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

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Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:

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Nixon, Texas · Petroleum storage tanks (third-party Oil leasing)

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

Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per Bbl

Refinery Throughput and Production Data

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

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Three Months Ended June 30, 2022 ("Q2 2022") Versus June 30, 2021 ("Q2 2021")

General and Administrative Expenses. General and administrative expenses increased 6% to $0.6 million in Q2 2022 compared to Q2 2021. The increase primarily related to higher insurance premiums and legal fees.

Depreciation and Amortization. Depreciation and amortization expenses remained flat at $0.7 million for both Q2 2022 and Q2 2021.

First Half Ended June 30, 2022 ("Half 2022") Versus June 30, 2021 ("Half 2021")

Total Revenue from Operations. Total revenue from operations increased 92% to $246.8 million for Half 2022 from $128.9 million for Half 2021. Increased commodity prices primarily drove refinery operations revenue higher in Half 2022; increased sales volume contributed slightly. Tolling and terminaling revenue was flat between the periods at $1.9 million.

Total Cost of Goods Sold. Total cost of goods sold increased approximately 72% to $223.4 million for Half 2022 from $130.1 million for Half 2021. The significant increase related to higher crude acquisition costs and slightly higher throughput.

General and Administrative Expenses. General and administrative expenses were flat at $1.3 million for both Half 2022 and Half 2021.

Depreciation and Amortization. Depreciation and amortization expenses totaled approximately $1.4 million for both Half 2022 and Half 2021.

Total Other Income (Expense). Total other expense in Half 2022 totaled $3.3 million compared to total other expense of $3.0 million in Half 2021, representing an increase of approximately $0.3 million. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.

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Segment Contribution Margin (Deficit). Segment contribution margin improved dramatically in Q2 2022 compared to Q2 2021 due to higher refining margins.

Less: Total cost of goods sold (119,309 ) (70,466 ) Gross margin (deficit)

Gross margin (deficit) per bbl $ 15.87 $ (1.97 )

(1) Net revenue excludes intercompany crude sales.

Segment Contribution Margin (Deficit). Segment contribution margin improved dramatically in Half 2022 compared to Half 2021 driven by higher refining margins.

Less: Total cost of goods sold (223,386 ) (130,089 ) Gross margin (deficit)

Gross margin (deficit) per bbl $ 10.61 $ (1.60 )

(1) Net revenue excludes intercompany crude sales.

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Net Revenue. Tolling and terminaling net revenue was relatively flat in Q2 2022 compared to Q2 2021.

Intercompany Fees and Sales. Intercompany fees and sales, which reflect processing fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in Q2 2022 compared to Q2 2021. Processed naphtha volumes increased 72% between the two periods.

(1) Net revenue excludes intercompany crude sales.

Net Revenue. Tolling and terminaling net revenue was relatively flat in Half 2022 compared to Half 2021.

Intercompany Fees and Sales. Intercompany fees and sales, which reflect processing fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in Half 2022 compared to Half 2021. Processed naphtha volumes increased 84% between the two periods.

Segment Contribution Margin. Segment contribution margin in Half 2022 decreased 12% to $2.0 million from $2.3 million in Half 2021. The decrease related to higher intercompany fees and operation costs tied to naphtha volumes.

(1) Net revenue excludes intercompany crude sales.

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Reconciliation of Segment Contribution Margin (Deficit)

(1) General and administrative expenses within refinery operations include the LEH operating fee and accretion of asset retirement obligations.

(1) General and administrative expenses within refinery operations include the LEH operating fee and accretion of asset retirement obligations.

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Cash Flow Q2 2022 Compared to Q2 2021

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The table below summarizes our principal contractual obligations at June 30, 2022, by expected settlement period.

Total Debt and Lease Obligations

See "Item 1. Financial Statements - Notes (3) and (10)" for additional disclosures related to third-party and related-party debt.

Debt Defaults. Most of our debt is in default.

· Veritex Loans - Interest and late fee payments to Veritex totaled $0.5

million and $0 for Q2 2022 and Q2 2021, respectively. Interest and late fee

payments to Veritex totaled $1.3 million and $0 for Half 2022 and Half 2021,

respectively. As of the filing date of this report, LE and LRM were in

default under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for

failing to make required monthly principal and interest payments and failing

to satisfy financial covenants. In addition, LE was in default under the LE

Term Loan Due 2034 for failing to replenish a $1.0 million payment reserve

account. In a letter to LE and LRM dated August 2, 2022, Veritex affirmed

existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034

for failing to make payments of principal and interest when due and demanded

payment of all past due amounts owed. In addition, Veritex reserved all of

its rights and noted that Veritex may, at its discretion, exercise all

remedies available to it, which may include accelerating the loan, requesting

appointment of a receiver, initiating foreclosure proceedings, or filing a

· GNCU Loan - For Q2 2022, required interest only payments to GNCU totaled $0.1

million. For Half 2022 , required interest only payments to GNCU totaled $0.4

million. As of the filing date of this report, NPS was in default under the

NPS Term Loan Due 2031 for failing to satisfy financial covenants.

· Kissick Debt - Under a 2015 subordination agreement, John Kissick agreed to

subordinate his right to payments, as well as any security interest and liens

on the Nixon facility's business assets, in favor of Veritex as holder of the

LE Term Loan Due 2034. To date, LE has made no payments under the

subordinated Kissick Debt. To date, Mr. Kissick has taken no action due to

the non-payment. As of the filing date of this report, there were defaults

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· · Notes and Loan Agreement - As of the filing date of this report, Blue

Dolphin was in default concerning past due payment obligations under the

March Carroll Note, March Ingleside Note, and June LEH Note. As of the same

date, BDPL was also in default related to past due payment obligations under

the BDPL-LEH Loan Agreement. Affiliates controlled approximately 82% of the

voting power of our Common Stock as of the filing date of this report, an

Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a

significant customer of our refined products, and we borrow from Affiliates

BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)

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BSEE Offshore Pipelines and Platform Decommissioning

Critical Accounting Policies and Estimates

In February 2022, Russia invaded neighboring Ukraine. The conflict caused turmoil in global markets, injecting even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations.

New Accounting Standards and Disclosures

New Pronouncements Issued, Not Yet Effective.

No new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.

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