                                                                                        -----------
     Loss before minority interests, and income taxes                                    (9,958,009)
                                                                                        -----------






                                       12


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

                                        September 30,   December 31,
                                             2001           2000
                                        ------------   ------------
           Identifiable assets:
              Oil and gas exploration
                 and production         $  3,543,141   $  4,164,299
             Pipeline operations           7,620,622      8,958,876
             Other                           690,210        789,780
                                        ------------   ------------
             Consolidated               $ 11,853,973   $ 13,912,955
                                        ============   ============

     1.   Consolidated  income (loss) from  operations  includes  $1,050,752 and
          $582,436 in  unallocated  general  and  administrative  expenses,  and
          unallocated  depletion,  depreciation  and amortization of $20,873 and
          $22,445  for the nine  months  ended  September  30,  2001  and  2000,
          respectively.

          Consolidated  income  (loss) from  operations  includes  $169,021  and
          $180,369 in  unallocated  general  and  administrative  expenses,  and
          unallocated  depletion,  depreciation  and  amortization of $5,551 and
          $7,780  for  the  quarters   ended   September   30,  2001  and  2000,
          respectively.

     2.   Pipeline  depreciation  and  amortization  includes  a  provision  for
          pipeline  abandonment of $14,805 and $14,805 for the nine months ended
          September  30,  2001 and 2000,  respectively.  Oil and gas  depletion,
          depreciation,  amortization  and abandonment  includes a provision for
          abandonment  costs of platforms and wells of $5.3 million for the nine
          months ended September 30, 2000. In addition,  the Company recorded an
          expense  of  approximately  $1.1  million  for the nine  months  ended
          September  30, 2001,  as a result of a change in the  estimated  costs
          associated with the Buccaneer Field abandonment.

     3.   Pipeline  depreciation  and  amortization  includes  a  provision  for
          pipeline  abandonment  of $4,935  and $4,935  for the  quarters  ended
          September  30,  2001 and 2000,  respectively.  Oil and gas  depletion,
          depreciation,  amortization  and abandonment  includes a provision for
          abandonment  costs of  platforms  and  wells of $5.3  million  for the
          quarter ended September 30, 2000.

7. 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  ("FASB").   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.

                                       13


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

In July  2001,  the FASB  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 upon
adoption of SFAS 142 on January 1, 2002.

In August 2001, the FASB issued Statement No. 143 ("SFAS 143"),  "Accounting for
Asset  Retirement   Obligations,"  which  addresses  financial   accounting  and
reporting for obligations  associated with the retirement of tangible long-lived
assets and the associated asset retirement  costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of the asset.

SFAS 143  requires  that the fair value of a liability  for an asset  retirement
obligation  be  recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made.  The fair value of the liability is added to
the carrying amount of the associated asset and this additional  carrying amount
is depreciated  over the life of the asset. The liability is accreted at the end
of each period  through  charges to  operating  expense.  If the  obligation  is
settled for other than the carrying  amount of the  liability,  the Company will
recognize a gain or loss on settlement.

The Company is required  and plans to adopt the  provisions  of SFAS 143 for the
quarter ending March 31, 2003. To accomplish this, the Company must identify all
legal  obligations for asset retirement  obligations,  if any, and determine the
fair value of these  obligations on the date of adoption.  The  determination of
fair value is complex and will require the Company to gather market  information
and develop  cash flow  models.  Additionally,  the Company  will be required to
develop processes to track and monitor these obligations.  Because of the effort
necessary  to comply with the  adoption of SFAS 143, it is not  practicable  for
management to estimate the impact of adopting this Statement at the date of this
report.

In October 2001, the FASB issued Statement No. 144 ("SFAS 144"), "Accounting for
the  Impairment  or Disposal  of  Long-Lived  Assets".  SFAS 144  provides  that
long-lived assets to be disposed of by sale be measured at the lower of carrying
amount  or fair  value  less  cost  to  sell,  whether  reported  in  continuing
operations  or  in  discontinued  operations,  and  broadens  the  reporting  of
discontinued  operations to include all components of an entity with  operations
that  can be  distinguished  from  the  rest  of the  entity  and  that  will be
eliminated from the ongoing operations of the entity in a disposal  transaction.
SFAS 144 is effective for fiscal years beginning after December 15, 2001.

                                       14


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

            FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                                   (Continued)

The  Company is  currently  assessing  the  impact of SFAS 144 on its  financial
condition and results of operations.










                                       15


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

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

              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,  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" 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 SEC 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
unaudited Condensed Consolidated Financial Statements and notes thereto included
in Item 1. of this report and the  consolidated  financial  statements and notes
thereto  included in the Annual Report on Form 10-K for the year ended  December
31, 2000.

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

The Company previously  announced a gas discovery in High Island Area Block A-7,
in the Gulf of Mexico. The Company owns an 8.9% reversionary working interest in
this field.  The Company will begin to receive  revenues  from its  reversionary
interest after "payout" occurs. Payout will occur after all of the other working
interest  owners  have  recovered  their  costs  and  expenses  associated  with
developing the field from sales of production  from the field.  At the beginning
of the third quarter of 2001,  there were three wells producing in this field at
a combined  rate of  approximately  60 Mmcf of natural  gas per day and a fourth
(exploratory)  well was being drilled.  Based on the Company's  estimate of when
payout  would  occur,  it  expected  to  begin   receiving   revenues  from  its
reversionary  working interest in the fourth quarter of 2001 or first quarter of
2002.  However,  two of the three wells have stopped producing and the remaining
well is producing  approximately  28 Mmcf of natural gas per day.  Additionally,
the  exploratory  well that was being  drilled  was  unsuccessful.  The  Company
believes that one of the  non-producing  wells will be worked-over and the other
plugged and abandoned.  As a result of these occurrences the Company now expects
to begin to receive  revenues  from its  reversionary  working  interest in this
field in the third quarter of 2002.

Effective as of September 30, 2001, Drillmar, Inc. ("Drillmar"),  entered into a
merger agreement and merged with Zephyr Drilling Ltd.  ("Zephyr").  Prior to the
merger,  Zephyr was a limited  partnership  in which  Drillmar  was the  general
partner. Zephyr owns a semi-submersible drilling rig that is being


                                       16


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
                                   (Continued)

retrofitted  into a  semi-tender.  As a  result  of the  merger,  the  Company's
interest  in Drillmar  decreased  from 64% to 12.8%.  Prior to the  merger,  the
Company  entered into an agreement  with  Drillmar  whereby it agreed to provide
office space and certain  administrative  services to Drillmar for approximately
$40,000 per month. Historically the Company has used the payments it is entitled
to receive under this agreement to fund its investment in Drillmar.  However, in
connection  with the merger the  Company  received a partial  payment  under the
services  agreement  in  October  2001 and  expects  to  receive  full  payments
beginning in November 2001.

On August 31, 2001, the Company, American Resources and BDCO Merger Sub, Inc., a
wholly owned subsidiary of the Company (the "Merger Subsidiary"), announced that
they  entered  into an  Agreement  and Plan of Merger (the  "Merger  Agreement")
pursuant  to which the  Merger  Subsidiary  will  merge  with and into  American
Resources and the holders, other than the Company, of American Resources' shares
of common stock, par value $0.00001 per share (the "Common  Stock"),  and Series
1993 Preferred Stock, par value $12.00 per share (the "Preferred  Stock"),  will
receive  approximately  326,000 and 1,200 shares of the Company's  common stock,
par value $0.01 per share, respectively. The merger requires the approval of (i)
a majority of American Resources'  outstanding Common Stock and Preferred Stock,
voting  together  as a  class;  and  (ii)  a  majority  of  American  Resources'
outstanding  Preferred  Stock voting  separately  as a class.  The Company,  the
beneficial owner, as of November 14, 2001, owned approximately 77% of the issued
and outstanding shares of Common Stock and 50.4% of the Preferred Stock.

American Resources' board of directors  unanimously approved the transaction and
its submission to stockholders  following a determination by a special committee
of the board,  composed of individuals  who are not directors or officers of the
Company, that the merger is fair and in the best interest of American Resources'
minority stockholders. The merger is subject to customary closing conditions.

In light of recent  developments,  the board of  directors  of the Company and a
special committee of the board of directors of American Resources are evaluating
whether it is in the best interests of their respective  stockholders to proceed
with the merger.  Although the Company and American  Resources have entered into
the  merger  agreement,  there  can be no  assurance  that  the  merger  will be
completed.

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

Prior to the  decrease  in  production  in the High  Island  A-7  field  and the
corresponding  delay in the Company's  receipt of payments from its reversionary
working interest in this field, the Company believed that it would have adequate
capital to meet its obligations and operating needs for the current fiscal year.

However,  due to this delay the Company now believes  that it will need to raise
between $4.5 to $7.0 million of capital to meet its  obligations  and  operating
needs.  The Company will need to seek external  financing  and/or sell assets to
raise the necessary capital.  There can be no assurance that the Company will be
able to obtain  financing or sell assets on commercially  reasonable  terms. The
Company's  inability to raise capital may have a material  adverse effect on its
financial  condition,  ability to meet its  obligations  and operating needs and
results of operations.


                                       17


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
                                   (Continued)

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

                                         September 30, 2001    December 31, 2000
                                         ------------------    -----------------

                                          Amount       %        Amount        %
                                         --------     ---      --------      ---

         Working capital                 $  1,549      18      $  1,388       15

         Property and equipment, net        4,064      47         5,345       58

         Other noncurrent assets            3,022      35         2,476       27
                                         --------              -------
         Total                           $  8,635     100      $  9,209      100
                                         ========              ========

         Other non-current liabilities   $      -       -      $    550        6

         Minority interests                 1,134      13         1,196       13


         Stockholders' equity               7,501      87         7,463       81
                                         --------              --------
         Total                           $  8,635     100      $  9,209      100
                                         ========              ========


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

Historically,  the Company has relied on the proceeds from financing  activities
and the sale of assets  to  supplement  its  capital  requirements.  In the nine
months ended  September 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 from oil and gas natural gas properties that the Company
has an interest in,  utilization  of its pipeline  systems,  utilization  of the
Company's  services by third parties and commodity prices among others.  See the
section titled "Recent Developments".

The net cash  provided  by or used in our  operating,  investing  and  financing
activities is summarized below (amounts in thousands):

                                                    Nine Months Ended
                                                    -----------------
                                                      September 30
                                                      ------------
                                                     2001      2000
                                                     ----      ----
               Net cash provided by (used in):
               Operating activities                $    294   $ 3,197
               Investing activities                   3,251    (2,753)
               Financing activities                  (2,480)      261
                                                   ------------------
                    Net increase in cash           $ 1,065    $   705
                                                   ==================



                                       18


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
                                   (Continued)

The Company's cash flow from operating  activities  decreased by $2.9 million in
the  current  period  compared  to the nine  months  ended  September  30,  2000
("previous  period"),  due primarily to abandonment  costs offset in part by the
increased cash flow generated from the Company's  American Resources oil and gas
properties.

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  $1.7  million,  investment
costs associated with Drillmar of approximately $0.4 million and exploration and
development  costs  associated with an American  Resources,  oil and natural gas
properties of approximately $0.5 million.

Cash flow used in financing  activities  during the current period  consisted of
the  payment  of  convertible  promissory  notes  in  the  principal  amount  of
approximately  $2.2 million to related  parties,  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 for the nine months ended September
30, 2000.

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
Applied Technologies, Inc. ("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  $1.7 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.  The Company
initially  expected  that the platform  removal would be completed in the fourth
quarter of 2001.  However,  the  Company has  requested  an  extension  from the
Minerals  Management  Service until mid-2002 to complete the site clearance when
weather  conditions  in the Gulf of Mexico are  typically  more  favorable.  The
Company  received an extension  from the Minerals  Management  Service until the
second quarter of 2002 to begin site clearance at one platform facility location
and  expects  to  receive a  comparable  extension  for the  remaining  platform
facility  location.  In addition,  Tetra and the Company  reached 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


                                       19


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
                                   (Continued)

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.  Work to remove the two platform
facilities  began in August 2001 with $216,000 cost incurred as of September 30,
2001.

Although the  abandonment  may be delayed,  the Company still  believes that its
provision for total  abandonment  costs of $4.9 million at September 30, 2001 is
adequate.

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.

The  Company's  reserves and future net  revenues  reported at December 31, 2000
reflected  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. For the nine
months ended  September  30, 2001,  the Company  incurred  capital  expenditures
totaling $738,000,  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  fourth  quarter  of 2001 will be
$535,000.

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. 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 $900,000 at September 30, 2001.

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

The Company  reported net income for the nine months ended  September  30, 2001,
("current  period") of $64,205,  compared to a net loss of $9.9 million reported
for the nine months ended September 30, 2000 ("previous  period").  The increase
in net income is primarily due to an impairment of the Buccaneer  Field of $10.7
million recorded in the previous period. In addition the Company recorded a gain
on the sale of the Black Marlin  Pipeline  System of $1.4 million in the current
period, offset in part by an increase of $1.1 million in the Company's Buccaneer
Field abandonment obligations.

                                       20


                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
                                   (Continued)

For the  quarter  ended  September  30,  2001  ("current  quarter")  the Company
reported a net loss of $419,300  compared to a net loss of $10.1 million for the
quarter ended  September 30, 2000  ("previous  quarter").  The change in the net
loss is  primarily  due to the Company  recording an  impairment  charge for the
Buccaneer   Field  of  $10.7   million  in  the   previous   quarter.   Pipeline
transportation revenues decreased in the current quarter resulting from the sale
of the Black Marlin Pipeline System in January 2001.

Revenues:

Nine  Months  2001 vs.  Nine  Months  2000.  Current  period  oil and gas  sales
increased by $289,273 from the previous  period.  The increase was primarily due
to an  increase  of 37% in gas  prices  and  3% in oil  prices  resulting  in an
increase of $776,000 offset partially by a 5% reduction in volumes  resulting in
a  reduction  of revenue of  $192,000.  The  increase in oil and gas sales noted
above was partially offset by a loss of revenues totaling approximately $287,000
from the Buccaneer Field production in the previous period.

Current period  revenues from pipeline  operations  decreased by $932,099 or 54%
from the previous  period.  The decrease was due to the sale of the Black Marlin
Pipeline  System in January  2001.  The Black Marlin  Pipeline  System  provided
revenues  of $1.0  million for the  previous  period  compared to  approximately
$50,000 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.

Third Quarter 2001 vs. Third Quarter 2000. Current quarter revenues from oil and
gas sales decreased by $786,379 from those of the previous  quarter.  The change
was due to a 26% decrease in gas prices  resulting in a reduction of revenues of
$292,000,  and a decrease of 28% in production  volumes resulting in a reduction
of  revenues  of  $367,000.  The  decrease  in oil and gas sales in the  current
quarter also  resulted in a loss of revenues  from the  Buccaneer  Field,  which
totaled $54,000 in the previous quarter.

Current quarter revenues from pipeline  operations  decreased by $427,093 or 65%
from the previous  quarter.  The decrease was  primarily  due to the sale of the
Black Marlin  Pipeline  System in January 2001. The Black Marlin Pipeline System
provided revenues of approximately $450,000 for the third quarter of 2000.

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:

Nine Months  2001 vs.  Nine  Months  2000.  Current  period  pipeline  operating
expenses decreased by $327,874 or 44% from the previous period. The decrease was
primarily due to the sale of the Black Marlin  Pipeline  System in January 2001.
The Black Marlin Pipeline System operating expenses were approximately  $377,000
for the  previous  period  compared  to  approximately  $33,000  for the current
period.


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                  BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - UNAUDITED
                                   (Continued)

Current period depletion,  depreciation,  amortization and abandonment increased
$937,708 over the previous period. The increase was primarily due to the Company
increasing  its  abandonment  estimate  by  $1.1  million  associated  with  the
Buccaneer Field.  This increase was partially  offset by a $133,000  decrease in
depreciation  related  to the  Black  Marlin  Pipeline  System  that was sold in
January 2001.

General and  administrative  expenses for the current period increased  $555,324
from the previous  period.  The increase was due in part to an increase in legal
expense  associated  with  the H&N  lawsuit  of  approximately  $177,000  net of
insurance  proceeds 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. Management fees of approximately  $200,000 received from Fidelity
Oil were recorded as a reduction to general and  administrative  expenses during
the nine months ended September 30, 2000.

Interest  and other  expense  increased  $216,463 in the current  period was due
primarily to a $350,000 increase in the provision for the contingent  payment to
Den norske,  offset in part by lower  interest  expense.  In January  2001,  the
Company retired debt totaling $2.2 million.

Third Quarter 2001 vs. Third Quarter 2000.  Current quarter  pipeline  operating
expenses decreased by $90,577 or 37% from the previous quarter. The decrease was
primarily due to the sale of the Black Marlin Pipeline System in January 2001.

Current quarter depletion, depreciation,  amortization and abandonment decreased
$154,327  from the previous  quarter.  The decrease was  primarily  due to a 28%
reduction in production  volumes  accounting for  approximately  $58,000 and the
sale of the Black  Marlin  Pipeline  System in January  2001  resulting in lower
depreciation of $49,934 in the current quarter.

General and  administrative  expenses for the current quarter increased $196,547
from the previous quarter.  The increase was primarily due to 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.   Management  fees  of
approximately  $120,000  received from Fidelity Oil were recorded as a reduction
to general and  administrative  expenses during the three months ended September
30, 2000.

Interest and other expense  decreased  $27,599 in the current quarter  primarily
due to a $50,000  increase in the  provision for the  contingent  payment to Den
norske,  offset in part by lower interest expense.  In January 2001, the Company
retired debt totaling $2.2 million.


                                       22


                  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 as such is not subject to risk of interest
rate changes.







                                       23


                  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 6.     EXHIBITS AND REPORT ON FORM 8-K

               A)   No Exhibits

               B)   Form 8-K - On August 31, 2001,  the Company  filed a current
                    report on Form 8-K dated  August 30,  2001,  with respect to
                    the  execution  of an  agreement  and  plan of  merger  with
                    American Resources Offshore, Inc. The items reported in such
                    current report were Item 5 (Other Events).

                    On November 8, 2001,  the Company filed a current  report on
                    Form  8-K  dated  November  8,  2001,   with  respect  to  a
                    discussion  of recent  developments  which have effected the
                    Company. The item reported in such current report was Item 5
                    (Other Events).




                                       24


                  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:    November 14, 2001               /s/ Michael J. Jacobson
                                         ---------------------------------------
                                         Michael J. Jacobson
                                         President and Chief Executive Officer



                                         /s/ G. Brian Lloyd
                                         ---------------------------------------
                                         G. Brian Lloyd
                                         Vice President, Treasurer
                                         (Principal Accounting Officer)








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