Note 14 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2026

Commitments and Contingencies Disclosure [Text Block]

(14)

Commitments and Contingencies

Fifth Amended and Restated Operating Agreement. See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin assets by an Affiliate under the Fifth Amended and Restated Operating Agreement and modifications to this agreement.

Defaults Under Secured Loan Agreements. See “Note ( 9)” to our consolidated financial statements for additional information regarding defaults under secured loan agreements with third parties and their potential effects on our business, financial condition, and results of operations.

Financing Agreements and Guarantees

Indebtedness. See “Notes ( 3) and ( 9)” to our consolidated financial statements for disclosures related to related-party and third-party indebtedness and defaults thereto.

Guarantees. Affiliates provided guarantees on certain debt of Blue Dolphin and its subsidiaries. The maximum amount of any guarantee is equal to the principal amount and accrued interest, which amounts are reduced as payments are made. See “Notes ( 3) and ( 9)” to our consolidated financial statements for additional disclosures related to related-party and third-party guarantees associated with indebtedness and defaults thereto.

Health, Safety and Environmental Matters. The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failing to obtain and comply with these permits or environmental, health, or safety laws could result in fines, penalties or other sanctions, or a revocation of our permits.

Notes to Consolidated Financial Statements (Continued)

Contingencies - Supplier Dispute

The Company is disputing certain balances owed under its crude supply agreement. As of June 30, 2026, the Company had recorded an accounts payable balance of $14.5 million related to this supplier. The supplier asserted that additional amounts were due; however, the Company disputes these claims. The matter primarily relates to pricing terms, and discussions with the supplier are ongoing. The Company has evaluated this matter in accordance with Accounting Standards Codification Topic 450, Contingencies. Based on the information currently available, management believes that the likelihood of loss in excess of amounts recorded ranges from remote to reasonably possible. Accordingly, no additional accrual was recorded as of June 30, 2026. While the Company does not believe a loss is probable, it is reasonably possible that a loss of up to approximately $3.4 million could be incurred. The Company is unable to estimate a more precise range of potential loss at this time. The ultimate resolution of this matter may differ from the amounts currently recorded, and such differences could have a material effect on the Company’s financial position, results of operations, or cash flows in the period in which the matter is resolved.

Legal Matters. In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, sometimes unspecified, damages or penalties may be sought from us in some matters, which may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

Unresolved Matters

TCEQ Final Agreed Order Follow Up. In February 2025, TCEQ approved a final agreed order between the agency and LRM in which: (i) the TCEQ acknowledged that LRM had ceased unauthorized disposal of industrial solid waste and industrial hazardous waste and (ii) LRM accepted a final penalty amount of approximately $0.4 million. LRM is paying the penalty in monthly installments over a three-year period. In June 2025, LRM submitted a third-party prepared Site Investigation Report to the TCEQ as required under the final agreed order. In February 2026, the TCEQ requested additional assessment activities by LRM following review of the Site Investigation Report. LRM had 120 days (until June 6, 2026) to comply with the TCEQ's February 2026 letter request. However, based on preliminary progress reviewed by the agency, TCEQ granted LRM an extension to provide a revised Affected Property Assessment Report by September 4, 2026.

Supplemental Pipeline Bonds. BOEM periodically reevaluates both the rules that govern and whether a grant holder, lessee, or operator must provide supplemental financial assurance. Such additional security beyond minimum bonding requirements covers the present and future cost of decommissioning platforms and pipelines at the end of their production or service activities.

●

On March 9, 2026, in response to President Trump's Executive Order 14154 of January 20, 2025, Unleashing American Energy, BOEM published in the Federal Register a proposed Risk Management and Financial Assurance for Outer Continental Shelf ("OCS") Lease and Grant Obligations rule (the "2026 Proposed Rule") that would substantially revise certain provisions of the current Risk Management and Financial Assurance of OCS Lease and Grant Obligatons rule implemented in 2024 (the "2024 Final Rule"). The 2026 Proposed Rule, which proposes easing financial assurance requirements by lowering credit rating thresholds, reducing cost estimates, and providing greater flexibility using predecessor financial strength, intends to reverse many of the 2024 Final Rule's changes from the Biden Administration. Public comments on the 2026 Proposed Rule were originally due by May 8, 2026; however, BOEM extended the deadline to May 15, 2026. BOEM is currently reviewing and analyzing all comments that were submitted.

●

In March 2018, BOEM ordered BDPL to provide additional financial assurance totaling approximately $5.7 million for five existing pipeline rights-of-way, an increase of approximately $4.8 million. In June 2018, BOEM issued BDPL INCs for each right of way that failed to comply. Although BDPL appealed the INCs in June 2018, the IBLA dismissed the appeal in August 2025 on the basis that: (i) one of the pipeline rights-of-way (ROW OCS-G 19655, HI A-173) was already decommissioned, and (ii) for the other four rights-of-way, BDPL should have challenged the March 2018 BOEM order, not the INCs issued due to BDPL's non-compliance with the March 2018 BOEM order (i.e., the doctrine of administrative finality).

As of the filing date of this report, BDPL completed field execution operations to decommission all of its offshore pipelines in federal waters; however, the company is preparing required documentation for submission to federal agencies. Once BSEE confirms that BDPL has satisfied its decommissioning obligations, the regulatory basis for requiring BDPL to maintain or provide financial assurance will be eliminated. BOEM can then authorize RLI Corp. to release the cash collateral backing BDPL's existing bonds and rescind the 2018 orders for additional financial assurance and the related INCs. We did not record a liability on our consolidated balance sheets as of June 30, 2026 and December 31, 2025. At both June 30, 2026 and December 31, 2025, BDPL maintained $1.2 million in cash-backed existing bonds issued to BOEM through RLI Corp. These bonds consisted of $0.9 million in supplemental pipeline bonds and $0.3 million for a general compliance area-wide bond.

Notes to Consolidated Financial Statements (Continued)

Offshore Platform Inspections, Decommissioning Obligations, INCs, and Civil Penalties. Until decommissioning, BSEE, PHMSA, and the U.S. Coast Guard, as applicable, require lessees and grant holders to inspect and maintain platforms and other structures in accordance with regulatory requirements.

Platform Inspection Obligation. We are required by BSEE and the U.S. Coast Guard to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. I n April 2025, BSEE issued BDPL an INC for missed platform inspections; BSEE approved BDPL's correction in June 2025. On January 7, 2026, BSEE issued BDPL an INC for failing to perform a Level 3 inspection on the GA-288C platform. On January 26, 2026 BDPL requested an extension from BSEE on the basis that the platform would be decommissioned in the second quarter of 2026. On February 2, 2026, BSEE granted BDPL's extension request to July 31, 2026. However, due to Tropical Storms Arthur and Bertha the project has been delayed until the third quarter of 2026. On August 5, 2026, BDPL requested and BSEE granted an additional extension until November 1, 2026.

Decommissioning Obligations. BSEE mandated that BDPL's pipelines and facilities assets, including its platform offshore in federal waters, be decommissioned due to their extended period of inactivity. Beginning in mid-2025, management used a third-party consultant to conduct a request for bid process to decommission BDPL's offshore assets. In October 2025, the consultant completed its review, which resulted in final project bids that were double what management expected. As a result, management increased Blue Dolphin's ARO liability by $3.0 million at September 30, 2025.

Management is currently working to fulfill BDPL's decommissioning obligations to BSEE, PHMSA, and the USACOE related to these assets. As of the filing date of this report, BDPL completed field execution operations to decommission all of its offshore pipelines in federal waters, and it anticipates completing decommissioning operations related to its offshore platform during the third quarter of 2026. However, BDPL's delay in decommissioning its offshore assets does not relieve BDPL of its obligations to comply with BSEE's mandate or of BSEE's authority to issue INCs or impose civil penalties. At June 30, 2026 , we accrued $2.2 million on our balance sheet within accrued expenses and other current liabilities related to BSEE civil penalties.

BSEE INCs and Civil Penalties. BDPL has outstanding INCs and two open civil penalties (Civil Penalty G-2024-054 and Civil Penalty G-2024-056) issued from BSEE for failing to timely decommission its offshore assets. In July 2025, BSEE dismissed Civil Penalty G-2024-010 that was issued to BDPL in April 2024; no penalty was assessed against the company. In April 2026, BSEE and BDPL reached a settlement agreement regarding the INCs and two open civil penalties (the "Settlement Agreement"). The confidential Settlement Agreement, which does not relate to BOEM matters, requires specific payment and performance obligations on the part of BDPL. During the six months ended June 30, 2026, we reversed a portion of the previous accrual for penalties associated with these matters in Gain on regulatory settlement.

There can be no assurance that BDPL will complete the anticipated decommissioning work or correctly predict the outcome of the BSEE INCs or civil penalties. If BDPL is unable to perform its obligations under the Settlement Agreement as intended, BSEE may exercise its rights under supplemental pipeline bonds or exercise any other rights and remedies it has available.