Note 14 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2025

Commitments and Contingencies Disclosure [Text Block]

(14)

Commitments and Contingencies

Fourth 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 Fourth 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.

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.

Resolved Matters.

RLI Corp. Surety Bonds. Blue Dolphin currently has surety bonds through RLI Corp. as required by different regulatory agencies, including an area-wide general lease surety bond to operate in the Gulf of America and multiple pipeline surety bonds with BOEM and an operator performance bond with the Railroad Commission of Texas. The bonds total approximately $1.2 million in the aggregate. In February 2024, RLI Corp. filed suit against Blue Dolphin, BDPL, and BDEX seeking an injunction to fully collateralize the bonds in cash, representing an increase of $1.0 million. In July 2024, RLI Corp. informed the court that the parties reached a settlement in principle, and the parties executed a settlement agreement in September 2024. From September 2024 to March 31, 2025, BDPL made payments to RLI Corp. under the settlement agreement totaling $1.0 million, bringing the total surety bond amount to $1.2 million in cash. Once BDPL’s offshore pipeline and platform assets have been decommissioned, BDPL can request that BOEM cancel the associated pipeline surety bonds. Once approved by BOEM, RLI Corp. would release the cash collateral tied to these pipeline surety bonds back to BDPL. However, the Blue Dolphin surety bonds through RLI Corp. for BOEM associated with the area-wide general lease surety bond and for the Railroad Commission of Texas associated with the operator performance bond would remain in place.

TCEQ Final Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of $0.4 million and identified actions needed to correct the alleged violations. In September 2023, TCEQ presented its final penalty offer of $0.35 million, which LRM accepted. Although LRM believed the penalty matter was resolved in September 2023, TCEQ referred the matter to the State Office of Administrative Hearings ("SOAH"). A preliminary hearing, the purpose of which was to set a hearing schedule, was held on August 8, 2024; management participated in the hearing. Although a follow-up hearing was scheduled for January 2025, TCEQ presented, and LRM signed, a revised draft Agreed Order in November 2024. Under the terms of the revised draft Agreed Order, TCEQ acknowledged that LRM had ceased unauthorized disposal of industrial solid waste and industrial hazardous waste and LRM accepted a final penalty amount of approximately $0.4 million. The SOAH case was dismissed and the matter was remanded back to the TCEQ in December 2024; TCEQ finalized the Agreed Order in February 2025, and LRM is paying the penalty in monthly installments over a three-year period. LRM submitted a Site Investigation Report, as prepared by a third-party, to the TCEQ in June 2025 as required under the final Agreed Order.

Unresolved Matters

BOEM Supplemental Pipeline Surety Bonds. To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the U.S. Gulf of America, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM. Historically, BDPL maintained $0.9 million in pipeline surety bonds with BOEM to decommission its trunkline offshore in federal waters. In March 2018, BOEM ordered BDPL to provide additional financial assurance totaling approximately $5.7 million for five (5) existing pipeline rights-of-way, representing an increase of $4.8 million. In June 2018, BOEM issued BDPL five (5) INCs for each right-of-way that failed to comply. In June 2018, BDPL appealed the INCs to the IBLA, filing its statement of reasons in July 2018.

In February 2025, the USDOI directed BOEM and BDPL to submit either a joint status report, or separate status reports, to update the court relative to the facts in the case. If joint, submissions were due by March 11, 2025; if separate, BOEM’s submission was due by March 11, 2025 and BDPL’s response to BOEM’s submission was due by March 25, 2025. Although BOEM submitted its report by its respective deadline, BDPL missed its deadline as notifications were sent to BDPL’s former counsel in the matter. On March 10, 2025, the USDOI notified BDPL by letter that the agency granted BDPL until March 31, 2025 to submit its response; however, management was not in receipt of the USDOI’s notification letter until March 25, 2025. On March 27, 2025, BDPL filed a motion through new counsel requesting an extension of its deadline to file its status report response no later than April 30, 2025; BDPL filed the required status report response to the court on April 24, 2025. On June 4, 2025, the IBLA issued a notice allowing BOEM and BDPL to engage in settlement negotiations, if desired. However, in August 2025, the IBLA dismissed BDPL's appeals to provide additional supplemental pipeline bonds. Based on dismissal of the appeals, BOEM can pursue enforcement of the original orders.

There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline surety bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We cannot predict the outcome of the supplemental pipeline bond INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of September 30, 2025 and December 31, 2024. At both September 30, 2025 and December 31, 2024, BDPL maintained $0.9 million in cash-backed pipeline surety bonds issued to the BOEM through RLI Corp.

BSEE Offshore Platform Inspections, Decommissioning Obligations, and Civil Penalties. BDPL has pipelines and platform assets subject to BSEE’s idle iron regulations. Idle iron regulations require lessees and rights-of-way holders to permanently abandon and remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

Platform Inspection Obligation. For our offshore platform in federal waters, we are required by regulatory authorities to perform certain annual, quarterly, and monthly inspections. On April 9, 2025, BSEE issued BDPL an INC for failing to conduct monthly platform inspections; BDPL corrected the INC on April 22, 2025, which was reviewed and approved by BSEE on June 3, 2025.

Decommissioning Obligations. BSEE mandated that BDPL's pipelines and facilities assets, including its offshore platform, offshore in federal waters be decommissioned due to their extended period of inactivity. 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 impose civil penalties. On March 17, 2025, BSEE issued BDPL an INC for failing to decommission Pipeline Segment No. 8437.

In October 2025, our third-party consultant completed its review and analysis of its request for bid process to decommission our offshore assets. Final project estimates were double what management expected. As a result, management increased its ARO liability from $3.0 million to $6.0 million at September 30, 2025. Management is evaluating its options for how best to proceed in meeting BDPL’s offshore decommissioning obligations. See “Note (10)” to our consolidated financial statements for additional disclosures related AROs. There can be no assurance that BDPL will be able to perform its decommissioning obligations or BSEE will not issue additional INCs for BDPL's failure to perform its decommissioning obligations. If BDPL is unable to perform its decommissioning obligations, BOEM may exercise its rights under supplemental pipeline surety bonds or exercise any other rights and remedies it has available.

BSEE Civil Penalties. BDPL has the following open civil penalty referrals from BSEE:

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Civil Penalty G-2024-054. In August 2024, BDPL received a civil penalty referral letter from BSEE for failing to remove its GA-288C junction platform offshore in federal waters. The civil penalty referral is associated with BSEE INC No. G-114 issued in October 2023. In March 2025, BSEE calculated a proposed civil penalty of $1.0 million against BDPL, and BSEE reserved its rights to assess additional civil penalties in the amount of $3,097 per day per violation until the referenced INC is fully remediated. In April 2025, BDPL exercised its right to request a meeting with the penalty reviewing officer to submit additional information for consideration. BSEE held the meeting on June 11, 2025. On July 21, 2025, BSEE sent BDPL a final decision letter that assigned a civil penalty of $1.3 million against BDPL. The revised amount included assessment of additional civil penalties in the amount of $3,097 per day for which the company booked an accrual through September 30, 2025.

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Civil Penalty G-2024-056. In August 2024, BDPL received a civil penalty referral letter from BSEE for failing to flush, fill, and abandon its lateral pipeline from GA-245 to the GA-273 subsea tie-in (Pipeline Segment No. 15635) offshore in federal waters. The civil penalty referral is associated with BSEE INC No. G-802 issued in November 2023. In January 2025, BSEE calculated a proposed civil penalty of $0.4 million against BDPL, and BSEE reserved its right to assess additional civil penalties in the amount of $3,097 per day per violation until the referenced INC is fully remediated. In March 2025, BDPL exercised its right to request a meeting with the penalty reviewing officer to submit additional information for consideration. BSEE held the meeting, which reviewing officers combined with Civil Penalty G-2024-054 above, on June 11, 2025. On July 21, 2025, BSEE sent BDPL a final decision letter that assigned a civil penalty of $0.9 million against BDPL. The revised amount included assessment of additional civil penalties in the amount of $3,097 per day for which the company booked an accrual through September 30, 2025.

BDPL had 60 days from receipt of BSEE's final decisions to: (1) pay the civil penalties, (2) request an informal resolution with the reviewing officers' next-level supervisor, or (3) appeal BSEE's decisions to the IBLA. In September 2025, BDPL requested an informal follow up meeting with the reviewing officers' next-level supervisor; the next-level supervisor confirmed receipt of the requests. As of the filing date of this report, the parties were working to schedule the informal follow up meeting to review Civil Penalties G-2024-054 and G-2024-056.

BDPL remains subject to additional civil penalties until the violation(s) have been corrected. At September 30, 2025, we accrued $2.7 million on our balance sheet within accrued expenses and other current liabilities related to BSEE civil penalties. We will record a liability of approximately $0.3 million per quarter for each of Civil Penalties G-2024-054 and G-2024-056 for potential future civil penalties.

The following BDPL civil penalty referral was closed:

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Civil Penalty G-2024-010. In April 2024, BDPL received a civil penalty referral letter from BSEE for failing to remediate certain BSEE INCs issued in September 2023 associated with its GA-288C junction platform offshore in federal waters. Specifically, remediation is associated with BSEE INC Nos. E120 (physically boarding platform monthly, performing visual inspections for environmental pollution, and maintaining monthly inspection records), G112 (removing 55-gallon drum leaking oil on platform deck), L141 (flushing and filling Pipeline Segment No. 13101 with inhibited seawater), and L142 (decommissioning in place Pipeline Segment No. 13101). In March 2025, BSEE calculated a proposed civil penalty of $1.1 million against BDPL. In April 2025, BDPL exercised its right to request a meeting with the penalty reviewing officer to submit additional information for consideration. BSEE held the meeting, which reviewing officers combined with Civil Penalties G-2024-054 and G-2024-056 above, on June 11, 2025. On July 16, 2025, BSEE sent BDPL a Notice of Civil Penalty Case Dismissal that indicated that no penalty would be assessed against BDPL based on the underlying INCs. During the nine months ended September 30, 2025, we reversed the previous accrual for penalties associated with this matter in General and administrative expenses.