**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        20-F**
 
 (Mark
        One)
 [
        ]   **REGISTRATION
        STATEMENT PURSUANT TO SECTION 12(b) or (g)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 OR
 
 [X]   **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
  For
        the
        fiscal year ended December 31, 2006
 
 OR
 
 [
        ]   **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 OR
 
 [
        ]   **SHELL
        COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 Commission
        file number 1-33198
 
 
 **TEEKAY
        OFFSHORE PARTNERS L.P.**
 (Exact
        name of Registrant as specified in its charter)
 
 Republic
        of The Marshall Islands
 (Jurisdiction
        of incorporation or organization)
  Bayside
        House, Bayside Executive Park, West Bay Street & Blake Road, P.O. Box
        AP-59212, Nassau,
 Commonwealth
        of the Bahamas
 (Address
        of principal executive offices)
 
 Securities
        registered or to be registered pursuant to Section 12(b) of the
        Act.
 
 **Title
                  of each class**
              **Name
                  of each exchange on which registered**Common
                  Units
              New
                  York Stock Exchange
 
 Securities
        registered or to be registered pursuant to Section 12(g) of the
        Act.
 
 None
 
 Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act.
 
 None
 
 Indicate
        the number of outstanding shares of each of the issuer's classes of capital
        or
        common stock as of the close of the period covered by the annual
        report.
 
 9,800,000
        Common Units
 9,800,000
        Subordinated Units
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 
 Yes
        [ ]
        No [X]
 
 If
        this
        report is an annual or transition report, indicate by check mark if the
        registrant is not required to file reports pursuant to Section 13 or 15(d)
        of
        the Securities Exchange Act of 1934.
 
 Yes
        [ ]
        No [X]
 1
  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 [ ]
 
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
        Accelerated Filer [ ]     Accelerated
        Filer [ ]    Non-Accelerated
        Filer [X]
 
 Indicate
        by check mark which financial statement item the registrant has elected to
        follow:
 
 Item
        17 [
        ] Item 18 [X]
 
 If
        this
        is an annual report, indicate by check mark whether the registrant is a shell
        company (as defined in Rule 12b-2 of the Exchange Act).
 
 Yes
        [ ]
        No [X]
 2
 **TEEKAY
        OFFSHORE PARTNERS L.P.**
 **INDEX
        TO REPORT ON FORM 20-F**
  **Page****PART
                  I.**Item
                  1.
              Identity
                  of Directors, Senior Management and Advisors
              Not
                  applicableItem
                  2.
              Offer
                  Statistics and Expected Timetable
              Not
                  applicableItem
                  3.
              Key
                  Information
              5Item
                  4.
              Information
                  on the Partnership
              20Item
                  4A.
              Unresolved
                  Staff Comments
              Not
                  applicableItem
                  5.
              Operating
                  and Financial Review and Prospects
              36Item
                  6.
              Directors,
                  Senior Management and Employees
              51Item
                  7.
              Major
                  Unitholders and Related Party Transactions
              55Item
                  8.
              Financial
                  Information
              59Item
                  9.
              The
                  Offer and Listing
              61Item
                  10.
              Additional
                  Information
              61Item
                  11.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              62Item
                  12.
              Description
                  of Securities Other than Equity Securities
              Not
                  applicable**PART
                  II.**Item
                  13.
              Defaults,
                  Dividend Arrearages and Delinquencies
              63Item
                  14.
              Material
                  Modifications to the Rights of Unitholders and Use of
                  Proceeds
              63****Item
                  15.
              Controls
                  and Procedures
              63Item
                  16A.
              Audit
                  Committee Financial Expert
              63Item
                  16B.
              Code
                  of Ethics
              63Item
                  16C.
              Principal
                  Accountant Fees and Services
              64Item
                  16D.
              Exemptions
                  from the Listing Standards for Audit Committees
              64Item
                  16E.
              Purchases
                  of Units by the Issuer and Affiliated Purchasers
              64**PART
                  III.**Item
                  17.
              Financial
                  Statements
              Not
                  applicableItem
                  18.
              Financial
                  Statements
              64Item
                  19.
              Exhibits
              65Signatures
              
              66


3


**PART
      I**




*This
      Annual Report should be read in conjunction with the consolidated financial
      statements and accompanying notes included in this report.*




*In
      addition to historical information, this Annual Report contains forward-looking
      statements that involve risks and uncertainties. Such forward-looking statements
      relate to future events and our operations, objectives, expectations,
      performance, financial condition and intentions. When used in this Annual
      Report, the words "expect," "intend," "plan," "believe," "anticipate,"
      "estimate" and variations of such words and similar expressions are intended
      to
      identify forward-looking statements. Forward-looking statements in this Annual
      Report include, in particular, statements regarding:*




· **
            *our
                  ability to make cash distributions on our units or any increases
                  in the
                  quarterly distributions;*




·
            *our
                future financial condition or results of operations and future revenues
                and expenses;*





· **
            *global
                growth prospects of the offshore and tanker markets;*




· **
            *offshore
                and tanker market fundamentals, including the balance of supply and
                demand
                in the offshore and tanker
                market;*




· **
            *the
                expected lifespan of a new shuttle tanker, floating storage and off-take
                (or FSO) unit and conventional
                tanker;*




· **
            *planned
                and estimated future capital expenditures and availability of capital
                resources to fund capital
                expenditures;*




· **
            *our
                ability to maintain long-term relationships with major crude oil
                companies;*




·
            *our
                ability to leverage to our advantage Teekay Shipping Corporation’s
                relationships and reputation in the shipping
                industry;*




·
            *our
                continued ability to enter into fixed-rate time charters with
                customers;*




· **
            *obtaining
                offshore projects that we or Teekay Shipping Corporation bid on or
                have
                been awarded;*




· **
            *our
                ability to maximize the use of our vessels, including the re-deployment
                or
                disposition of vessels no longer under long-term time
                charter;*




· **
            *expected
                pursuit of strategic opportunities, including the acquisition of
                vessels
                and expansion into new markets
                vessels;*




· **
            *our
                expected financial flexibility to pursue acquisitions and other expansion
                opportunities;*




· **
            *anticipated
                funds for liquidity needs and the sufficiency of cash
                flows;*




· **
            *the
                expected cost of, and our ability to comply with, governmental regulations
                and maritime self regulatory organization standards applicable to
                our
                business;*




· **
            *the
                expected impact of heightened environmental and quality concerns
                of
                insurance underwriters, regulators and
                charterers;*




· **
            *the
                  anticipated taxation of our partnership and its subsidiaries, including
                  our estimate of the percentage of our distributions that will constitute
                  dividends;*




· **
            *Teekay
                Shipping Corporation increasing its ownership interest in Teekay
                Petrojarl
                (formally Petrojarl ASA);*




· **
            *the
                anticipated incremental general and administrative expenses as a
                public
                company and expenses under service agreements with other affiliates
                of
                Teekay Shipping Corporation and for reimbursements of fees and costs
                of
                our general partner; and*




· **
            *our
                business strategy and other plans and objectives for future
                operations.*




*Forward-looking
      statements include, without limitation, any statement that may predict,
      forecast, indicate or imply future results, performance or achievements, and
      may
      contain the words believe, anticipate, expect, estimate, project, will be,
      will
      continue, will likely result, or words or phrases of similar meanings. These
      statements involve known and unknown risks and are based upon a number of
      assumptions and estimates that are inherently subject to significant
      uncertainties and contingencies, many of which are beyond our control. Actual
      results may differ materially from those expressed or implied by such
      forward-looking statements. Important factors that could cause actual results
      to
      differ materially include, but are not limited to: changes in production of
      oil
      from offshore oil fields; changes in the demand for offshore oil transportation,
      processing and storage services; greater or less than anticipated levels of
      vessel newbuilding orders or greater or less than anticipated rates of vessel
      scrapping; changes in trading patterns; changes in applicable industry laws
      and
      regulations and the timing of implementation of new laws and regulations;
      potential inability to implement our growth strategy; competitive factors in
      the
      markets in which we operate; potential for early termination of long-term
      contracts and our potential inability to renew or replace long-term contracts;
      loss of any customer, time charter or vessel; shipyard production or vessel
      delivery delays; our potential inability to raise financing to purchase
      additional vessels; our exposure to currency exchange rate fluctuations;
      conditions in the public equity markets; and other factors detailed from time
      to
      time in our periodic reports.*


4




*Forward-looking
      statements in this Annual Report are necessarily estimates reflecting the
      judgment of senior management and involve known and unknown risks and
      uncertainties. These forward-looking statements are based upon a number of
      assumptions and estimates that are inherently subject to significant
      uncertainties and contingencies, many of which are beyond our control. Actual
      results may differ materially from those expressed or implied by such
      forward-looking statements. Accordingly, these forward-looking statements
      should, be considered in light of various important factors, including those
      set
      forth in this Annual Report under Item 3. Key Information "Risk Factors”.*





*We
      do
      not intend to revise any forward-looking statements in order to reflect any
      change in our expectations or events or circumstances that may subsequently
      arise. You should carefully review and consider the various disclosures included
      in this Annual Report and in our other filings made with the SEC that attempt
      to
      advise interested parties of the risks and factors that may affect our business,
      prospects and results of operations.*





**Item
      1. Identity of Directors, Senior Management and Advisors**





Not
      applicable.





**Item
      2. Offer Statistics and Expected Timetable**





Not
      applicable.





**Item
      3. Key Information**





**Selected
      Financial Data**





The
      following tables present, in each case for the periods and as of the dates
      indicated, summary:





·
            historical
                financial and operating data of Teekay Offshore Partners Predecessor
                (as
                defined below); and





·
            financial
                and operating data of Teekay Offshore Partners L.P. and its subsidiaries
                (sometimes referred to as the*Partnership,**we*or*us*)
                since its initial public offering on December 19,
                2006.





Prior
      to
      the closing of the Partnership’s initial public offering of common units on
      December 19, 2006, Teekay Shipping Corporation transferred eight Aframax-class
      conventional crude oil tankers to a subsidiary of Norsk Teekay Holdings Ltd.
      (or *Norsk
      Teekay* )
      and one
      FSO unit to Teekay Offshore Australia Trust. Teekay Shipping Corporation then
      transferred to Teekay Offshore Operating L.P. (or *OPCO* )
      all of
      the outstanding interests of four wholly-owned subsidiaries — Norsk Teekay,
      Teekay Nordic Holdings Inc. (or *Teekay
      Nordic* ),
      Teekay
      Offshore Australia Trust and Pattani Spirit L.L.C. These four wholly-owned
      subsidiaries, which include the eight Aframax-class conventional crude oil
      tankers and the FSO unit, are collectively referred to as *Teekay
      Offshore Partners Predecessor* or the *Predecessor.*





The
      summary historical financial and operating data has been prepared on the
      following basis:





·
            the
                historical financial and operating data of Teekay Offshore Partners
                Predecessor as at and for the years ended December 31, 2002 and 2003
                are
                derived from the unaudited combined consolidated financial statements
                of
                Teekay Offshore Partners
                Predecessor;





·
            the
                historical financial and operating data of Teekay Offshore Partners
                Predecessor as at and for the years ended December 31, 2004 and 2005
                are
                derived from the audited combined consolidated financial statements
                of
                Teekay Offshore Partners
                Predecessor;





·
            the
                historical financial and operating data of Teekay Offshore Partners
                Predecessor as at and for the period ended December 18, 2006 are
                derived
                from the audited combined consolidated financial statements of Teekay
                Offshore Partners Predecessor; and





·
            the
                historical financial and operating data of Teekay Offshore Partners
                L.P.
                as at December 31, 2006 and for the period from December 19, 2006
                to
                December 31, 2006 reflect its initial public offering and are derived
                from
                the audited consolidated financial statements of the
                Partnership.





Our
      initial public offering and certain other transactions that occurred during
      2006
      have affected our historical performance or will affect our future performance.
      As a result, the following tables should be read together with, and are
      qualified in their entirety by reference to, (a) “Item 5. Operating and
      Financial Review and Prospects," included herein, and (b) the historical
      consolidated financial statements and the accompanying notes and the Report
      of
      Independent Registered Public Accounting Firm therein, with respect to the
      consolidated financial statements for the years ended December 31, 2006, 2005
      and 2004 aggregated as follows:





Year
      ended December 31, 2006


·
            January
                1 to December 18, 2006


·
            December
                19 to December 31, 2006





Year
      ended December 31, 2005


·
            January
                1 to December 31, 2005





Year
      ended December 31, 2004


·
            January
                1 to December 31, 2004




Our consolidated financial statements are prepared in
      accordance with United States generally accepted accounting principles (or
*GAAP*).


5


**Year Ended December 31, 2006****Years Ended December 31,**
            
            **January
                1**
              **to**
              **December
                18,**
            **December
                19,**
              **to**
              **December
                31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2006****(in
                thousands, except unit, per unit and fleet data)****Income
                Statement Data:**Voyage
                revenues
            
            $
            156,745
            
            $
            747,383
            
            $
            986,504
            
            $
            807,548
            
            $
            684,766
            
            $
            23,926Operating
                expenses:Voyage
                expenses(1)
            
            
            8,894
            
            
            146,893
            
            
            118,819
            
            
            74,543
            
            
            91,321
            
            
            3,102Vessel
                operating expenses(2)
            
            
            42,395
            
            
            87,507
            
            
            105,595
            
            
            104,475
            
            
            102,311
            
            
            4,087Time-charter
                hire expense
            
            
            -
            
            
            235,976
            
            
            372,449
            
            
            373,536
            
            
            239,311
            
            
            5,641Depreciation
                and amortization
            
            
            49,579
            
            
            93,269
            
            
            118,460
            
            
            107,542
            
            
            98,386
            
            
            3,636General
                and administrative
            
            
            11,733
            
            
            33,968
            
            
            65,819
            
            
            85,856
            
            
            70,387
            
            
            2,129Vessel
                and equipment writedowns and
              (gain)
                loss on sale of vessels
            
            
            -
            
            
            63
            
            
            (3,725
            )
            
            2,820
            
            
            (4,778
            )
            
            -Restructuring
                charge
            
            
            -
            
            
            -
            
            
            -
            
            
            955
            
            
            832
            
            
            -Total
                operating expenses
            
            
            112,601
            
            
            597,676
            
            
            777,417
            
            
            749,727
            
            
            597,770
            
            
            18,595Income
                from vessel operations
            
            
            44,144
            
            
            149,707
            
            
            209,087
            
            
            57,821
            
            
            86,996
            
            
            5,331Interest
                expense
            
            
            (28,136
            )
            
            (46,872
            )
            
            (43,957
            )
            
            (39,791
            )
            
            (67,225
            )
            
            (2,200
            )Interest
                income
            
            
            549
            
            
            1,278
            
            
            2,459
            
            
            4,605
            
            
            5,167
            
            
            191Equity
                income from joint ventures
            
            
            4,597
            
            
            5,047
            
            
            6,162
            
            
            5,199
            
            
            6,162
            
            
            -Gain
                (loss) on sale of marketable securities
            
            
            (1,227
            )
            
            517
            
            
            94,222
            
            
            -
            
            
            -
            
            
            -Foreign
                currency exchange gain (loss)(3)
            
            
            (35,121
            )
            
            (17,821
            )
            
            (37,910
            )
            
            34,178
            
            
            (66,574
            )
            
            (131
            )Income
                tax recovery (expense)
            
            
            (8,116
            )
            
            (30,035
            )
            
            (28,188
            )
            
            13,873
            
            
            (2,672
            )
            
            (99
            )Other
                - net
            
            
            1,313
            
            
            4,455
            
            
            14,064
            
            
            9,091
            
            
            8,360
            
            
            309Net
                income (loss) before non- controllinginterest
            
            
            (21,997
            )
            
            66,276
            
            
            215,939
            
            
            84,976
            
            
            (29,786
            )
            
            3,401Non-controlling
                interest
            
            
            (1,212
            )
            
            (2,763
            )
            
            (2,167
            )
            
            (229
            )
            
            (3,777
            )
            
            (2,553
            )Net
                income (loss)
            
            $
            (23,209
            )
            $
            63,513
            
            $
            213,772
            
            $
            84,747
            
            $
            (33,563
            )
            $
            848General
                partner’s interest in net income
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            17Limited
                partners interest:Net
                income (loss)
            
            
            (23,209
            )
            
            63,513
            
            
            213,772
            
            
            84,747
            
            
            (33,563
            )
            
            831Net
                income (loss) per:Common
                unit (basis and diluted)(4)
            
            
            (1.84
            )
            
            5.04
            
            
            16,97
            
            
            6.73
            
            
            (2.66
            )
            
            0.05Subordinated
                unit (basis and diluted)(4)
            
            
            (1.84
            )
            
            5.04
            
            
            16.97
            
            
            6.73
            
            
            (2.66
            )
            
            0.04Total
                unit (basis and diluted)(4)
            
            
            (1.84
            )
            
            5.04
            
            
            16.97
            
            
            6.73
            
            
            (2.66
            )
            
            0.04**Balance
                Sheet Data**(at end of period):Cash
                and marketable securities
            
            $
            39,754
            
            $
            160,957
            
            $
            143,729
            
            $
            128,986
            
            
            
            
            $
            113,986Vessels
                and equipment(5)
            
            
            725,263
            
            
            1,431,947
            
            
            1,427,481
            
            
            1,300,064
            
            
            
            
            
            1,524,842Total
                assets
            
            
            1,002,452
            
            
            2,037,855
            
            
            2,040,642
            
            
            1,884,017
            
            
            
            
            
            2,041,321Total
                debt(6)
            
            
            673,074
            
            
            1,354,392
            
            
            1,210,998
            
            
            991,855
            
            
            
            
            
            1,320,303Non-controlling
                interest
            
            
            14,412
            
            
            15,525
            
            
            14,276
            
            
            11,859
            
            
            
            
            
            427,977Total
                partners’/owner’s equity
            
            
            262,835
            
            
            529,794
            
            
            659,212
            
            
            740,379
            
            
            
            
            
            138,942Common
                units outstanding(4)
            
            
            2,800,000
            
            
            2,800,000
            
            
            2,800,000
            
            
            2,800,000
            
            
            2,800,000
            
            
            9,800,000Subordinated
                units outstanding(4)
            
            
            9,800,000
            
            
            9,800,000
            
            
            9,800,000
            
            
            9,800,000
            
            
            9,800,000
            
            
            9,800,000**Cash
                Flow Data:**Net
                cash provided by (used in):Operating
                activities(7)
            
            $
            12,110
            
            $
            227,297
            
            $
            242,592
            
            $
            152,687Financing
                activities(7)
            
            
            151,340
            
            
            731,329
            
            
            (69,710
            )
            
            (201,554
            )Investing
                activities(7)
            
            
            (156,301
            )
            
            (837,423
            )
            
            (190,110
            )
            
            34,124**Other
                Financial Data:**Net
                voyage revenues(8)
            
            $
            147,851
            
            $
            600,490
            
            $
            867,685
            
            $
            733,005
            
            $
            593,445
            
            $
            20,824EBITDA(9)
            
            
            62,073
            
            
            232,411
            
            
            401,918
            
            
            213,602
            
            
            129,553
            
            
            6,592Capital
                expenditures:Expenditures
                for vessels and equipment
            
            
            56,017
            
            
            146,279
            
            
            170,630
            
            
            24,760
            
            
            31,079
            
            
            -Expenditures
                for drydocking
            
            
            9,038
            
            
            11,980
            
            
            9,174
            
            
            8,906
            
            
            31,255
            
            
            -**Fleet
                data:**Average
                number of shuttle tankers(10)
            
            
            11.1
            
            
            30.5
            
            
            37.9
            
            
            35.8
            
            
            33.9
            
            
            36.0Average
                number of conventional tankers(10)
            
            
            7.0
            
            
            27.4
            
            
            40.7
            
            
            41.2
            
            
            22.0
            
            
            10.0Average
                number of FSO units(10)
            
            
            2.0
            
            
            2.2
            
            
            3.0
            
            
            3.0
            
            
            3.0
            
            
            3.0


6


(1)
            Voyage expenses are all expenses unique to a particular
              voyage, including any bunker fuel expenses, port fees, cargo loading
              and
              unloading expenses, canal tolls, agency fees and
              commissions.


(2)
            Vessel operating expenses
                include
                crewing, repairs and maintenance, insurance, stores, lube oils and
                communication expenses.


(3)
            Substantially
                all of these foreign currency exchange gains and losses were unrealized
                and not settled in cash. Under U.S. accounting guidelines, all
                foreign currency-denominated monetary assets and liabilities, such
                as cash
                and cash equivalents, accounts receivable, accounts payable, advances
                from
                affiliates and deferred income taxes, are revalued and reported based
                on
                the prevailing exchange rate at the end of the period. Prior to December
                19, 2006, our primary source of foreign currency gains and losses
                were our
                Norwegian Kroner-denominated advances from affiliates. Prior to our
                initial public offering, the Predecessor settled its Norwegian
                Kroner-denominated advances from affiliates.


(4)
            Net income (loss) per
                unit is
                determined by dividing net income (loss), after deducting the amount
                of
                net income (loss) allocated to our general partner’s interest from the
                issuance date of the units of December 19, 2006, by the weighted
                average
                number of units outstanding during the period. For periods prior
                to
                December 19, 2006, such units are deemed equal to the common and
                subordinated units received by Teekay Shipping Corporation in exchange
                for
                a 26.0% interest in OPCO.


(5)
            Vessels and equipment
                consists
                of (a) vessels, at cost less accumulated depreciation,
                (b) vessels under capital leases, at cost less accumulated
                depreciation, and (c) advances on newbuildings.


(6)
            Total debt includes long-term debt, capital lease
                obligations and advances from affiliates. (7)
            For
                the year ended December 31, 2006, cash flow data provided by (used
                in)
                operating activities, financing activities and investing activities
                was
                $155,710, ($223,720) and $53,010, respectively.


(8)
            Consistent with general
                practice in the shipping industry, we use net voyage revenues (defined
                as
                voyage revenues less voyage expenses) as a measure of equating revenues
                generated from voyage charters to revenues generated from time charters,
                which assists us in making operating decisions about the deployment
                of
                vessels and their performance. Under time charters and bareboat charters,
                the charterer typically pays the voyage expenses, whereas under voyage
                charter contracts and contracts of affreightment the shipowner typically
                pays the voyage expenses. Some voyage expenses are fixed, and the
                remainder can be estimated. If OPCO, as the shipowner, pays the voyage
                expenses, it typically passes the approximate amount of these expenses
                on
                to its customers by charging higher rates under the contract or billing
                the expenses to them. As a result, although voyage revenues from
                different
                types of contracts may vary, the net revenues after subtracting voyage
                expenses, which we call net voyage revenues, are comparable across
                the
                different types of contracts. We principally use net voyage revenues,
                a
                non-GAAP financial measure, because it provides more meaningful
                information to us than voyage revenues, the most directly comparable
                GAAP
                financial measure. Net voyage revenues are also widely used by investors
                and analysts in the shipping industry for comparing financial performance
                between companies in the shipping industry to industry averages.
                The
                following table reconciles net voyage revenues with voyage
                revenues.






**Year
                  Ended December 31, 2006****Years
                  Ended December 31,**
              
              **January
                  1**
                **to**
                **December
                  18,**
              
              **December
                  19**
                **to**
                **December
                  31,****2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2006**Voyage
                  revenues
              
              $
              156,745
              
              $
              747,383
              
              $
              986,504
              
              $
              807,548
              
              $
              684,766
              
              $
              23,926Voyage
                  expenses
              
              
              8,894
              
              
              146,893
              
              
              118,819
              
              
              74,543
              
              
              91,321
              
              
              3,102Net
                  voyage revenues
              
              $
              147,851
              
              $
              600,490
              
              $
              867,685
              
              $
              733,005
              
              $
              593,445
              
              $
              20,824
  (9)
              EBITDA. Earnings
                  before
                  interest, taxes, depreciation and amortization is used as a supplemental
                  financial measure by management and by external users of our financial
                  statements, such as investors, as discussed
                  below:


- *Financial and operating performance.*EBITDA assists our management
          and investors by increasing the comparability of the fundamental performance
          of OPCO and us from period to period and against the fundamental performance
          of other companies in our industry that provide EBITDA information. This
          increased comparability is achieved by excluding the potentially disparate
          effects between periods or companies of interest expense, taxes, depreciation
          or amortization, which items are affected by various and possibly changing
          financing methods, capital structure and historical cost basis and which
          items
          may significantly affect net income between periods. We believe that including
          EBITDA as a financial and operating measure benefits investors in
          (a) selecting between investing in us and other investment alternatives
          and (b) monitoring the ongoing financial and operational strength and
          health of OPCO and us in assessing whether to continue to hold common
          units.

- *Liquidity.*EBITDA allows us to assess the ability of assets to generate cash
          sufficient to service debt, make distributions and undertake capital
          expenditures. By eliminating the cash flow effect resulting from the existing
          capitalization of OPCO and other items such as drydocking expenditures,
          working capital changes and foreign currency exchange gains and losses
          (which
          may vary significantly from period to period), EBITDA provides a consistent
          measure of OPCO’s ability to generate cash over the long term. Management uses
          this information as a significant factor in determining (a) OPCO’s proper
          capitalization (including assessing how much debt to incur and whether
          changes
          to the capitalization should be made) and (b) whether to undertake
          material capital expenditures and how to finance them, all in light of
          existing cash distribution commitments to unitholders. Use of EBITDA as
          a
          liquidity measure also permits investors to assess the fundamental ability
          of
          OPCO and us to generate cash sufficient to meet cash needs, including
          distributions on our common units.

7


EBITDA
      should not be considered an alternative to net income, operating income, cash
      flow from operating activities or any other measure of financial performance
      or
      liquidity presented in accordance with GAAP. EBITDA excludes some, but not
      all,
      items that affect net income and operating income, and these measures may vary
      among other companies. Therefore, EBITDA as presented below may not be
      comparable to similarly titled measures of other companies.





**Year
                Ended December 31, 2006****Years
                Ended December 31,**
            
            **January
                1**
              **to**
              **December
                18,**
            
            **December
                19**
              **to**
              **December
                31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2006***Reconciliation
                of “EBITDA” to “Net**income
                (loss)”:*Net
                income (loss)
            
            $
            (23,209
            )
            $
            63,513
            
            $
            213,772
            
            $
            84,747
            
            $
            (33,563
            )
            $
            848Depreciation
                and amortization
            
            
            49,579
            
            
            93,269
            
            
            118,460
            
            
            107,542
            
            
            98,386
            
            
            3,636Interest
                expense, net
            
            
            27,587
            
            
            45,594
            
            
            41,498
            
            
            35,186
            
            
            62,058
            
            
            2,009Provision
                (benefit) for income taxes
            
            
            8,116
            
            
            30,035
            
            
            28,188
            
            
            (13,873
            )
            
            2,672
            
            
            99EBITDA
            
            $
            62,073
            
            $
            232,411
            
            $
            401,918
            
            $
            213,602
            
            $
            129,553
            
            $
            6,592*Reconciliation
                of “EBITDA” to “Net**operating
                cash flow”:*Net
                operating cash flow
            
            $
            12,110
            
            $
            227,297
            
            $
            242,592
            
            $
            152,687
            
            $
            155,710
            
            $
            -Non-controlling
                interest
            
            
            (1,212
            )
            
            (2,763
            )
            
            (2,167
            )
            
            (229
            )
            
            (3,777
            )
            
            (2,553
            )Expenditures
                for drydocking
            
            
            9,038
            
            
            11,980
            
            
            9,174
            
            
            8,906
            
            
            31,255
            
            
            -Interest
                expense, net
            
            
            27,587
            
            
            45,594
            
            
            41,498
            
            
            35,186
            
            
            62,058
            
            
            2,009Gain
                (loss) on sale of vessels
            
            
            -
            
            
            (63
            )
            
            3,725
            
            
            9,423
            
            
            6,928
            
            
            -Gain
                (loss) on sale of marketablesecurities,
                net of writedowns
            
            
            (1,227
            )
            
            (4,393
            )
            
            94,222
            
            
            -
            
            
            -
            
            
            -Loss
                on writedown of vessels andequipment
            
            
            -
            
            
            -
            
            
            -
            
            
            (12,243
            )
            
            (2,150
            )
            
            -Write-off
                of capitalized loan costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,790
            )
            
            -Equity
                income (net of dividends received)
            
            
            2,849
            
            
            (1,234
            )
            
            (1,338
            )
            
            2,449
            
            
            160
            
            
            -Change
                in working capital
            
            
            12,000
            
            
            (10,602
            )
            
            37,709
            
            
            (22,951
            )
            
            (54,078
            )
            
            7,134Foreign
                currency exchange gain (loss)and
                other, net
            
            
            928
            
            
            (33,405
            )
            
            (23,497
            )
            
            40,374
            
            
            (63,763
            )
            
            2EBITDA
            
            $
            62,073
            
            $
            232,411
            
            $
            401,918
            
            $
            213,602
            
            $
            129,553
            
            $
            6,592




EBITDA
      also includes the following items:





**Year
                Ended December 31, 2006****Years
                Ended December 31,**
            
            **January
                1**
              **to**
              **December
                18,**
            
            **December
                19**
              **to**
              **December
                31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2006**Vessel
                and equipment writedowns and(gain)
                loss on sale of vessels
            
            $
            -
            
            $
            (63
            )
            $
            3,725
            
            $
            (2,820
            )
            $
            4,778
            
            $
            -Gain
                (loss) on sale of marketablesecurities,
                net of writedowns
            
            
            (1,227
            )
            
            (4,393
            )
            
            94,222
            
            
            -
            
            
            -
            
            
            -Foreign
                currency exchange gain (loss)
            
            
            (35,121
            )
            
            (17,821
            )
            
            (37,910
            )
            
            34,178
            
            
            (66,574
            )
            
            (131
            )$
            (36,348
            )
            $
            (22,277
            )
            $
            60,037
            
            $
            31,358
            
            $
            (61,796
            )
            $
            (131
            )




(10)
            Average
                number of ships consists of the average
                number of owned and chartered-in vessels that were in OPCO’s possession
                during a period (excluding the five vessels owned by OPCO’s 50%-owned
                joint ventures for periods prior to December 1, 2006). On December
                1,
                2006, the joint venture agreements for the five 50%-owned joint ventures
                were amended, resulting in the consolidation of these joint venture
                companies with OPCO in accordance with GAAP.




8


**RISK
      FACTORS**





***Because
      our partnership interest in OPCO currently***  ***represents
      our only cash-generating asset, our cash flow***  ***depends
      completely on OPCO’s ability to make***  ***distributions
      to its partners, including us.***





Our
      cash
      flow initially depends completely on OPCO’s distributions to us as one of its
      partners. The amount of cash OPCO can distribute to its partners principally
      depends upon the amount of cash it generates from its operations, which may
      fluctuate from quarter to quarter based on, among other things:





·the
      rates it obtains from its charters and contracts of affreightment (whereby
      OPCO
      carries an agreed quantity of cargo for a customer over a specified trade route
      within a givenperiod
      of time);




·  the price and level of production of, and demand for, crude oil, particularly
      the level of production at the offshore oil fields OPCO services under contracts
      of affreightment;





·  the level of its operating costs, such as the cost of crews and insurance;





·  the number of off-hire days for its fleet and the timing of, and number of
      days
      required for, drydocking of its vessels;





·  the
      rates, if any, at which OPCO may be able to redeploy shuttle tankers in the
      spot
      market as conventional oil tankers during any periods of reduced or terminated
      oil production at fields serviced by contracts of affreightment;





·  delays
      in the delivery of any newbuildings or vessels undergoing conversion and the
      beginning of payments under charters relating to those vessels;





·  prevailing global and regional economic and political conditions;





·  currency exchange rate fluctuations; and





·  the effect of governmental regulations and maritime self-regulatory organization
      standards on the conduct of its business.





The
      actual amount of cash OPCO will have available for distribution also will depend
      on other factors such as:





·  the level of capital expenditures it makes, including for maintaining vessels
      or
      converting existing vessels for other uses and complying with
      regulations;





·  its debt service requirements and restrictions on distributions contained in
      its
      debt instruments;





·  fluctuations in its working capital needs;





·  its ability to make working capital borrowings; and





·  the amount of any cash reserves, including reserves for future maintenance
      capital expenditures, working capital and other matters, established by the
      Board of Directors of our general partner.





OPCO’s
      limited partnership agreement provides that it will distribute its available
      cash to its partners on a quarterly basis. OPCO’s available cash includes cash
      on hand less any reserves that may be appropriate for operating its business.
      The amount of OPCO’s quarterly distributions, including the amount of cash
      reserves not distributed, will be determined by the Board of Directors of our
      general partner on our behalf.





The
      amount of cash OPCO generates from operations may differ materially from its
      profit or loss for the period, which will be affected by non-cash items. As
      a
      result of this and the other factors mentioned above, OPCO may make cash
      distributions during periods when it records losses and may not make cash
      distributions during periods when it records net income.





***We
      may not have sufficient cash from operations to***  ***enable
      us to pay the minimum quarterly distribution on our***  ***common
      units or to increase distributions.***





The
      source of our earnings and cash flow initially will consist exclusively of
      cash
      distributions from OPCO. Therefore, the amount of distributions we are able
      to
      make to our unitholders will fluctuate, initially, based on the level of
      distributions made by OPCO to its partners, including us, and, in the future,
      based on the level of distributions made by OPCO and any subsidiaries through
      which we later conduct operations. Neither OPCO nor any such operating
      subsidiaries may make quarterly distributions at a level that will permit us
      to
      make distributions to our common unitholders at the minimum quarterly
      distribution level or to increase our quarterly distributions in the future.
      In
      addition, while we would expect to increase or decrease distributions to our
      unitholders if OPCO increases or decreases distributions to us, the timing
      and
      amount of any such increased or decreased distributions will not necessarily
      be
      comparable to the timing and amount of the increase or decrease in distributions
      made by OPCO to us.





Our
      ability to distribute to our unitholders any cash we may receive from OPCO
      or
      any future operating subsidiaries is or may be limited by a number of factors,
      including, among others:





· interest
      expense and principal payments on any indebtedness we incur;





·  restrictions
      on distributions contained in any of our current or future debt
      agreements;





· fees
      and expenses of us, our general
      partner, its affiliates or third parties we are required to reimburse or pay,
      including expenses we incur as a result of being a public
      company; and





9


·  reserves
      our general partner believes are prudent for us to maintain for the proper
      conduct of our business or to provide for future distributions.





Many
      of
      these factors will reduce the amount of cash we may otherwise have available
      for
      distribution. We may not be able to pay distributions, and any distributions
      we
      do make may not be at or above our minimum quarterly distribution. The actual
      amount of cash that is available for distribution to our unitholders will depend
      on several factors, many of which are beyond the control of us or our general
      partner.




***Our
      ability to grow may be adversely affected by our***  ***cash
      distribution policy. OPCO’s ability to meet its
      financial***  ***needs
      and grow may be adversely affected by its cash***  ***distribution
      policy.***





Our
      cash
      distribution policy, which is consistent with our partnership agreement,
      requires us to distribute all of our available cash each quarter. Accordingly,
      our growth may not be as fast as businesses that reinvest their available cash
      to expand ongoing operations.





OPCO’s
      cash distribution policy requires it to distribute all of its available cash
      each quarter. In determining the amount of cash available for distribution
      by
      OPCO, the Board of Directors of our general partner, in making the determination
      on our behalf, will approve the amount of cash reserves to set aside, including
      reserves for future maintenance capital expenditures, working capital and other
      matters. OPCO also relies upon external financing sources, including commercial
      borrowings, to fund its capital expenditures. Accordingly, to the extent OPCO
      does not have sufficient cash reserves or is unable to obtain financing, its
      cash distribution policy may significantly impair its ability to meet its
      financial needs or to grow.





***OPCO
      must make substantial capital expenditures to maintain the operating capacity
      of
      its fleet, which will reduce cash available for distribution. In addition,
      each
      quarter our general partner is required to deduct estimated maintenance capital
      expenditures from operating surplus, which may result in less cash available
      to
      unitholders than if actual maintenance capital expenditures were
      deducted.***





OPCO
      must
      make substantial capital expenditures to maintain, over the long term, the
      operating capacity of its fleet. We intend to expand our fleet through wholly
      owned subsidiaries, which would increase the level of our maintenance capital
      expenditures. Maintenance capital expenditures include capital expenditures
      associated with drydocking a vessel, modifying an existing vessel or acquiring
      a
      new vessel to the extent these expenditures are incurred to maintain the
      operating capacity of our fleet. These expenditures could increase as a result
      of changes in:





·  the
      cost
      of labor and materials;





·  customer
      requirements;





·  increases
      in fleet size or the cost of replacement vessels;





·  governmental
      regulations and maritime self-regulatory organization standards relating to
      safety, security or the environment; and





·  competitive
      standards.





In
      addition, actual maintenance capital expenditures will vary significantly from
      quarter to quarter based on the number of vessels drydocked during that quarter.
      Significant maintenance capital expenditures will reduce the amount of cash
      OPCO
      has available to distribute to us and that we have available for distribution
      to
      our unitholders.





Our
      partnership agreement requires our general partner to deduct our estimated,
      rather than actual, maintenance capital expenditures from operating surplus
      each
      quarter in an effort to reduce fluctuations in operating surplus. The amount
      of
      estimated maintenance capital expenditures deducted from operating surplus
      is
      subject to review and change by the conflicts committee of our general partner
      at least once a year. In years when estimated maintenance capital expenditures
      are higher than actual maintenance capital expenditures, the amount of cash
      available for distribution to unitholders will be lower than if actual
      maintenance capital expenditures were deducted from operating surplus. If our
      general partner underestimates the appropriate level of estimated maintenance
      capital expenditures, we may have less cash available for distribution in future
      periods when actual capital expenditures begin to exceed our previous
      estimates.





***We
      will be required to make substantial capital***  ***expenditures
      to expand the size of our fleet. We generally will***  ***be
      required to make significant installment payments for***  ***acquisitions
      of newbuilding vessels or for the conversion of***  ***existing
      vessels prior to their delivery and generation of***  ***revenue.
      Depending on whether we finance our expenditures***  ***through
      cash from operations or by issuing debt or equity***  ***securities,
      our ability to make cash distributions may be***  ***diminished
      or our financial leverage could increase or our***  ***unitholders
      could be diluted.***





We
      intend
      to make substantial capital expenditures to increase the size of our fleet.
      The
      total delivered cost for a shuttle tanker is approximately $60 to
      $150 million, an FSO unit is approximately $20 to $50 million and a
      floating production, storage and offloading (or *FPSO* )
      unit is
      approximately $100 million to $1.0 billion, although actual costs will
      vary significantly depending on the market price charged by shipyards, the
      size
      and specifications of the vessel, governmental regulations and maritime
      self-regulatory organization standards.





We
      and
      Teekay Shipping Corporation regularly evaluate and pursue opportunities to
      provide marine transportation services for new or expanding offshore projects.
      Teekay Shipping Corporation currently is seeking to provide transportation
      services for several offshore projects. Under an omnibus agreement that we
      have
      entered into, Teekay Shipping Corporation is required to offer to us, within
      365 days of their deliveries, certain shuttle tankers, FSO units and FPSO
      units Teekay Shipping Corporation may acquire, including two shuttle tankers
      and
      one FSO unit currently being converted from conventional oil tankers or being
      upgraded by Teekay Shipping Corporation. Neither we nor Teekay Shipping
      Corporation may be awarded charters or contracts of affreightment relating
      to
      any of the projects we pursue or it pursues, and we may choose not to purchase
      the vessels Teekay Shipping Corporation is required to offer to us under the
      omnibus agreement. If we obtain from Teekay Shipping Corporation any offshore
      project, we will need to incur significant capital expenditures to build the
      offshore vessels needed to fulfill the project requirements. If we choose to
      purchase the shuttle tankers and FSO or FPSO units Teekay Shipping Corporation
      is required to offer to us, we plan to finance the cost either through
      internally generated funds, debt or equity financings or the issuance to it
      of
      equity securities.


10
 We
        generally are required to make installment payments on newbuildings prior
        to
        their delivery. We typically must pay between 10% to 20% of the purchase
        price
        of a shuttle tanker upon signing the purchase contract, even though delivery
        of
        the completed vessel will not occur until much later (approximately three
        to
        four years from the order). If we finance these acquisition costs by issuing
        debt or equity securities, we will increase the aggregate amount of interest
        or
        minimum quarterly distributions we must make prior to generating cash from
        the
        operation of the newbuilding.





To
      fund
      the remaining portion of these and other capital expenditures, we will be
      required to use cash from operations or incur borrowings or raise capital
      through the sale of debt or additional equity securities. Use of cash from
      operations will reduce cash available for distribution to unitholders. Our
      ability to obtain bank financing or to access the capital markets for future
      offerings may be limited by our financial condition at the time of any such
      financing or offering as well as by adverse market conditions resulting from,
      among other things, general economic conditions and contingencies and
      uncertainties that are beyond our control. Our failure to obtain the funds
      for
      future capital expenditures could have a material adverse effect on our
      business, results of operations and financial condition and on our ability
      to
      make cash distributions. Even if we are successful in obtaining necessary funds,
      the terms of such financings could limit our ability to pay cash distributions
      to unitholders. In addition, incurring additional debt may significantly
      increase our interest expense and financial leverage, and issuing additional
      equity securities may result in significant unitholder dilution and would
      increase the aggregate amount of cash required to meet our minimum quarterly
      distribution to unitholders, which could have a material adverse effect on
      our
      ability to make cash distributions.





***OPCO’s
      substantial debt levels may limit its or our***  ***flexibility
      in obtaining additional financing, pursuing other***  ***business
      opportunities and paying distributions to you.***





If
      we are
      awarded contracts for additional offshore projects, our consolidated debt and
      capital lease obligations may significantly increase. As at December 31, 2006,
      we and OPCO had the ability to incur additional debt, including approximately
      $315 million of borrowings available under OPCO’s revolving credit
      facilities, subject to limitations in the credit facilities. Our level of debt
      could have important consequences to us, including the following:





·  our
      ability to obtain additional financing, if necessary, for working capital,
      capital expenditures, acquisitions or other purposes may be impaired or such
      financing may not be available on favorable terms;





·  we
      will
      need a substantial portion of our cash flow to make principal and interest
      payments on our debt, reducing the funds that would otherwise be available
      for
      operations, future business opportunities and distributions to
      unitholders;





·  our
      debt
      level will make us more vulnerable than our competitors with less debt to
      competitive pressures or a downturn in our business or the economy
      generally; and





·  our
      debt
      level may limit our flexibility in responding to changing business and economic
      conditions.





Our
      ability to service our debt will depend upon, among other things, our future
      financial and operating performance, which will be affected by prevailing
      economic conditions and financial, business, regulatory and other factors,
      some
      of which are beyond our control. If our operating results are not sufficient
      to
      service our current or future indebtedness, we will be forced to take actions
      such as reducing distributions, reducing or delaying our business activities,
      acquisitions, investments or capital expenditures, selling assets, restructuring
      or refinancing our debt, or seeking additional equity capital or bankruptcy
      protection. We may not be able to effect any of these remedies on satisfactory
      terms, or at all.





***Financing
      agreements containing operating and financial***  ***restrictions
      may restrict OPCO’s and our business and financing***  ***activities.***





The
      operating and financial restrictions and covenants in OPCO’s financing
      arrangements and any future financing agreements for OPCO or us could adversely
      affect its and our ability to finance future operations or capital needs or
      to
      engage, expand or pursue our business activities. For example, the arrangements
      may restrict OPCO’s or our ability to:





·  incur
      or
      guarantee indebtedness;





·  change
      ownership or structure, including mergers, consolidations, liquidations and
      dissolutions;





·  make
      dividends or distributions;


·  make
      certain negative pledges and grant certain liens;





·  sell,
      transfer, assign or convey assets;





·  make
      certain investments; and





·  enter
      into a new line of business.





In
      addition, OPCO’s credit facilities require OPCO to maintain a minimum liquidity
      (cash, cash equivalents and undrawn committed revolving credit lines) of
      $75.0 million, with aggregate liquidity of not less than 5.0% of the total
      consolidated debt of OPCO and its subsidiaries. OPCO’s or our ability to comply
      with covenants and restrictions contained in debt instruments may be affected
      by
      events beyond its or our control, including prevailing economic, financial
      and
      industry conditions. If market or other economic conditions deteriorate,
      compliance with these covenants may be impaired. If restrictions, covenants,
      ratios or tests in the financing agreements are breached, a significant portion
      of the obligations may become immediately due and payable, and the lenders’
commitment to make further loans may terminate. Neither OPCO nor we might have,
      or be able to obtain, sufficient funds to make these accelerated payments.
      In
      addition, obligations under OPCO’s credit facilities are secured by certain of
      its vessels, and if it is unable to repay debt under the credit facilities,
      the
      lenders could seek to foreclose on those assets.


11


***Restrictions
      in OPCO’s debt agreements may prevent it or***  ***us
      from paying distributions.***





The
      payment of principal and interest on OPCO’s debt will reduce cash available for
      distribution to us and on our units. In addition, OPCO’s financing agreements
      will prohibit the payment of distributions upon the occurrence of the following
      events, among others:





·  failure
      to pay any principal, interest, fees, expenses or other amounts when
      due;


·  failure
        to notify the lenders of any material oil spill or discharge of hazardous
        material, or of any action or claim related thereto;





·  breach
      or
      lapse of any insurance with respect to the vessels;





·  breach
      of
      certain financial covenants;





·  failure
      to observe any other agreement, security instrument, obligation or covenant
      beyond specified cure periods in certain cases;





·  default
      under other indebtedness;





·  bankruptcy
      or insolvency events;





·  failure
      of any representation or warranty to be materially correct;





·  a
      change
      of control, as defined in the applicable agreement; and





·  a
      material adverse effect, as defined in the applicable agreement.





***OPCO
      derives a substantial majority of its revenues from a limited number of
      customers, and the loss of any such customers could result in a significant
      loss
      of revenues and cash flow.***





OPCO
      has
      derived, and we believe it will continue to derive, a substantial majority
      of
      revenues and cash flow from a limited number of customers. Teekay Shipping
      Corporation and Statoil ASA accounted for approximately 21% and 27%,
      respectively, of consolidated voyage revenues during the year ended December
      31,
      2006, approximately 31% and 23%, respectively, of consolidated voyage revenues
      during 2005, and approximately 40% and 19%, respectively, of combined
      consolidated voyage revenues during 2004. No other customer accounted for 10%
      or
      more of revenues during any of these periods.





If
      OPCO
      loses a key customer, it may be unable to obtain replacement long-term charters
      or contracts of affreightment and may become subject, with respect to any
      shuttle tankers redeployed on conventional oil tanker trades, to the volatile
      spot market, which is highly competitive and subject to significant price
      fluctuations. If a customer exercises its right under some charters to purchase
      the vessel, OPCO may be unable to acquire an adequate replacement vessel. Any
      replacement newbuilding would not generate revenues during its construction
      and
      OPCO may be unable to charter any replacement vessel on terms as favorable
      to it
      as those of the terminated charter.





The
      loss
      of any of OPCO’s significant customers could have a material adverse effect on
      our business, results of operations and financial condition and our ability
      to
      make cash distributions.





***We
      will depend on Teekay Shipping Corporation to assist***  ***us
      and OPCO in operating our businesses and competing in
      our***  ***markets.***





We,
      OPCO
      and operating subsidiaries of OPCO have entered, and any future operating
      subsidiaries of us may enter, into various services agreements with certain
      subsidiaries of Teekay Shipping Corporation pursuant to which those subsidiaries
      will provide to us and OPCO all of our and OPCO's administrative services and
      to
      the operating subsidiaries substantially all of their managerial, operational
      and administrative services (including vessel maintenance, crewing, purchasing,
      shipyard supervision, insurance and financial services) and other technical
      and
      advisory services. Our operational success and ability to execute our growth
      strategy will depend significantly upon the satisfactory performance of these
      services by the Teekay Shipping Corporation subsidiaries. Our business will
      be
      harmed if such subsidiaries fail to perform these services satisfactorily or
      if
      they stop providing these services to us, OPCO or its operating subsidiaries.





Our
      ability to compete for offshore oil marine transportation, processing and
      storage projects and to enter into new charters or contracts of affreightment
      and expand our customer relationships will depend largely on our ability to
      leverage our relationship with Teekay Shipping Corporation and its reputation
      and relationships in the shipping industry. If Teekay Shipping Corporation
      suffers material damage to its reputation or relationships, it may harm our
      or
      OPCO’s ability to:





·  renew
      existing charters and contracts of affreightment upon their
      expiration;





·  obtain
      new charters and contracts of affreightment;





·  successfully interact with shipyards during periods of shipyard construction
      constraints;





·  obtain
      financing on commercially acceptable terms; or





·  maintain
      satisfactory relationships with suppliers and other third parties.





If
      our or
      OPCO’s ability to do any of the things described above is impaired, it could
      have a material adverse effect on our business, results of operations and
      financial condition and our ability to make cash distributions.


12


OPCO's
      operating subsidiaries and any of our future operating subsidiaries may also
      contract with certain subsidiaries of Teekay Shipping Corporation for the Teekay
      Shipping Corporation subsidiaries to have newbuildings constructed or existing
      vessels converted on behalf of the operating subsidiaries and to incur the
      construction-related financing. The operating subsidiaries would purchase the
      vessels on or after delivery based on an agreed-upon price. OPCO's operating
      subsidiaries do not currently have this type of arrangement with Teekay Shipping
      Corporation or any of its affiliates.





***Our
      growth depends on continued growth in demand for***  ***offshore
      oil transportation, processing and storage services.***





Our
      growth strategy focuses on expansion in the shuttle tanker, FSO and FPSO
      sectors. Accordingly, our growth depends on continued growth in world and
      regional demand for these offshore services, which could be negatively affected
      by a number of factors, such as:





·
            decreases
                in the actual or projected price of oil, which could lead to a reduction
                in or termination of production of oil at certain fields we service
                or a
                reduction in exploration for or development of new offshore oil
                fields;





·
            increases
                in the production of oil in areas linked by pipelines to consuming
                areas,
                the extension of existing, or the development of new, pipeline systems
                in
                markets we may serve, or the conversion of existing non-oil pipelines
                to
                oil pipelines in those markets;





·
            decreases
                in the consumption of oil due to increases in its price relative
                to other
                energy sources, other factors making consumption of oil less attractive
                or
                energy conservation measures; ·
            availability of new, alternative energy
                sources; and ·
            negative global or regional economic or political
              conditions, particularly in oil consuming regions, which could reduce
              energy consumption or its growth.




Reduced
      demand for offshore marine transportation, processing or storage services would
      have a material adverse effect on our future growth and could harm our business,
      results of operations and financial condition.





***Because
      payments under OPCO’s contracts of affreightment***  ***are
      based on the volume of oil it transports, OPCO’s
      utilization***  ***of
      its shuttle tanker fleet and the success of its
      shuttle***  ***tanker
      business depends upon continued production from
      existing***  ***or
      new oil fields it services, which is beyond our or
      OPCO’s***  ***control
      and generally declines naturally over time. Any
      decrease***  ***in
      the volume of oil OPCO transports under contracts of***  ***affreightment
      could adversely affect our business and operating***  ***results.***





A
      majority of OPCO’s shuttle tankers operate under contracts of affreightment.
      Payments under these contracts of affreightment are based upon the volume of
      oil
      OPCO transports, which depends upon the level of oil production at the fields
      OPCO services under the contracts. Oil production levels are affected by several
      factors, all of which are beyond our or OPCO’s control, including: geologic
      factors, including general declines in production that occur naturally over
      time; the rate of technical developments in extracting oil and related
      infrastructure and implementation costs; and operator decisions based on revenue
      compared to costs from continued operations. Factors that may affect an
      operator’s decision to initiate or continue production include: changes in oil
      prices; capital budget limitations; the availability of necessary drilling
      and
      other governmental permits; the availability of qualified personnel and
      equipment; the quality of drilling prospects in the area; and regulatory
      changes. In addition, the volume of oil OPCO transports may be adversely
      affected by extended repairs to oil field installations or suspensions of field
      operations as a result of oil spills or otherwise.





The
      rate
      of oil production at fields OPCO services may decline from existing or future
      levels, and may be terminated. If such a reduction or termination occurs, the
      spot market rates, if any, in the conventional oil tanker trades at which OPCO
      may be able to redeploy the affected shuttle tankers may be lower than the
      rates
      previously earned by the vessels under the contracts of affreightment, which
      would reduce its and our results of operations and ability to make cash
      distributions.





***The
      duration of many of OPCO’s shuttle tanker and FSO***  ***contracts
      is the life of the relevant oil field or is subject to***  ***extension
      by the field operator or vessel charterer. If the oil***  ***field
      no longer produces oil or is abandoned or the contract***  ***term
      is not extended, OPCO will no longer generate revenue
      under***  ***the
      related contract and will need to seek to redeploy
      affected***  ***vessels.***





Many
      of
      OPCO’s shuttle tanker contracts have a “life-of-field” duration, which means
      that the contract continues until oil production at the field ceases. If
      production terminates for any reason, OPCO no longer will generate revenue
      under
      the related contract. Other shuttle tanker and FSO contracts under which OPCO’s
      vessels operate are subject to extensions beyond their initial term. The
      likelihood of these contracts being extended may be negatively affected by
      reductions in oil field reserves, low oil prices generally or other factors.
      If
      OPCO is unable to promptly redeploy any affected vessels at rates at least
      equal
      to those under the contracts, if at all, its and our operating results will
      be
      harmed. Any potential redeployment may not be under long-term contracts, which
      may affect the stability of OPCO’s and our cash flow and ability to make cash
      distributions.





***The
      results of OPCO’s shuttle tanker operations in the***  ***North
      Sea are subject to seasonal fluctuations.***





Due
      to
      harsh winter weather conditions, oil field operators in the North Sea typically
      schedule oil platform and other infrastructure repairs and maintenance during
      the summer months. Because the North Sea is our primary existing offshore oil
      market, this seasonal repair and maintenance activity contributes to
      quarter-to-quarter volatility in our results of operations, as oil production
      typically is lower in the second and third quarters in this region compared
      with
      production in the first and fourth quarters. Because a significant portion
      of
      OPCO’s North Sea shuttle tankers operate under contracts of affreightment, under
      which revenue is based on the volume of oil transported, the results of these
      shuttle tanker operations in the North Sea under these contracts generally
      reflect this seasonal production pattern. When OPCO redeploys affected shuttle
      tankers as conventional oil tankers while platform maintenance and repairs
      are
      conducted, the overall financial results for its North Sea shuttle tanker
      operations may be negatively affected as the rates in the conventional oil
      tanker markets at times may be lower than contract of affreightment rates.
      In
      addition, OPCO seeks to coordinate some of the general drydocking schedule
      of
      its fleet with this seasonality, which may result in lower revenues and
      increased drydocking expenses during the summer months.





13


***Our
      growth depends on our ability to expand***  ***relationships
      with existing customers and obtain new customers,***  ***for
      which we will face substantial competition.***





One
      of
      our principal objectives is to enter into additional long-term, fixed-rate
      time
      charters and contracts of affreightment. The process of obtaining new long-term
      time charters and contracts of affreightment is highly competitive and generally
      involves an intensive screening process and competitive bids, and often extends
      for several months. Shuttle tanker, FSO and FPSO contracts are awarded based
      upon a variety of factors relating to the vessel operator,
      including:




·
            industry
                relationships and reputation for customer service and safety;


·
            experience and quality of ship operations;


·
            quality,
                experience and technical capability of the crew;


·
            relationships with shipyards and the ability
                to get
                suitable berths;


·
            construction management experience, including
                the
                ability to obtain on-time delivery of new vessels according to customer
                specifications;


·
            willingness to accept operational risks pursuant
                to the
                charter, such as allowing termination of the charter for force majeure
                events; and


·
            competitiveness of the bid in terms of overall
                price.




We
      expect
      substantial competition for providing services for potential shuttle tanker,
      FSO
      and FPSO projects from a number of experienced companies, including
      state-sponsored entities. OPCO’s Aframax conventional tanker business also faces
      substantial competition from major oil companies, independent owners and
      operators and other sized tankers. Many of our competitors have significantly
      greater financial resources than do we, OPCO or Teekay Shipping Corporation,
      which also may compete with us. We anticipate that an increasing number of
      marine transportation companies — including many with strong reputations
      and extensive resources and experience — will enter the FSO and FPSO
      sectors. This increased competition may cause greater price competition for
      charters. As a result of these factors, we may be unable to expand our
      relationships with existing customers or to obtain new customers on a profitable
      basis, if at all, which would have a material adverse effect on our business,
      results of operations and financial condition and our ability to make cash
      distributions.





***Delays
      in deliveries of newbuilding vessels or of***  ***conversions
      of existing vessels could harm our operating***  ***results.***





The
      delivery of any newbuildings or vessel conversions we may order could be
      delayed, which would delay our receipt of revenues under the charters or other
      contracts related to the vessels. In addition, under some charters we may enter
      into that are related to a newbuilding or conversion, if our delivery of the
      newbuilding or converted vessel to our customer is delayed, we may be required
      to pay liquidated damages during the delay. For prolonged delays, the customer
      may terminate the charter and, in addition to the resulting loss of revenues,
      we
      may be responsible for substantial liquidated damages.





The
      completion and delivery of newbuildings or vessel conversions could be delayed
      because of:




·
            quality or engineering problems, the risk of
                which may
                be increased with FPSO units due to their technical
                complexity; ·
            changes in governmental regulations or maritime
                self-regulatory organization standards; ·
            work stoppages or other labor disturbances at
                the
                shipyard; ·
            bankruptcy
                or other financial crisis of the shipbuilder; ·
            a backlog of orders at the shipyard; ·
            political or economic disturbances; ·
            weather interference or catastrophic event, such
                as a
                major earthquake or fire; ·
            requests for changes to the original vessel
                specifications; ·
            shortages of or delays in the receipt of necessary
                construction materials, such as steel; ·
            inability to finance the construction or conversion
                of
                the vessels; or ·
            inability to obtain requisite permits or approvals.




If
      delivery of a vessel is materially delayed, it could adversely affect our
      results of operations and financial condition and our ability to make cash
      distributions.


14


***Charter
      rates for conventional oil tankers may fluctuate substantially over time and
      may
      be lower when we are or OPCO is attempting to recharter conventional oil
      tankers, which could adversely affect operating results. Any changes in charter
      rates for shuttle tankers or FSO or FPSO units could also adversely affect
      redeployment opportunities for those vessels.***





Our
      ability to recharter OPCO's conventional oil tankers following expiration of
      existing time-charter contracts commencing in 2011 and the rates payable upon
      any renewal or replacement charters will depend upon, among other things, the
      state of the conventional tanker market. Conventional oil tanker trades are
      highly competitive and have experienced significant fluctuations in charter
      rates based on, among other things, oil and vessel demand. For example, an
      oversupply of conventional oil tankers can significantly reduce their charter
      rates. There also exists some volatility in charter rates for shuttle tankers
      and FSO and FPSO units.





Six
      of
      OPCO's fixed-term charters and eleven contracts of affreightment (representing
      approximately 10% of OPCO's aggregate contract of affreightment volumes) are
      scheduled to expire prior to December 31, 2008. If, upon expiration or
      termination of these or other contracts, long-term recharter rates are lower
      than existing rates, our earnings and cash flow under any new contracts could
      be
      adversely affected.


***Over
          time, vessel values may fluctuate substantially***  ***and,
          if these values are lower at a time when we are or OPCO
          is***  ***attempting
          to dispose of vessels, we or OPCO may incur a***  ***loss.***





Vessel
      values for shuttle tankers, conventional oil tankers and FSO and FPSO units
      can
      fluctuate substantially over time due to a number of different factors,
      including:




·
            prevailing economic conditions in oil and energy
                markets; ·
            a substantial or extended decline in demand for
                oil; ·
            increases in the supply of vessel capacity; and ·
            the
                cost of retrofitting or modifying existing vessels, as a result of
                technological advances in vessel design or equipment, changes in
                applicable environmental or other regulations or standards, or
                otherwise.


If
        a
        charter or contract of affreightment terminates, we or OPCO may be unable
        to
        re-deploy the affected vessels at attractive rates and, rather than continue
        to
        incur costs to maintain and finance them, may seek to dispose of them. Inability
        to dispose of vessels at a reasonable value could result in a loss on their
        sale
        and adversely affect our or OPCO’s results of operations and financial
        condition.


***We
      may be unable to make or realize expected benefits***  ***from
      acquisitions, and implementing our growth strategy
      through***  ***acquisitions
      may harm our business, financial condition and***  ***operating
      results.***




Our
      growth strategy includes selectively acquiring existing shuttle tankers and
      FSO
      and FPSO units or businesses that own or operate these types of vessels.
      Historically, there have been very few purchases of existing vessels and
      businesses in the FSO and FPSO segments. Factors that may contribute to a
      limited number of acquisition opportunities for FSO units and FPSO units in
      the
      near term include the relatively small number of independent FSO and FPSO fleet
      owners. In addition, competition from other companies, many of which have
      significantly greater financial resources than do we or Teekay Shipping
      Corporation, could reduce our acquisition opportunities or cause us to pay
      higher prices.





Any
      acquisition of a vessel or business may not be profitable at or after the time
      of acquisition and may not generate cash flow sufficient to justify the
      investment. In addition, our acquisition growth strategy exposes us to risks
      that may harm our business, financial condition and operating results, including
      risks that we may:




·
            fail to realize anticipated benefits, such as
                new
                customer relationships, cost-savings or cash flow
                enhancements; ·
            be unable to hire, train or retain qualified
                shore and
                seafaring personnel to manage and operate our growing business and
                fleet; ·
            decrease our liquidity by using a significant
                portion of
                available cash or borrowing capacity to finance acquisitions; ·
            significantly increase our interest expense or
                financial
                leverage if we incur additional debt to finance acquisitions; ·
            incur or assume unanticipated liabilities, losses
                or
                costs associated with the business or vessels
                acquired; or ·
            incur other significant charges, such as impairment
              of
              goodwill or other intangible assets, asset devaluation or restructuring
              charges.




Unlike
      newbuildings, existing vessels typically do not carry warranties as to their
      condition. While we generally inspect existing vessels prior to purchase, such
      an inspection would normally not provide us with as much knowledge of a vessel’s
      condition as we would possess if it had been built for us and operated by us
      during its life. Repairs and maintenance costs for existing vessels are
      difficult to predict and may be substantially higher than for vessels we have
      operated since they were built. These costs could decrease our cash flow and
      reduce our liquidity.




***Terrorist
      attacks, increased hostilities or war could***  ***lead
      to further economic instability, increased costs and***  ***disruption
      of business.***




Terrorist
      attacks, such as the attacks that occurred in the United States on
      September 11, 2001, and the current conflicts in Iraq and Afghanistan and
      other current and future conflicts, may adversely affect our or OPCO’s business,
      operating results, financial condition, ability to raise capital and future
      growth. Continuing hostilities in the Middle East may lead to additional armed
      conflicts or to further acts of terrorism and civil disturbance in the United
      States or elsewhere, which may contribute further to economic instability and
      disruption of oil production and distribution, which could result in reduced
      demand for our or OPCO’s services.


15


In
      addition, oil facilities, shipyards, vessels, pipelines and oil fields could
      be
      targets of future terrorist attacks. Any such attacks could lead to, among
      other
      things, bodily injury or loss of life, vessel or other property damage,
      increased vessel operational costs, including insurance costs, and the inability
      to transport oil to or from certain locations. Terrorist attacks, war or other
      events beyond our control that adversely affect the distribution, production
      or
      transportation of oil to be shipped by us could entitle customers to terminate
      the charters and impact the use of shuttle tankers under contracts of
      affreightment, which would harm our or OPCO’s cash flow and
      business.





***Operations
      outside the United States expose us and OPCO***  ***to
      political, governmental and economic instability, which
      could***  ***harm
      our and its operations.***





Because
      OPCO’s operations are primarily conducted outside of the United States, they may
      be affected by economic, political and governmental conditions in the countries
      where it engages in business or where its vessels are registered. Any disruption
      caused by these factors could harm its or our business, including by reducing
      the levels of oil exploration, development and production activities in these
      areas. OPCO derives some of its revenues from shipping oil from politically
      unstable regions. Conflicts in these regions have included attacks on ships
      and
      other efforts to disrupt shipping. In addition, vessels trading in some of
      these
      regions have been subject, in limited instances, to piracy. Hostilities or
      other
      political instability in regions where OPCO operates or where we or OPCO may
      operate could have a material adverse effect on the growth of our or its business,
      results of operations and financial condition and ability to make cash
      distributions. In addition, tariffs, trade embargoes and other economic
      sanctions by the United States or other countries against countries in Southeast
      Asia or elsewhere as a result of terrorist attacks, hostilities or otherwise
      may
      limit trading activities with those countries, which could also harm our or
      OPCO’s business and ability to make cash distributions. Finally, a government
      could requisition one or more of our vessels, which is most likely during war
      or
      national emergency. Any such requisition would cause a loss of the vessel and
      could harm our cash flow and financial results.





***Marine
      transportation is inherently risky, particularly***  ***in
      the extreme conditions in which many of OPCO’s vessels***  ***operate.
      An incident involving significant loss of product or***  ***environmental
      contamination by any of its vessels could harm its***  ***and
      our reputation and business.***





Vessels
      and their cargoes and oil production facilities OPCO services are at risk of
      being damaged or lost because of events such as:





·  marine
      disasters;





·  bad
      weather;




· mechanical
      failures;





·   grounding,
      capsizing, fire, explosions and collisions;





·   piracy;





·   human
      error; and





·   war
      and
      terrorism.





OPCO’s
      shuttle tanker fleet primarily operates in the North Sea. Harsh weather
      conditions in this region (or other regions in which it operates or we or it
      in
      the future may operate) may increase the risk of collisions, oil spills, or
      mechanical failures.





An
      accident involving any of our or OPCO’s vessels could result in any of the
      following:





·   death
      or
      injury to persons, loss of property or damage to the environment and natural
      resources;





·   delays
      in
      the delivery of cargo;





·   loss
      of
      revenues from charters or contracts of affreightment;




· liabilities
      or costs to recover any spilled oil or other petroleum products and to restore
      the eco-system where the spill occurred;





·   governmental
      fines, penalties or restrictions on conducting business;





·   higher
      insurance rates; and





·   damage
      to
      our and OPCO’s reputation and customer relationships generally.





Any
      of
      these results could have a material adverse effect on our and OPCO’s business,
      financial condition and operating results. In addition, any damage to, or
      environmental contamination involving, oil production facilities serviced could
      suspend that service and result in loss of revenues.





***Insurance
      may be insufficient to cover losses that may***  ***occur
      to our or OPCO’s property or result from our or its***  ***operations.***





The
      operation of shuttle tankers, conventional oil tankers and FSO and FPSO units
      is
      inherently risky. All risks may not be adequately insured against, and any
      particular claim may not be paid by insurance. In addition, substantially all
      of
      OPCO’s vessels are not insured against loss of revenues resulting from vessel
      off-hire time, based on the cost of this insurance compared to OPCO’s off-hire
      experience. Any claims covered by insurance would be subject to deductibles,
      and
      since it is possible that a large number of claims may be brought, the aggregate
      amount of these deductibles could be material. Certain insurance coverage is
      maintained through mutual protection and indemnity associations, and as a member
      of such associations OPCO or we may be required to make additional payments
      over
      and above budgeted premiums if member claims exceed association
      reserves.


16


We
      or
      OPCO may be unable to procure adequate insurance coverage at commercially
      reasonable rates in the future. For example, more stringent environmental
      regulations have led in the past to increased costs for, and in the future
      may
      result in the lack of availability of, insurance against risks of environmental
      damage or pollution. A catastrophic oil spill or marine disaster could exceed
      the insurance coverage, which could harm our or OPCO’s business, financial
      condition and operating results. Any uninsured or underinsured loss could harm
      our or OPCO’s business and financial condition. In addition, the insurance may
      be voidable by the insurers as a result of certain actions, such as vessels
      failing to maintain certification with applicable maritime self-regulatory
      organizations.





Changes
      in the insurance markets attributable to terrorist attacks may also make certain
      types of insurance more difficult to obtain. In addition, the insurance that
      may
      be available may be significantly more expensive than existing
      coverage.





***We
      or OPCO may experience operational problems with***  ***vessels
      that reduce revenue and increase costs.***





Shuttle
      tankers are complex and their operation is technically challenging. To the
      extent we acquire FPSO units, this complexity and challenge will increase.
      Marine transportation operations are subject to mechanical risks and problems.
      Operational problems may lead to loss of revenue or higher than anticipated
      operating expenses or require additional capital expenditures. Any of these
      results could harm our or OPCO’s business, financial condition and operating
      results.





***The
      offshore shipping and storage industry is subject to***  ***substantial
      environmental and other regulations, which may***  ***significantly
      limit operations or increase expenses.***





OPCO’s
      operations are affected by extensive and changing environmental protection
      laws
      and other regulations and international conventions, including those relating
      to
      equipping and operating offshore vessels and vessel safety. OPCO has incurred,
      and expects to continue to incur, substantial expenses in complying with these
      laws and regulations, including expenses for vessel modifications and changes
      in
      operating procedures. Additional laws and regulations may be adopted that could
      limit our or OPCO’s ability to do business or further increase costs, which
      could harm our or OPCO’s business. In addition, failure to comply with
      applicable laws and regulations may result in administrative and civil
      penalties, criminal sanctions or the suspension or termination of operations.
      We
      may become subject to additional laws and regulations if we enter new markets
      or
      trades.





In
      addition to international regulations affecting oil tankers generally, countries
      having jurisdiction over North Sea areas also impose regulatory requirements
      applicable to operations in those areas. Operators of North Sea oil fields
      impose further requirements. As a result, OPCO must make significant
      expenditures for sophisticated equipment, reporting and redundancy systems
      on
      its shuttle tankers. Additional regulations and requirements may be adopted
      or
      imposed that could limit OPCO’s or our ability to do business or further
      increase the cost of doing business in the North Sea or other regions in which
      OPCO now or we or OPCO in the future may operate.





The
      United States Oil Pollution Act of 1990 (or *OPA
      90* )
      also
      has increased expenses in the industry. OPA 90 provides for potentially
      unlimited joint, several, and strict liability for owners, operators and demise
      or bareboat charterers for oil pollution and related damages in
      U.S. waters, which include the U.S. territorial sea and the
      200-nautical mile exclusive economic zone around the United States. OPA 90
      applies to discharges of any oil from a vessel, including discharges of oil
      tanker cargoes and discharges of fuel and lubricants from an oil tanker. To
      comply with OPA 90, vessel owners generally incur increased costs in meeting
      additional maintenance and inspection requirements, in developing contingency
      arrangements for potential spills and in obtaining required insurance coverage.
      OPA 90 contains financial responsibility requirements for vessels operating
      in
      U.S. waters and requires vessel owners and operators to establish and
      maintain with the U.S. Coast Guard evidence of insurance or of
      qualification as a self-insurer or other acceptable evidence of financial
      responsibility sufficient to meet certain potential liabilities under OPA 90
      and
      the U.S. Comprehensive Environmental Response, Compensation and Liability
      Act (or *CERCLA* ),
      which
      imposes similar liabilities upon owners, operators and bareboat charterers
      of
      vessels from which a discharge of “hazardous substances” (other than oil)
      occurs. Under OPA 90 and CERCLA, owners, operators and bareboat charterers
      are
      jointly and severally strictly liable for costs of cleanup and damages resulting
      from a discharge or threatened discharge within U.S. waters. This means we
      and OPCO may be subject to liability even if not negligent or at fault. OPA
      90
      and CERCLA do not preclude claimants from seeking damages resulting from the
      discharge of oil and hazardous substances under other applicable law, including
      maritime tort law.





Many
      states in the United States bordering on a navigable waterway have enacted
      legislation providing for potentially unlimited strict liability without regard
      to fault for the discharge of pollutants within their waters. An oil spill
      or
      other event could result in significant liability, including fines, penalties,
      criminal liability and costs for natural resource damages. The potential for
      these releases could increase to the extent we increase our operations in
      U.S. waters.





In
      addition, we believe that the heightened environmental, quality and security
      concerns of insurance underwriters, regulators and charterers will generally
      lead to additional regulatory requirements, including enhanced risk assessment
      and security requirements and greater inspection and safety requirements on
      all
      vessels in the oil tanker markets.





These
      requirements are likely to add incremental costs to our and OPCO’s operations
      and the failure to fulfill these requirements may affect the ability of our
      and
      OPCO’s vessels to obtain and, possibly, collect on insurance or to obtain the
      required certificates for entry into the different ports where OPCO
      operates.





Our
      and
      OPCO’s business is indirectly affected by price controls, tax and accounting
      regimes and other regulations that apply to the oil industry generally and
      offshore exploration, development and production activities specifically. New
      regulations that restrict any of these activities could decrease demand for
      services and have a material adverse effect on our or OPCO’s business, financial
      condition and operating results.


17


***Exposure
      to currency exchange rate fluctuations will***  ***result
      in fluctuations in cash flows and operating results.***





OPCO
      currently is paid partly in Norwegian Kroners under two time-charters. In
      addition, we, OPCO and its operating subsidiaries have entered into services
      agreements with certain subsidiaries of Teekay Shipping Corporation pursuant
      to
      which those subsidiaries provide to us and OPCO administrative services and
      to
      OPCO's operating subsidiaries managerial, operational and administrative
      services. Under the services agreements, Teekay Shipping Corporation is paid
      in
      U.S. dollars for reasonable direct and indirect expenses incurred in
      providing the services. A substantial majority of those expenses are in
      Norwegian Kroners. The Teekay Shipping Corporation subsidiaries are paid under
      the services agreements based on a fixed U.S. Dollar/Norwegian Kroner
      exchange rate until December 31, 2008. Thereafter, the exchange rate is not
      fixed, which may result in increased payments under the services agreements
      if
      the strength of the U.S. Dollar declines relative to the Norwegian
      Kroner.





***Many
      seafaring employees are covered by collective***  ***bargaining
      agreements and the failure to renew those agreements***  ***or
      any future labor agreements may disrupt operations and***  ***adversely
      affect our cash flows.***





A
      significant portion of Teekay Shipping Corporation’s seafarers that crew certain
      OPCO vessels and Norwegian-based onshore operational staff that provide services
      to us, OPCO and its operating subsidiaries are employed under collective
      bargaining agreements. Teekay Shipping Corporation may be subject to additional
      labor agreements in the future. Teekay Shipping Corporation may be subject
      to
      labor disruptions if relationships deteriorate with the seafarers or the unions
      that represent them. The collective bargaining agreements may not prevent labor
      disruptions, particularly when the agreements are being renegotiated. Salaries
      are typically renegotiated annually or bi-annually for seafarers and annually
      for onshore operational staff. Although these negotiations have not caused
      labor
      disruptions in the past, any future labor disruptions could harm our or OPCO’s
      operations and could have a material adverse effect on our or its business,
      results of operations and financial condition and ability to make cash
      distributions.





***Teekay
      Shipping Corporation and its affiliates may***  ***engage
      in competition with OPCO and us.***





Teekay
      Shipping Corporation and its affiliates may engage in competition with us.
      Pursuant to an omnibus agreement we entered into in connection with our initial
      public offering, Teekay Shipping Corporation, Teekay LNG Partners L.P (NYSE:
      TGP). and their respective controlled affiliates (other than us, OPCO and its
      and our subsidiaries) generally will agree not to engage in, acquire or invest
      in any business that owns, operates or charters (a) dynamically-positioned
      shuttle tankers (other than those operating in the conventional oil tanker
      trade
      under contracts with a remaining duration of less than three years, excluding
      extension options), (b) FSO units or (c) FPSO units (collectively *offshore
      vessels* )
      without
      the consent of our general partner. The omnibus agreement, however, allows
      Teekay Shipping Corporation, Teekay LNG Partners L.P. and any of such controlled
      affiliates to:





·  own,
      operate and charter offshore vessels if the remaining duration of the time
      charter or contract of affreightment for the vessel, excluding any extension
      options, is less than three years;





·  own,
      operate and charter offshore vessels and related time charters or contracts
      of
      affreightment acquired as part of a business or package of assets and operating
      or chartering those vessels if a majority of the value of the total assets
      or
      business acquired is not attributable to the offshore vessels and related
      contracts, as determined in good faith by Teekay Shipping Corporation’s Board of
      Directors or the conflicts committee of the Board of Directors of Teekay LNG
      Partners’ general partner, as applicable; however, if at any time Teekay
      Shipping Corporation or Teekay LNG Partners completes such an acquisition,
      it
      must, within 365 days of the closing of the transaction, offer to sell the
      offshore vessels and related contracts to us for their fair market value plus
      any additional tax or other similar costs to Teekay Shipping Corporation or
      Teekay LNG Partners that would be required to transfer the vessels and contracts
      to us separately from the acquired business or package of
      assets; or





·  own,
      operate and charter offshore vessels and related time charters and contracts
      of
      affreightment that relate to tender, bid or award for a proposed offshore
      project that Teekay Shipping Corporation or any of its subsidiaries has
      submitted or received hereafter submits or receives; however, at least
      365 days after the delivery date of any such offshore vessel, Teekay
      Shipping Corporation must offer to sell the vessel and related time charter
      or
      contract of affreightment to us, with the vessel valued (a) for
      newbuildings originally contracted by Teekay Shipping Corporation, at its
“fully-built-up cost” (which represents the aggregate expenditures incurred (or
      to be incurred prior to delivery to us) by Teekay Shipping Corporation to
      acquire, construct and/or convert and bring such offshore vessel to the
      condition and location necessary for our intended use, plus project development
      costs for completed projects and projects that were not completed but, if
      completed, would have been subject to an offer to us) and (b) for any other
      vessels, Teekay Shipping Corporation’s cost to acquire a newbuilding from a
      third party or the fair market value of an existing vessel, as applicable,
      plus
      in each case any subsequent expenditures that would be included in the
“fully-built-up cost” of converting the vessel prior to delivery to
      us.





If
      we
      decline the offer to purchase the offshore vessels and time charters described
      in the immediately preceding two bullet points, Teekay Shipping Corporation
      or
      Teekay LNG Partners, as applicable, may own and operate the offshore vessels,
      but may not expand that portion of its business.





In
      addition, pursuant to the omnibus agreement, Teekay Shipping Corporation, Teekay
      LNG Partners and any of their respective controlled affiliates (other than
      us,
      OPCO and its and our subsidiaries) may:





·  acquire,
      operate and charter offshore vessels and related time charters and contracts
      of
      affreightment if our general partner has previously advised Teekay Shipping
      Corporation or Teekay LNG Partners that our general partner’s Board of Directors
      has elected, with the approval of its conflicts committee, not to cause us
      or
      our controlled affiliates to acquire or operate the vessels and related time
      charters and contracts of affreightment;




· acquire
      up to a 9.9% equity ownership, voting or profit participation interest in any
      publicly traded company engages in, acquires or invests in any
      business that owns or operates or charters offshore vessels and
      related time charters and contracts of affreightment;





·  provide
      ship management services relating to owning, operating or chartering offshore
      vessels and related time charters and contracts of affreightment; or





·  own a
      limited partner interest in OPCO or own shares of Teekay Petrojarl (formally
      Petrojarl ASA. And referred to herein as *Petrojarl* ).


18


In
      addition, Petrojarl has the right to continue to own, operate and charter its
      four FPSOs and one shuttle tanker until such time, if ever, Teekay
      Shipping Corporation acquires 100% of Petrojarl. If that happens, Teekay
      Shipping Corporation will be required to offer to us certain of Petrojarl’s
      fleet and Petrojarl’s interests in its joint venture projects with Teekay
      Shipping corporation. As at December 31, 2006, Teekay Shipping Corporation
      owned
      64.5% of Petrojarl.





If
      there
      is a change of control of Teekay Shipping Corporation or of the general partner
      of Teekay LNG Partners, the non-competition provisions of the omnibus agreement
      may terminate, which termination could have a material adverse effect on our
      business, results of operations and financial condition and our ability to
      make
      cash distributions.




***Our
      general partner and its other affiliates own a***  ***controlling
      interest in us and have conflicts of interest and***  ***limited
      fiduciary duties, which may permit them to favor their***  ***own
      interests to those of unitholders.***





Teekay
      Shipping Corporation indirectly owns the 2.0% general partner interest and
      a
      57.75% limited partner interest in us and owns and controls our general partner,
      which controls us. Although our general partner has a fiduciary duty to manage
      us in a manner beneficial to us and our unitholders, the directors and officers
      of our general partner have a fiduciary duty to manage our general partner
      in a
      manner beneficial to Teekay Shipping Corporation. Furthermore, certain directors
      and officers of our general partner are directors or officers of affiliates
      of
      our general partner. Conflicts of interest may arise between Teekay Shipping
      Corporation and its affiliates, including our general partner, on the one hand,
      and us and our unitholders, on the other hand. As a result of these conflicts,
      our general partner may favor its own interests and the interests of its
      affiliates over the interests of our unitholders. These conflicts include,
      among
      others, the following situations:




·  neither
      our partnership agreement nor any other agreement requires Teekay Shipping
      Corporation or its affiliates (other than our general partner) to pursue a
      business strategy that favors us or utilizes our assets, and Teekay Shipping
      Corporation’s officers and directors have a fiduciary duty to make decisions in
      the best interests of the stockholders of Teekay Shipping Corporation, which
      may
      be contrary to our interests;




·  the
      Chief Executive Officer and Chief Financial Officer and three of the directors
      of our general partner also serve as executive officers or directors of Teekay
      Shipping Corporation and the general partner of Teekay LNG Partners
      L.P.;





·  our
      general partner is allowed to take into account the interests of parties other
      than us, such as Teekay Shipping Corporation, in resolving conflicts of
      interest, which has the effect of limiting its fiduciary duty to our
      unitholders;





·  our
      general partner has limited its liability and reduced its fiduciary duties
      under
      the laws of the Marshall Islands, while also restricting the remedies available
      to our unitholders and unitholders are treated as having agreed to the modified
      standard of fiduciary duties and to certain actions that may be taken by our
      general partner, all as set forth in our partnership agreement;





·  our
      general partner determines the amount and timing of our asset purchases and
      sales, capital expenditures, borrowings, issuances of additional partnership
      securities and reserves, each of which can affect the amount of cash that is
      available for distribution to our unitholders;





·  in some
      instances, our general partner may cause us to borrow funds in order to permit
      the payment of cash distributions, even if the purpose or effect of the
      borrowing is to make a distribution on the subordinated units or to make
      incentive distributions or to accelerate the expiration of the subordination
      period relating to our subordinated units held by Teekay Shipping
      Corporation;





·  our
      general partner determines which costs incurred by it and its affiliates are
      reimbursable by us;





·  our
      partnership agreement does not restrict our general partner from causing us
      to
      pay it or its affiliates for any services rendered to us on terms that are
      fair
      and reasonable or entering into additional contractual arrangements with any
      of
      these entities on our behalf;





·  our
      general partner intends to limit its liability regarding our contractual and
      other obligations;





·  our
      general partner may exercise its right to call and purchase common units if
      it
      and its affiliates own more than 80.0% of our common units;





·  our
      general partner controls the enforcement of obligations owed to us by it and
      its
      affiliates; and




· our
      general partner decides whether to retain separate counsel, accountants or
      others to perform services for us.





***Although
      we control OPCO through our ownership of its***  ***general
      partner, OPCO’s general partner owes fiduciary duties
      to***  ***OPCO
      and OPCO’s other partner, Teekay Shipping Corporation,***  ***which
      may conflict with the interests of us and our***  ***unitholders.***





Conflicts
      of interest may arise as a result of the relationships between us and our
      unitholders, on the one hand, and OPCO, its general partner and its other
      limited partner, Teekay Shipping Corporation, on the other hand. Teekay Shipping
      Corporation owns a 74.0% limited partner interest in OPCO and controls our
      general partner, which appoints the directors of OPCO’s general partner. The
      directors and officers of OPCO’s general partner have fiduciary duties to manage
      OPCO in a manner beneficial to us, as such general partner’s owner. At the same
      time, OPCO’s general partner has a fiduciary duty to manage OPCO in a manner
      beneficial to OPCO’s limited partners, including Teekay Shipping Corporation.
      The Board of Directors of our general partner may resolve any such conflict
      and
      has broad latitude to consider the interests of all parties to the conflict.
      The
      resolution of these conflicts may not be in the best interest of us or our
      unitholders.





For
      example, conflicts of interest may arise in the following
      situations:





·  the
      allocation of shared overhead expenses to OPCO and us;





·  the
      interpretation and enforcement of contractual obligations between us and our
      affiliates, on the one hand, and OPCO or its subsidiaries, on the other
      hand;


19


·  the
      determination and timing of the amount of cash to be distributed to OPCO’s
      partners and the amount of cash to be reserved for the future conduct of OPCO’s
      business;





·  the
      decision as to whether OPCO should make asset or business acquisitions or
      dispositions, and on what terms;





·  the
      determination or the amount and timing of OPCO’s capital expenditures;





·  the
      determination of whether OPCO should use cash on hand, borrow or issue equity
      to
      raise cash to finance maintenance or expansion capital projects, repay
      indebtedness, meet working capital needs or otherwise; and





·  any
      decision we make to engage in business activities independent of, or in
      competition with, OPCO.





***The
      fiduciary duties of the officers and directors of***  ***our
      general partner may conflict with those of the officers
      and***  ***directors
      of OPCO’s general partner.***





Our
      general partner’s officers and directors have fiduciary duties to manage our
      business in a manner beneficial to us and our partners. However, the Chief
      Executive Officer and Chief Financial Officer and all of the non-independent
      directors of our general partner also serve as executive officers or directors
      of OPCO’s general partner and of Teekay Shipping Corporation and the general
      partner of Teekay LNG Partners L.P., and, as a result, have fiduciary duties,
      among others, to manage the business of OPCO in a manner beneficial to OPCO
      and
      its partners, including Teekay Shipping Corporation. Consequently, these
      officers and directors may encounter situations in which their fiduciary
      obligations to OPCO, Teekay Shipping Corporation or Teekay LNG Partners L.P.,
      on
      one hand, and us, on the other hand, are in conflict. The resolution of these
      conflicts may not always be in the best interest of us or our unitholders.






**Item
      4. Information on the Partnership**





**A.
      Overview, History and Development**





**Overview
      and History**





We
      are an
      international provider of marine transportation and storage services to the
      offshore oil industry. We were formed as a Marshall Islands limited partnership
      in August 2006 by Teekay Shipping Corporation (NYSE:TK), a leading provider
      of
      marine services to the global oil and natural gas industries, to further develop
      its operations in the offshore market. We plan to leverage the expertise,
      relationships and reputation of Teekay Shipping Corporation and our controlled
      affiliates to pursue growth opportunities in this market. As of December 31,
      2006, Teekay Shipping Corporation, which owned and controls our general partner,
      owned a 57.75% limited partner interest in us.





We
      own a
      26.0% interest in Teekay Offshore Operating L.P. (or *OPCO* ),
      which
      owns and operates the world’s largest fleet of shuttle tankers, in addition to
      floating storage and offtake (or *FSO* )
      units
      and double-hull conventional oil tankers. We control OPCO through our ownership
      of its general partner, and Teekay Shipping Corporation owns the remaining
      74.0%
      interest in OPCO.





OPCO’s
      fleet currently consists of:





·  ***Shuttle
      Tankers.*** OPCO
      has
      a fleet consisting of 36 vessels, 24 of which are owned fully or jointly
      and 12 of which are chartered-in. All of the shuttle tankers operate under
      contracts of affreightment for various offshore oil fields or under fixed-rate
      time charter or bareboat charter contracts for specific oil field installations.
      The majority of the contracts of affreightment volumes are life-of-field, which
      have a weighted-average remaining life of approximately 16 years. The time
      charters and bareboat charters have an average remaining contract term of
      approximately 6 years. As of December 31, 2006, our shuttle tankers, which
      had a
      total cargo capacity of approximately 4.4 million deadweight tonnes (or *dwt* ),
      represented approximately 65% of the total tonnage of the world shuttle tanker
      fleet.





·  ***FSO
      Units.*** OPCO
      has
      a fleet of four FSO units. All of the FSO units operate under fixed-rate
      contracts, with an average remaining term of approximately 5 years. As of
      December 31, 2006, our FSO units had a total cargo capacity of approximately
      0.5
      million dwt.





·  ***Conventional
      Tankers.*** OPCO
      has
      a fleet of nine Aframax-class conventional crude oil tankers. The conventional
      tankers all have fixed-rate time charters with Teekay Shipping Corporation,
      with
      an average remaining term of approximately 8 years. As of December 31,
      2006, our conventional tankers had a total cargo capacity of approximately
      0.9
      million dwt.





We
      are
      incorporated under the laws of the Republic of The Marshall Islands as Teekay
      Offshore Partners L.P. and maintain our principal executive headquarters at
      Bayside House, Bayside Executive Park, West Bay Street & Blake Road, P.O.
      Box AP-59212, Nassau, The Bahamas. Our telephone number at such address is
      (242)
      502-8820. Our principal operating office is located at Suite 2000, Bentall
      5,
      550 Burrard Street, Vancouver, British Columbia, Canada, V6C 2K2. Our telephone
      number at such address is (604) 683-3529.





**Potential
      Additional FPSO, FSO and Shuttle Tanker Projects**





During
      October 2006, Teekay Shipping Corporation acquired a 64.5% interest in
      Petrojarl, an independent operator in the floating production storage and
      offloading (or *FPSO* )
      sector.
      Petrojarl is one of the largest independent FPSO operators and deployed the
      first FPSO in the North Sea in 1986. Pursuant to the omnibus agreement we
      entered into in connection with our initial public offering, Teekay Shipping
      Corporation is obligated to offer to us its interest in certain future FPSO
      and
      FSO projects.


20


We
      also
      have the opportunity to directly acquire three vessels from Teekay Shipping
      Corporation by the end of the second quarter of 2008. Pursuant to the omnibus
      agreement, Teekay Shipping Corporation is obligated to offer to us two shuttle
      tankers, each currently undergoing conversion from conventional oil tankers,
      and
      one FSO unit currently being upgraded. The two shuttle tankers will operate
      under 13-year bareboat charters with Petrobras and the FSO unit will operate
      under a 7-year time charter with a consortium of oil companies. If we elect
      to
      acquire any of these vessels, the purchase price will be the vessel’s fair
      market value as agreed by Teekay Shipping Corporation and the conflicts
      committee of our general partner’s Board of Directors, plus the cost of
      converting or upgrading the vessel prior to delivery. Teekay Shipping
      Corporation will be obligated to offer to us under the omnibus agreement certain
      other shuttle tankers, FPSO and FSO units it may acquire in the future. Please
      see Item 5- Major Unitholders and Related Party Transactions.





**B.
      Business Overview**





**Shuttle
      Tanker Segment**





A
      shuttle
      tanker is a specialized ship designed to transport crude oil and condensates
      from offshore oil field installations to onshore terminals and refineries.
      Shuttle tankers are equipped with sophisticated loading systems and dynamic
      positioning systems that allow the vessels to load cargo safely and reliably
      from oil field installations, even in harsh weather conditions. Shuttle tankers
      were developed in the North Sea as an alternative to pipelines. The first cargo
      from an offshore field in the North Sea was shipped in 1977, and the first
      dynamically-positioned shuttle tankers were introduced in the early 1980s.
      Shuttle tankers are often described as “floating pipelines” because these
      vessels typically shuttle oil from offshore installations to onshore facilities
      in much the same way a pipeline would transport oil along the ocean
      floor.


Our
        shuttle tankers are primarily subject to long-term, fixed-rate time-charter
        contracts for a specific offshore oil field or under contracts of affreightment
        for various fields. The number of voyages performed under these contracts
        of
        affreightment normally depends upon the oil production of each field.
        Competition for charters is based primarily upon price, availability, the
        size,
        technical sophistication, age and condition of the vessel and the reputation
        of
        the vessel's manager. Technical sophistication of the vessel is especially
        important in harsh operating environments such as the North Sea. Although
        the
        size of the world shuttle tanker fleet has been relatively unchanged in recent
        years, conventional tankers could be converted into shuttle tankers by adding
        specialized equipment to meet the requirements of the oil companies. Shuttle
        tanker demand may also be affected by the possible substitution of sub-sea
        pipelines to transport oil from offshore production platforms.





As
      of
      December 31, 2006, there were approximately 65 vessels in the world shuttle
      tanker fleet (including newbuildings), the majority of which operate in the
      North Sea. Shuttle
      tankers also operate in Brazil, Canada, Russia and Africa. As of
      December 31, 2006, we owned 24 shuttle tankers and chartered-in an additional
      12
      shuttle tankers. Other shuttle tanker owners in the North Sea owned
      approximately two to ten shuttle tankers each as of December 31, 2006. We
      believe that we have significant competitive advantages in the shuttle tanker
      market as a result of the quality, type and dimensions of our vessels combined
      with our market share in the North Sea.




21




The
      following tables provide additional information about our shuttle tankers as
      of
      December 31, 2006:




Vessel
            Capacity
              (dwt)
            Built
            Ownership
            Positioning
                system
            Operating
                Region
            Contract
                Type (1)
            Charterer
            Remaining
              TermNavion
                Hispania
            126,700
            1999
            100%
            DP2
            North
                Sea
            CoA
            (10)
            (11)Navion
                Oceania
            126,300
            1999
            100%
            DP2
            North
                Sea
            CoA
            (10)
            (11)Navion
                Anglia
            126,300
            1999
            100%
            DP2
            North
                Sea
            CoA
            (10)
            (11)Navion
                Scandia
            126,700
            1998
            100%
            DP2
            North
                Sea
            CoA
            (10)
            (11)StatoilNavion
                Britannia (2)
            124,200
            1998
            100%
            DP2
            North
                Sea
            CoA
            (10)
            (11)Navion
                Norvegia (2)
            130,600
            1995
            100%
            DP
            North
                Sea
            CoA
            (10)
            (11)Navion
                Europa (2)
            130,300
            1995
            100%
            DP
            North
                Sea
            CoA
            (10)
            (11)Navion
                Clipper
            78,200
            1993
            100%
            DP
            North
                Sea
            CoA
            (10)
            (11)Navion
                Fennia (2)
            95,200
            1992
            100%
            DP
            North
                Sea
            CoA
            (10)
            (11)Grena
            148,000
            2003
            In-chartered
              (until
                2013) (3)
            DP2
            North
                Sea
            CoA
            (10)
            (11)Bertora
            100,300
            2001
            In-chartered
              (until
                2011) (3)
            DP2
            North
                Sea
            CoA
            (10)
            (11)Sallie
                Knutsen
            153,600
            1999
            In-chartered
              (until
                2015)
            DP2
            North
                Sea
            CoA
            (10)
            (11)Karen
                Knutsen
            153,600
            1999
            In-chartered
              (until
                2013)
            DP2
            North
                Sea
            CoA
            (10)
            (11)Elisabeth
                Knutsen (3)
            124,700
            1997
            In-chartered
              (until
                2007)
            DP2
            North
                Sea
            CoA
            (10)
            (11)Gerd
                Knutsen
            146,200
            1996
            In-chartered
              (until
                2008)
            DP
            North
                Sea
            CoA
            (10)
            (11)Aberdeen
            87,000
            1996
            In-chartered
              (until
                2007)
            DP
            North
                Sea
            CoA
            (10)
            (11)Randgrid
                (2)
            124,500
            1995
            In-chartered
              (until
                2014) (4)
            DP
            North
                Sea
            CoA
            (10)
            (11)Tordis
                Knutsen
            123,800
            1993
            In-chartered
              (unit
                2007)
            DP
            North
                Sea
            CoA
            (10)
            (11)Vigdis
                Knutsen
            123,400
            1993
            In-chartered
              (until
                2008)
            DP
            North
                Sea
            CoA
            (10)
            (11)Navion
                Akarita
            107,200
            1991
            Lease
              (until
                2012) (5)
            DP
            North
                Sea
            CoA
            (10)
            (11)Tove
                Knutsen (2)
            106,300
            1989
            In-chartered
              (until
                2007)
            DP2
            North
                Sea
            CoA
            (10)
            (11)Stena
                Sirita
            127,400
            1999
            50%
                (7)
            DP2
            North
                Sea
            Time
                charter
            ExxonMobil
                (8)
            3
                yearsNordic
                Marita
            103,900
            1999
            100%
            DP
            Brazil
            Time
                charter
            Petrobras
            3
                yearsStena
                Natalita
            108,000
            2001
            50%
                (7)
            DP2
            North
                Sea
            Time
                charter
            ExxonMobil
                (8)
            2
                yearsStena
                Alexita
            127,400
            1998
            50%
                (7)
            DP2
            North
                Sea
            Time
                charter
            ExxonMobil
                (8)
            2
                yearsNordic
                Svenita
            106,500
            1997
            100%
            DP
            Brazil
            Time
                charter
            Petrobas
            2
                yearsNordic
                Savonita
            108,100
            1992
            100%
            DP
            Brazil
            Time
                charter
            Petrobras
            2
                yearsNordic
                Torinita
            106,800
            1992
            100%
            DP2
            North
                Sea
            Time
                charter
            Knutsen
                (8)
            2
                yearsBasker
                Spirit
            97,000
            1992
            100%
            DP
            Australia
            Time
                charter
            Anzon
                (8)
            2
                yearsNavion
                Stavanger
            147,500
            2003
            100%
            DP2
            Brazil
            Bareboat
            Petrobras
                (9)
            13
                yearsNordic
                Spirit
            151,300
            2001
            100%
            DP
            Brazil
            Bareboat
            Petrobras
                (9)
            12
                yearsStena
                Spirit
            151,300
            2001
            50%
                (7)
            DP
            Brazil
            Bareboat
            Petrobras
                (9)
            12
                yearsNordic
                Brasilia
            151,300
            2004
            100%
            DP
            Brazil
            Bareboat
            Petrobras
                (9)
            11
                yearsNordic
                Rio
            151,300
            2004
            50%
                (7)
            DP
            Brazil
            Bareboat
            Petrobras
                (9)
            11
                yearsPetroatlantic
            92,900
            2003
            100%
            DP2
            North
                Sea
            Bareboat
            Petrojarl
                (9)
            3
                yearsPetronordic
            92,900
            2002
            100%
            DP2
            North
                Sea
            Bareboat
            Petrojarl
                (9)
            3
                yearsTotal
                capacity
            4,386,700


__________




(1)
            
            “CoA” refers to contracts of affreightment.


(2)
            
            The vessel is capable of loading from a submerged
                turret
                loading buoy.


(3)
            
            OPCO has options to extend the time charter or
                purchase
                the vessel.


(4)
            
            The time charter period is linked to the term
                of the
                transportation service agreement for the Heidrun field on the Norwegian
                continental shelf, which term is in turn linked to the production
                level at
                the field.


(5)
            
            OPCO has options to extend the bareboat
                lease.


(6)
            
            Not all of the contracts of affreightment customers
                utilize every ship in the contract of affreightment
                fleet.


22




(7)
            
            Owned through a 50% joint venture. The parties
                share in
                the profits and losses of the joint venture in proportion to each
                party’s
                relative capital contributions. Teekay Shipping Corporation subsidiaries
                provide operational services for these
                vessels. (8)
            
            Charterer has an option to extend the time charter
                or
                bareboat charter. (9)
            
            Charterer has the right to purchase the vessel at
              end of
              the bareboat charter. (10)
            
            Charterers
              include Statoil,Chevron,Marathon
              Oil,Hess,Exxon-Mobil,NorskeHydro,Eni,Mongstad,Terminal,Draugen
              TransportBP,ConocoPhillips,Shell,Total,Talisman,DONG,Danoil,Denerco,Idemitsu,RWE
              Dea,Lundin,DNO
              (6). (11)
            
            Majority
              of volumes are life-of-field.




On
      the
      Norwegian continental shelf, regulations have been imposed on the operators
      of
      offshore fields related to vaporized crude oil that is formed and emitted during
      loading operations and which is commonly referred to as “VOC.” To assist the oil
      companies in their efforts to meet the regulations on VOC emissions from shuttle
      tankers, OPCO and Teekay Shipping Corporation have played an active role in
      establishing a unique co-operation among all of the approximately 26 owners
      of
      offshore fields in the Norwegian sector. The purpose of the co-operation is
      to
      implement VOC recovery systems on selected shuttle tankers and to ensure a
      high
      degree of VOC recovery at a minimum cost followed by joint reporting to the
      authorities. Currently, there are 12 VOC plants installed aboard shuttle tankers
      operated or owned by OPCO. The oil companies have engaged OPCO to undertake
      the
      day-to-day administration, technical follow-up and handling of payments through
      a dedicated clearing house function.





During
      2006, approximately 73% of our net voyage revenues were **** earned
      by
      the vessels in the shuttle tanker segment, compared to approximately 61% in
      2005
      and 55% in 2004. Please read Item 5 - Operating and Financial Review and
      Prospects: Results of Operations.





**Conventional
      Tanker Segment**





Conventional
      oil tankers are used primarily for transcontinental seaborne transportation
      of
      oil. Conventional oil tankers are operated by both major oil companies
      (including state-owned companies) that generally operate captive fleets, and
      independent operators that charter out their vessels for voyage or time charter
      use. Most conventional oil tankers controlled by independent fleet operators
      are
      hired for one or a few voyages at a time at fluctuating market rates based
      on
      the existing tanker supply and demand. These charter rates are extremely
      sensitive to this balance of supply and demand, and small changes in tanker
      utilization have historically led to relatively large changes in short-term
      rates. Long-term, fixed-rate charters for crude oil transportation, such as
      those applicable to OPCO’s conventional tanker fleet, are less typical in the
      industry. As used in this discussion, “conventional” oil tankers exclude those
      vessels that can carry dry bulk and ore, tankers that currently are used for
      storage purposes and shuttle tankers.





Oil
      tanker demand is a function of several factors, including the location of oil
      production, refining and consumption and world oil demand and supply. Tanker
      demand is based on the amount of crude oil transported in tankers and the
      distance over which the oil is transported. The distance over which oil is
      transported is determined by seaborne trading and distribution patterns, which
      are principally influenced by the relative advantages of the various sources
      of
      production and locations of consumption.





The
      majority of crude oil tankers range in size from approximately 80,000 to
      approximately 320,000 dwt. Aframax tankers are the mid-size of the various
      primary oil tanker types, typically sized from 75,000 to 119,999 dwt. As of
      December 31, 2006, the world Aframax tanker fleet consisted of approximately
      690 vessels, of which 546 crude tankers and 144 coated tankers are termed
      as conventional tankers. As of December 31, 2006, there were approximately
      240 conventional Aframax newbuildings on order for delivery through 2010.
      Delivery of a vessel typically occurs within three to four years after
      ordering.





As
      of
      December 31, 2006, our conventional
      Aframax-class oil tankers had an
      average age of approximately 9.8 years, compared to the average age of
      8.6 years for the world Aframax-class conventional tanker fleet. New
      Aframax tankers generally are expected to have a lifespan of approximately
      25 to
      30 years, based on estimated hull fatigue life. However, United States and
      international regulations require the phase-out of double-hulled vessels by
      25
      years. All of our Aframax tankers are double-hulled.





Because
      all of the vessels in OPCO’s conventional Aframax fleet are subject to
      long-term, fixed-rate charters, we do not expect to compete for deployment
      of
      the Aframax vessels until the first charter is scheduled to end in December
      2011. The shuttle tankers in OPCO’s contract of affreightment fleet may operate
      in the conventional spot market during downtime or maintenance periods for
      oil
      field installations or otherwise, which provides greater capacity utilization
      for the fleet.





The
      following table provides additional information about our conventional tankers
      as of December 31, 2006.





Vessel
            Capacity
                (dwt)
            Built
            Ownership
            Contract
              Type
            Charterer
            Remaining
                Term (1)Kilimanjaro
                Spirit
            115,000
            2004
            100%
            Time
                charter
            Teekay
            12
                yearsFuji
                Spirit
            106,300
            2003
            100%
            Time
                charter
            Teekay
            12
                yearsHamane
                Spirit
            105,200
            1997
            100%
            Time
                charter
            Teekay
            9
                yearsPoul
                Spirit
            105,300
            1995
            100%
            Time
                charter
            Teekay
            8
                yearsGotland
                Spirit
            95,300
            1995
            100%
            Time
                charter
            Teekay
            8
                yearsTorben
                Spirit
            98,600
            1994
            100%
            Time
                charter
            Teekay
            6
                yearsScotia
                Spirit (2)
            95,000
            1992
            100%
            Time
                charter
            Teekay
            5
                yearsLeyte
                Spirit
            98,700
            1992
            100%
            Time
                charter
            Teekay
            5
                yearsLuzon
                Spirit
            98,600
            1992
            100%
            Time
                charter
            Teekay
            5
                yearsTotal
                capacity
            918,000


__________


(1)  Charterer has options to extend each time charter on an annual basis for a
      total
      of five years after the initial term. Charterer also has the right to purchase
      the vessel beginning on the third anniversary of the contract at a specified
      price.


23


(2)  This vessel has been equipped with FSO equipment and OPCO can end the charter
      upon 30-days notice if it has arranged an FSO project for the
      vessel.




During
      2006, approximately 24% of our net voyage revenues were **** earned
      by
      the vessels in the conventional tanker segment, compared to approximately 36%
      in
      2005 and 42% in 2004. Please read Item 5 - Operating and Financial Review and
      Prospects: Results of Operations.





**FSO
      Segment**





FSO
      units
      provide on-site storage for oil field installations that have no storage
      facilities or that require supplemental storage. An FSO unit is generally used
      in combination with a jacked-up fixed production
      system, floating production systems that do not have sufficient storage
      facilities or as supplemental storage for fixed platform systems, which
      generally have some on-board storage capacity. An FSO unit is usually of similar
      design to a conventional tanker, but has specialized loading and offtake systems
      required by field operators or regulators. FSO units are moored to the seabed
      at
      a safe distance from a field installation and receive the cargo from the
      production facility via a dedicated loading system. An FSO unit is also equipped
      with an export system that transfers cargo to shuttle or conventional tankers.
      Depending on the selected mooring arrangement and where they are located, FSO
      units may or may not have any propulsion systems. FSO units are usually
      conversions of older single-hull conventional oil tankers. These conversions,
      which include a loading and offtake system and hull refurbishment, can generally
      extend the lifespan of a vessel by up to 20 years over the normal
      conventional tanker lifespan of 25 years.





Our
      FSO
      units are generally placed on long-term, fixed-rate time charters or bareboat
      charters as an integrated part of the field development plan, and thus provide
      stable cash flow to us.





As
      of
      December 31, 2006, there were approximately 76 FSO units operating and five
      FSO
      units on order in the world fleet, and we had four FSO units. The major markets
      for FSO units are Asia, the Middle East, West Africa and the North Sea. Our
      primary competitors in the FSO market are conventional tanker owners, who have
      access to tankers available for conversion, and oil field services companies
      and
      oil field engineering and construction companies who compete in the floating
      production system market. Competition in the FSO market is primarily based
      on
      price, expertise in FSO operations, management of FSO conversions and
      relationships with shipyards, as well as the ability to access vessels for
      conversion that meet customer specifications.





The
      following table provides additional information about our FSO units as of
      December 31, 2006.





Vessel
            Capacity
              (dwt)
            Built
            Ownership
            Field
                name and
              location
            Contract
                Type
            Charterer
            Remaining
              TermPattani
                Spirit
            113,800
            1988
            100%
            Platong,
                Thailand
            Bareboat
            Teekay
            8
                years (1)Nordic
                Apollo
            126,900
            1978
            89%
            Banff,
                U.K.
            Bareboat
            Teekay
            8
                years (2)Navion
                Saga (3)
            149,000
            1991
            100%
            Volve,
                Norway
            Time
                charter
            Statoil
            3
                years (3)Karratha
                Spirit
            106,600
            1988
            100%
            Legendre,
                Australia
            Time
                charter
            Woodside
            1
                year (4)Total
                capacity
            496,300


________





(1)  This
      vessel is on a back-to-back charter between Teekay and Unocol for a remaining
      term of eight years.




(2)    
Charterer
      is required to charter
      the vessel for as long as a specified FPSO unit, the *Petrojarl
      Banff* ,
      produces the Banff field in the North Sea, which could extend to 2014 depending
      on the field operator.





(3)  This vessel will be in drydock for FSO conversion and will trade in the spot
      conventional market before the FSO time charter begins, which is scheduled
      for
      the second quarter of 2007.





(4)  Charterer has option to extend the time charter after the initial fixed
      period.





During
      2006, 2005 and 2004, approximately 3% of our net voyage revenues
      were **** earned
      by
      the vessels in the FSO segment. Please read Item 5 - Operating and Financial
      Review and Prospects: Results of Operations





**Business
      Strategies**





Our
      primary business objective is to increase distributions per unit by executing
      the following strategies:





·  ***Expand
      global operations in high growth regions.*** As
      offshore exploration and production activity continues to accelerate worldwide,
      we will seek to continue to expand shuttle tanker and FSO unit operations into
      growing offshore markets such as Brazil and Australia. In addition, we intend
      to
      pursue opportunities in new markets such as Arctic Russia, Eastern Canada,
      the
      Gulf of Mexico, Asia and Africa.





·  ***Pursue
      opportunities in the FPSO sector.*** We
      believe that Teekay Shipping Corporation’s acquisition of Petrojarl will enable
      us to competitively pursue FPSO projects anywhere in the world by combining
      Petrojarl’s engineering and operational expertise with Teekay Shipping
      Corporation’s global marketing organization and extensive customer and shipyard
      relationships.




·  ***Acquire
      additional vessels on long-term fixed-rate contracts.*** We
      intend
      to continue acquiring shuttle tankers and FSO units with long-term contracts,
      rather than ordering vessels on a speculative basis, and we intend to follow
      this same practice in acquiring FPSO units. We believe this approach facilitates
      the financing of new vessels based on their anticipated future revenues and
      ensures that new vessels will be employed upon acquisition, which should
      stabilize cash flows. Additionally, we anticipate growing by acquiring
      additional limited partner interests in OPCO that Teekay Shipping Corporation
      may offer us in the future.


24


· ***Provide
      superior customer service by maintaining high reliability,
      safety,***  ***environmental
      and quality standards.*** Energy
      companies seek transportation partners that have a reputation for high
      reliability, safety, environmental and quality standards. We intend to leverage
      OPCO’s and Teekay Shipping Corporation’s operational expertise and customer
      relationships to further expand a sustainable competitive advantage with
      consistent delivery of superior customer service by:




· 
responsiveness,
      reliability,
      professionalism and integrity;





·  adoption
      of responsible environmental practices and strict adherence to environmental
      regulations;





·  dedication
      to safe operations; and




· use
      of
      customer feedback and industry and internal performance measures to drive
      continuous improvements.





·  ***Manage
      our conventional tanker fleet to provide stable cash flows.*** The
      terms
      for OPCO’s existing long-term conventional tanker charters are 5 to
      12 years. We believe the fixed-rate time charters for these tankers will
      provide stable cash flows during their terms and a source of funding for
      expanding offshore operations. Depending on prevailing market conditions during
      and at the end of each existing charter, we may seek to extend the charter,
      enter into a new charter, operate the vessel on the spot market or sell the
      vessel, in order to maximize returns on the conventional fleet while managing
      residual risk.





**Competitive
      Strengths**





We
      believe that we are well positioned to execute our business strategies because
      of the following competitive strengths:





·  ***Leading
      position in the shuttle tanker sector.*** OPCO
      is
      the world’s largest owner and operator of shuttle tankers, as it owned or
      operated 36 of the 65 vessels in the world shuttle tanker fleet as at
      December 31, 2006. OPCO’s large fleet size ensures that it can provide
      comprehensive coverage of charterers’ requirements and provides opportunities to
      enhance the efficiency of operations and increase fleet
      utilization.





·  ***Offshore
      operational expertise and enhanced growth opportunities through
      our***  ***relationship
      with Teekay Shipping Corporation.*** Teekay
      Shipping Corporation has achieved a global brand name in the shipping industry
      and the offshore market, developed an extensive network of long-standing
      relationships with major energy companies and earned a reputation for
      reliability, safety and excellence. Some benefits we expect to receive due
      to
      our relationship with Teekay Shipping Corporation include:





·  access
      through services agreements to its comprehensive market intelligence and
      operational and technical sophistication gained from over 25 years of
      providing shuttle tanker services and FSO services to offshore energy customers.
      We believe this expertise will also assist us in successfully expanding into
      the
      FPSO sector through Teekay Shipping Corporation’s acquisition of Petrojarl and
      our rights to participate in certain FPSO projects under the omnibus
      agreement;





·  access
      to
      Teekay Shipping Corporation’s general commercial and financial core
      competencies, practices and systems, which we believe enhances the efficiency
      and quality of operations;





·  enhanced
      growth opportunities and added competitiveness in bidding for transportation
      requirements for offshore projects and in attracting and retaining long-term
      contracts throughout the world; and





·  improved
      leverage with leading shipyards during periods of vessel production constraints,
      which are anticipated over the next few years, due to Teekay Shipping
      Corporation’s established relationships with these shipyards and the high number
      of newbuilding orders it places.





·  ***Cash
      flow stability from contracts with leading energy companies.*** We
      benefit from stability in cash flows due to the long-term, fixed-rate contracts
      underlying most of OPCO’s business. OPCO is able to secure long-term contracts
      because its services are an integrated part of offshore oil field projects
      and a
      critical part of the logistics chain of the fields. Due to the integrated nature
      of OPCO’s services, the high cost of field development and the need for
      uninterrupted oil production, contractual relationships with customers with
      respect to any given field typically last until the field is no longer
      producing.





·  ***Disciplined
      vessel acquisition strategy and successful project
      execution.*** OPCO’s
      fleet has been built through successful new project tenders and acquisitions,
      and this strategy has contributed significantly to its leading position in
      the
      shuttle tanker market. A significant portion of OPCO’s shuttle tanker fleet was
      established through the acquisition of Ugland Nordic Shipping AS in 2001 and
      Navion AS, Statoil ASA’s shipping subsidiary, in 2003. In addition, OPCO has
      increased the size of its fleet through customized shuttle tanker and FSO
      projects for major energy companies around the world.





·  ***We
      have financial flexibility to pursue acquisitions and other expansion
      opportunities through additional debt borrowings and the issuance of additional
      partnership units.***  As
      of
      March 31, 2007, our existing revolving credit facilities provided us access
      to
      $328.0 million for working capital and acquisition purposes. We
      believe that borrowings available under our revolving credit facilities, access
      to other bank financing facilities and the debt capital markets, and our ability
      to issue additional partnership units will provide us with financial flexibility
      to pursue acquisition and expansion opportunities .





**Customers**





OPCO
      provides marine transportation and storage services to energy and oil service
      companies or their affiliates. OPCO’s most important customer measured by annual
      voyage revenue and excluding Teekay Shipping Corporation is Statoil ASA, which
      is Norway’s largest energy company and one of the world’s largest producers of
      crude oil. Statoil created the shuttle tanker industry beginning in the late
      1970s and developed the current operating model in the North Sea. Statoil chose
      Teekay Shipping Corporation to purchase its shuttle tanker operation in 2003,
      and Teekay Shipping Corporation and OPCO continue to have a close working
      relationship with Statoil.


25


Teekay
        Shipping Corporation and Statoil ASA accounted for approximately 21% and
        27%,
        respectively, of consolidated voyage revenues during the year ended December
        31,
        2006, approximately 31% and 23%, respectively, of consolidated voyage revenues
        during 2005, and approximately 40% and 19%, respectively, of combined
        consolidated voyage revenues during 2004. No other customer accounted for
        10% or
        more of revenues during any of these periods.





**Safety,
      Management of Ship Operations and Administration**





Safety
      and environmental compliance are top operational priorities. We operate our
      vessels in a manner intended to protect the safety and health of our employees,
      the general public and the environment. We actively manage the risks inherent
      in
      our and OPCO’s business and are committed to eliminating incidents that threaten
      safety and the integrity of the vessels. We are also committed to reducing
      emissions and waste generation.





Key
      performance indicators facilitate regular monitoring of OPCO’s operational
      performance. Targets are set on an annual basis to drive continuous improvement,
      and indicators are reviewed monthly to determine if remedial action is necessary
      to reach the targets.





Teekay
      Shipping Corporation, through certain of its subsidiaries, assists OPCO’s
      operating subsidiaries in managing their ship operations. Det Norske Veritas,
      the Norwegian classification society, has approved Teekay Shipping Corporations
      safety management system as complying with the International Safety Management
      Code (or *ISM
      Code* ),
      and
      this system has been implemented for our Bahamian-flagged and Norwegian-flagged
      vessels. As part of Teekay Shipping Corporation’s ISM Code compliance, all of
      the vessels’ safety management certificates are being maintained through ongoing
      internal audits performed by Teekay Shipping Corporation’s certified internal
      auditors and intermediate external audits performed by Det Norske
      Veritas.





Teekay
      Shipping Corporation provides, through certain of its subsidiaries, expertise
      in
      various functions critical to the operations of OPCO’s operating subsidiaries.
      This affords a safe, efficient and cost-effective operation and, pursuant to
      administrative services agreements with certain subsidiaries of Teekay Shipping
      Corporation, access to human resources, financial and other administrative
      functions.





Critical
      ship management functions that certain subsidiaries of Teekay Shipping
      Corporation provide to OPCO’s operating subsidiaries through the Teekay Marine
      Services division located in various offices around the world
      include:





·  vessel
      maintenance;




·  crewing;





·  purchasing;





·  shipyard
      supervision;





·  insurance; and





·  financial
      management services.





These
      functions are supported by onboard and onshore systems for maintenance,
      inventory, purchasing and budget management.





OPCO’s
      operating subsidiaries provide technical and voyage management services for
      their conventional Aframax tankers, but rely on certain subsidiaries of Teekay
      Shipping Corporation for substantially all other services.





In
      addition, Teekay Shipping Corporation’s day-to-day focus on cost control is
      applied to OPCO’s operations. In 2003, Teekay Shipping Corporation and two other
      shipping companies established a purchasing alliance, Teekay Bergesen Worldwide,
      which leverages the purchasing power of the combined fleets, mainly in such
      commodity areas as lube oils, paints and other chemicals. Through arrangements
      with Teekay Shipping Corporation, OPCO and we benefit from this purchasing
      alliance.





We
      believe that the generally uniform design of some of OPCO’s vessels and the
      adoption of common equipment standards also results in operational efficiencies,
      including with respect to crew training and vessel management, equipment
      operation and repair, and spare parts ordering.





**Risk
      of Loss, Insurance and Risk Management**





The
      operation of any ocean-going vessel carries an inherent risk of catastrophic
      marine disasters, death or injury of persons and property losses caused by
      adverse weather conditions, mechanical failures, human error, war, terrorism,
      piracy and other circumstances or events. The occurrence of any of these events
      may result in loss of revenues or increased costs.





OPCO
      carries “hull and machinery” and “protection and indemnity” insurance coverage
      to protect against most of the accident-related risks involved in the conduct
      of
      its business. Hull and machinery insurance covers loss of or damage to a vessel
      due to marine perils such as collisions, grounding and weather. Protection
      and
      indemnity insurance indemnifies against other liabilities incurred while
      operating vessels, including injury to the crew, third parties, cargo loss
      and
      pollution. The current available amount of OPCO’s coverage for pollution is
      $1 billion per vessel per incident. OPCO also carries insurance policies
      covering war risks (including piracy and terrorism).





Under
      bareboat charters, the customer is responsible to insure the vessel. We believe
      that current insurance coverage is adequate to protect against most of the
      accident-related risks involved in the conduct of OPCO’s business and that it
      maintains appropriate levels of environmental damage and pollution coverage.
      However, we cannot assure that all covered risks are adequately insured against,
      that any particular claim will be paid or that we or OPCO will be able to
      procure adequate insurance coverage at commercially reasonable rates in the
      future. More stringent environmental regulations at times in the past have
      resulted in increased costs for, and may result in the lack of availability
      of,
      insurance against the risks of environmental damage or pollution. Substantially
      all of OPCO’s vessels are not insured against loss of revenues resulting from
      vessel off-hire time, based on the cost of this insurance compared to OPCO’s
      off-hire experience.


26


We
        and
        OPCO use in our operations Teekay Shipping Corporation’s thorough risk
        management program that includes, among other things, computer-aided risk
        analysis tools, maintenance and assessment programs, a seafarers competence
        training program, seafarers workshops and membership in emergency response
        organizations. We believe we benefit from Teekay Shipping Corporation’s
        commitment to safety and environmental protection as certain of its subsidiaries
        assist us and OPCO in managing vessel operations.





Teekay
      Shipping Corporation has achieved certification under the standards reflected
      in
      International Standards Organization's (or *ISO* )
      9001
      for quality assurance, ISO 14001 for environment management systems, OHSAS
      18001
      for Occupational Health and Safety, and the IMO's International Management
      Code
      for the Safe Operation of Ships and Pollution Prevention on a fully integrated
      basis.





**Classification,
      Audits and Inspections**





All
      of
      OPCO’s shuttle tankers and conventional oil tankers have been certified as being
      “in-class” by their respective classification societies: American Bureau of
      Shipping Det Norske Veritas, Lloyd’s Register of Shipping or Nippon Kaiji
      Kyokai. Although FSO units and FPSO units generally are not classified by
      classification societies, each of OPCO's FSO units has been inspected and
      certified as ""in-class'' by their respective classification societies. Every
      “in-class” vessel’s hull and machinery is “classed” by a classification society.
      The classification society certifies that the vessel has been built and is
      maintained in accordance with the rules of that classification society and
      complies with applicable rules and regulations of the country of registry of
      the
      vessel and the international conventions of which that country is a signatory,
      although for some vessels this latter certification is obtained directly from
      the relevant flag state authorities. Each vessel is inspected by a
      classification society surveyor annually, with either the second or third annual
      inspection being a more detailed survey (an *Intermediate
      Survey* )
      and the
      fourth or fifth annual inspection being the most comprehensive survey (a *Special
      Survey* ).
      The
      inspection cycle resumes after each Special Survey. Vessels also may be required
      to be drydocked at each Intermediate and Special Survey for inspection of the
      underwater parts of the vessel and resulting repairs. In-water surveys generally
      take vessels out of service for one day. Many of OPCO’s vessels have qualified
      with their respective classification societies for drydocking every four or
      five
      years in connection with the Special Survey and are no longer subject to the
      Intermediate Survey drydocking process. To qualify, the resiliency of the
      underwater coatings of each vessel was enhanced and the hull was marked to
      accommodate underwater inspections by divers.





In
      addition to classification inspections:




·  the
      vessel’s flag state, or the vessel’s classification society if nominated by the
      flag state, inspect the vessels to ensure they comply with applicable rules
      and
      regulations of the country of registry of the vessel and the international
      conventions of which that country is a signatory;





·  port
      state control authorities, such as the U.S. Coast Guard and Australian
      Maritime Safety Authority, inspect some of the vessels; and





·  many
      customers regularly inspect OPCO’s vessels as a condition to chartering, and
      regular inspections are standard practice under long-term charters.





In
      addition to third-party audits and inspections, the seafaring staff operating
      the vessels regularly inspect them and perform much of the necessary routine
      maintenance. Shore-based operational and technical specialists also inspect
      the
      vessels at least twice a year for conformity with established criteria. Upon
      completion of each inspection, recommendations are made for improving the
      overall condition of the vessel and its maintenance, safety and crew welfare.
      All recommendations are monitored until they are completed.





Objectives
      in inspecting a vessel are to:





·  ensure
      adherence to operating standards;





·  maintain
      the structural integrity of the vessel;





·  maintain
      machinery and equipment to give full reliability in service;





·  optimize
      performance in terms of speed and fuel consumption; and





·  ensure
      the vessel’s appearance will support the Teekay Shipping Corporation brand and
      meet customer expectations.





To
      achieve the vessel structural integrity objective, we use a comprehensive
“Structural Integrity Management System” developed by Teekay Shipping
      Corporation. This system is designed to monitor the condition of the vessels
      closely and to ensure that structural strength and integrity are maintained
      throughout a vessel’s life.





**Regulations**





***General***





Our
      business and the operation of OPCO’s vessels are significantly affected by
      international conventions and national, state and local laws and regulations
      in
      the jurisdictions in which its vessels operate, as well as in the country or
      countries of their registration. Because these conventions, laws and regulations
      change frequently, we cannot predict the ultimate cost of compliance or their
      impact on the resale price or useful life of the vessels. Additional
      conventions, laws and regulations may be adopted that could limit our or OPCO’s
      ability to do business or increase the cost of doing business and that may
      materially adversely affect operations. OPCO is required by various governmental
      and quasi-governmental agencies to obtain permits, licenses and certificates
      with respect to its operations. Subject to the discussion below and to the
      fact
      that the kinds of permits, licenses and certificates required for the operations
      of the vessels OPCO owns will depend on a number of factors, we believe that
      we
      and OPCO will be able to continue to obtain all permits, licenses and
      certificates material to the conduct of operations.





We
      believe that the heightened environmental and quality concerns of insurance
      underwriters, regulators and charterers will generally lead to greater
      inspection and safety requirements on all vessels in the oil tanker markets
      and
      will accelerate the scrapping of older vessels throughout these
      industries.


27


***Regulation —
      International Maritime Organization (or***  ***IMO)***





IMO
      regulations include the International Convention for Safety of Life at Sea
      (or *SOLAS* ),
      including amendments to SOLAS implementing the International Security Code
      for
      Ports and Ships (or *ISPS* ),
      the
      ISM Code, the International Convention on Prevention of Pollution from Ships
      (or
      the *MARPOL
      Convention* ),
      the
      International Convention on Civil Liability for Oil Pollution Damage of 1969,
      the International Convention on Load Lines of 1966. The IMO Marine Safety
      Committee has also published guidelines for vessels with dynamic positioning
      ( *DP* )
      systems, which would apply to shuttle tankers and DP-assisted FSO units and
      FPSO
      units. SOLAS provides rules for the construction of and equipment required
      for
      commercial vessels and includes regulations for safe operation. Flag states
      which have ratified the convention and the treaty generally employ the
      classification societies, which have incorporated SOLAS requirements into their
      class rules, to undertake surveys to confirm compliance.





SOLAS
      and
      other IMO regulations concerning safety, including those relating to treaties
      on
      training of shipboard personnel, lifesaving appliances, radio equipment and
      the
      global maritime distress and safety system, are applicable to OPCO’s operations.
      Non-compliance with IMO regulations, including SOLAS, the ISM Code, ISPS and
      the
      specific requirements for shuttle tankers, FSO units and FPSO units under the
      NPD (Norway) and HSE (United Kingdom) regulations, may subject OPCO to increased
      liability or penalties, may lead to decreases in available insurance coverage
      for affected vessels and may result in the denial of access to or detention
      in
      some ports. For example, the Coast Guard and European Union authorities have
      indicated that vessels not in compliance with the ISM Code will be prohibited
      from trading in U.S. and European Union ports.





The
      ISM
      Code requires vessel operators to obtain a safety management certification
      for
      each vessel they manage, evidencing the shipowner’s compliance with requirements
      of the ISM Code relating to the development and maintenance of an extensive
      “Safety Management System.” Such a system includes, among other things, the
      adoption of a safety and environmental protection policy setting forth
      instructions and procedures for safe operation and describing procedures for
      dealing with emergencies. Each of the existing vessels in OPCO’s fleet currently
      is ISM Code-certified, and we expect to obtain safety management certificates
      for each newbuilding upon delivery.





ISPS
      was
      adopted in December 2002 in the wake of heightened concern over worldwide
      terrorism and became effective on July 1, 2004. The objective of ISPS is to
      enhance maritime security by detecting security threats to ships and ports
      and
      by requiring the development of security plans and other measures designed
      to
      prevent such threats. The United States implemented ISPS with the adoption
      of
      the Maritime Transportation Security Act of 2002 (or *MTSA* ),
      which
      requires vessels entering U.S. waters to obtain certification of plans to
      respond to emergency incidents there, including identification of persons
      authorized to implement the plans. Each of the existing vessels in OPCO’s fleet
      currently complies with the requirements of ISPS and MTSA, and we expect all
      newbuildings to comply upon delivery.





Under
      IMO
      regulations an oil tanker must be of double-hull construction, be of a mid-deck
      design with double-side construction or be of another approved design ensuring
      the same level of protection against oil pollution in the event that such
      tanker:





·  is
      the
      subject of a contract for a major conversion or original construction on or
      after July 6, 1993;





·  commences
      a major conversion or has its keel laid on or after January 6,
      1994; or





·  completes
      a major conversion or is a newbuilding delivered on or after July 6, 1996.





In
      December 2003, the IMO revised its regulations relating to the prevention of
      pollution from oil tankers. These regulations, which became effective
      April 5, 2005, accelerate the mandatory phase-out of single-hull tankers
      and impose a more rigorous inspection regime for older tankers. All of OPCO’s
      shuttle and conventional oil tankers are double-hulled and were delivered after
      July 6, 1996, so those tankers will not be affected directly by these IMO
      regulations.





***Shuttle
      Tanker, FSO Unit and FPSO Unit Regulation***





OPCO’s
      shuttle tankers primarily operate in the North Sea. In addition to the
      regulations imposed by the IMO, countries having jurisdiction over North Sea
      areas impose regulatory requirements in connection with operations of shuttle
      tankers, FSO units and FPSO units in those areas, including HSE in the United
      Kingdom and NPD in Norway. These regulatory requirements, together with
      additional requirements imposed by operators in North Sea oil fields, require
      that we make further expenditures for sophisticated equipment, reporting and
      redundancy systems on the shuttle tankers and for the training of seagoing
      staff. Additional regulations and requirements may be adopted or imposed that
      could limit OPCO’s ability to do business or further increase the cost of doing
      business in the North Sea. In Brazil, Petrobras serves in a regulatory capacity
      and has adopted standards similar to those in the North Sea.





***Environmental
      Regulations — The United States Oil***  ***Pollution
      Act of 1990 (or OPA 90)***





OPA
      90
      established an extensive regulatory and liability regime for the protection
      and
      cleanup of the environment from oil spills, including discharges of oil cargoes,
      bunker fuels or lubricants. OPA 90 affects all owners and operators whose
      vessels trade to the United States or its territories or possessions or whose
      vessels operate in United States waters, which include the U.S. territorial
      sea and 200-mile exclusive economic zone around the United States.


Under
        OPA
        90, vessel owners, operators and bareboat charterers are “responsible parties”
and are jointly, severally and strictly liable (unless the spill results
        solely
        from the act or omission of a third party, an act of God or an act of war
        and
        the responsible party reports the incident and reasonably cooperates with
        the
        appropriate authorities) for all containment and cleanup costs and other
        damages
        arising from discharges or threatened discharges of oil from their vessels.
        These other damages are defined broadly to include:





·  natural
      resources damages and the related assessment costs;





·  real
      and
      personal property damages;




· net
      loss
      of taxes, royalties, rents, fees and other lost revenues;




· lost
      profits or impairment of earning capacity due to property or natural resources
      damage;


28


·  net
      cost
      of public services necessitated by a spill response, such as protection from
      fire, safety or health hazards; and





·  loss
      of
      subsistence use of natural resources.




OPA
      90
      limits the liability of responsible parties. Effective as of October 9,
      2006, the limit for double-hulled tank vessels was increased to the greater
      of
      $1,900 per gross ton or $16 million per tanker that is over
      3,000 gross tons per incident, subject to adjustment for inflation. These
      limits of liability would not apply if the incident were proximately caused
      by
      violation of applicable U.S. federal safety, construction or operating
      regulations, including IMO conventions to which the United States is a
      signatory, or by the responsible party’s gross negligence or willful misconduct,
      or if the responsible party fails or refuses to report the incident or to
      cooperate and assist in connection with the oil removal activities. We currently
      plan to continue to maintain for each vessel pollution liability coverage in
      the
      amount of $1 billion per incident. A catastrophic spill could exceed the
      coverage available, which could harm our and OPCO’s business, financial
      condition and results of operations.





Under
      OPA
      90, with limited exceptions, all newly built or converted tankers delivered
      after January 1, 1994 and operating in United States waters must be built
      with double-hulls. All of OPCO’s existing shuttle tankers and conventional
      tankers are double-hulled.





In
      December 1994, the U.S. Coast Guard (or *Coast Guard*) implemented
      regulations requiring evidence of financial responsibility in the amount of
      $1,500 per gross ton for tankers, coupling the then existing OPA limitation
      on liability of $1,200 per gross ton with the Comprehensive Environmental
      Response, Compensation, and Liability Act (or *CERCLA*) liability limit
      of $300 per gross ton. The financial responsibility limits have not been
      increased to comport with the amended statutory limits of OPA. However, the
      Coast Guard has issued a notice of policy change indicating its intention to
      change the financial responsibility regulations accordingly. Under the
      regulations, such evidence of financial responsibility may be demonstrated
      by
      insurance, surety bond, self-insurance, guaranty or an alternate method subject
      to agency approval. Under OPA 90, an owner or operator of a fleet of vessels
      is
      required only to demonstrate evidence of financial responsibility in an amount
      sufficient to cover the tanker in the fleet having the greatest maximum limited
      liability under OPA 90 and CERCLA.





The
      Coast
      Guard’s regulations concerning certificates of financial responsibility (or
*COFR*) provide, in accordance with OPA 90, that claimants may bring suit
      directly against an insurer or guarantor that furnishes COFR. In addition,
      in
      the event that such insurer or guarantor is sued directly, it is prohibited
      from
      asserting any contractual defense that it may have had against the responsible
      party and is limited to asserting those defenses available to the responsible
      party and the defense that the incident was caused by the willful misconduct
      of
      the responsible party. Certain organizations, which had typically provided
      COFR
      under pre-OPA 90 laws, including the major protection and indemnity
      organizations, have declined to furnish evidence of insurance for vessel owners
      and operators if they are subject to direct actions or required to waive
      insurance policy defenses. The Coast Guard has indicated that it intends to
      propose a rule that would increase the required amount of such COFRs to $2,200
      per gross ton to reflect the higher limits on liability imposed by OPA 90,
      as described above.





The
      Coast
      Guard’s financial responsibility regulations may also be satisfied by evidence
      of surety bond, guaranty or by self-insurance. Under the self-insurance
      provisions, the shipowner or operator must have a net worth and working capital,
      measured in assets located in the United States against liabilities located
      anywhere in the world, that exceeds the applicable amount of financial
      responsibility. OPCO has complied with the Coast Guard regulations by obtaining
      financial guarantees from a third party. If other vessels in the fleet trade
      into the United States in the future, we expect that OPCO will obtain additional
      guarantees from third-party insurers or to provide guarantees through
      self-insurance.





OPA
      90
      and CERCLA permit individual states to impose their own liability regimes with
      regard to oil or hazardous substance pollution incidents occurring within their
      boundaries, and some states have enacted legislation providing for unlimited
      strict liability for spills. OPCO intends to comply with all applicable state
      regulations in the ports where its vessels call.





Owners
      or
      operators of tank vessels operating in United States waters are required to
      file
      vessel response plans with the Coast Guard, and their tank vessels are required
      to operate in compliance with their Coast Guard approved plans. Such response
      plans must, among other things:





·  address
      a
“worst case” scenario and identify and ensure, through contract or other
      approved means, the availability of necessary private response resources to
      respond to a “worst case discharge”;





·  describe
      crew training and drills; and




· identify
      a qualified individual with full authority to implement removal actions.





We
      have
      filed vessel response plans with the Coast Guard for the tankers we own and
      have
      received approval of such plans for all vessels in the fleet to operate in
      U.S.
      waters. In addition, OPCO conducts regular oil spill response drills in
      accordance with the guidelines set out in OPA 90. The Coast Guard has
      announced it intends to propose similar regulations requiring certain vessels
      to
      prepare response plans for the release of hazardous substances.





OPA
      90
      allows U.S. state legislatures to pre-empt associated regulation if the
      state’s regulations are equal or more stringent. Several coastal states such as
      California, Washington and Alaska require state-specific COFR and vessel
      response plans.





CERCLA
      contains a similar liability regime to OPA 90, but applies to the discharge
      of
“hazardous substances” rather than “oil.” Petroleum products should not be
      considered hazardous substances under CERCLA, but additives to oil might fall
      within its scope. CERCLA imposes strict joint and several liability upon the
      owner, operator or bareboat charterer of a vessel for cleanup costs and damages
      arising from a discharge of hazardous substances.





OPA
      90
      and CERCLA do not preclude claimants from seeking damages resulting from the
      discharge of oil and hazardous substances under other applicable law, including
      maritime tort law. The application of this doctrine varies by jurisdiction.
      There can be no assurance that a court in a particular jurisdiction will not
      determine that the carriage of oil aboard a vessel is an ultra-hazardous
      activity, which could result in strict liability for damages caused to injured
      parties even when neither we nor OPCO has acted negligently.


29


***Environmental
      Regulation — Other Environmental***  ***Initiatives***





Although
      the United States is not a party, many countries have ratified and follow the
      liability scheme adopted by the IMO and set out in the International Convention
      on Civil Liability for Oil Pollution Damage, 1969, as amended (or *CLC*),
      and the Convention for the Establishment of an International Fund for Oil
      Pollution of 1971, as amended. Under these conventions, which are applicable
      to
      vessels that carry persistent oil as cargo, a vessel’s registered owner is
      strictly liable for pollution damage caused in the territorial waters of a
      contracting state by discharge of persistent oil, subject to certain complete
      defenses. Many of the countries that have ratified the CLC have increased the
      liability limits through a 1992 Protocol to the CLC. The liability limits in
      the
      countries that have ratified this Protocol are currently approximately
      $6.8 million plus approximately $960 per gross registered tonne above
      5,000 gross tonnes with an approximate maximum of $137 million per
      vessel, with the exact amount tied to a unit of account which varies according
      to a basket of currencies. The right to limit liability is forfeited under
      the
      CLC when the spill is caused by the owner’s actual fault or privity and, under
      the 1992 Protocol, when the spill is caused by the owner’s intentional or
      reckless conduct. Vessels trading to contracting states must provide evidence
      of
      insurance covering the limited liability of the owner. In jurisdictions where
      the CLC has not been adopted, various legislative schemes or common law governs,
      and liability is imposed either on the basis of fault or in a manner similar
      to
      the CLC.





In
      addition, the IMO, various countries and states, such as Australia, the United
      States and the State of California, and various regulators, such as port
      authorities, the U.S. Coast Guard and the U.S. Environmental
      Protection Agency, have either adopted legislation or regulations, or are
      separately considering the adoption of legislation or regulations, aimed at
      regulating the discharge of ballast water and the discharge of bunkers as
      potential pollutants.





The
      United States Clean Water Act prohibits the discharge of oil or hazardous
      substances in U.S. navigable waters and imposes strict liability in the form
      of
      penalties for unauthorized discharges. The Clean Water Act also imposes
      substantial liability for the costs of removal, remediation and damages and
      complements the remedies available under the more recent OPA 90 and CERCLA
      discussed above. Pursuant to regulations promulgated by the U.S. Environmental
      Protection Agency (or *EPA*) in the early 1970s, the discharge of sewage
      and effluent from properly functioning marine engines was exempted from the
      permit requirements of the National Pollution Discharge Elimination System.
      This
      exemption allowed vessels in U.S. ports to discharge certain substances,
      including ballast water, without obtaining a permit to do so. However, on
      March 30, 2005, a U.S. District Court for the Northern District of
      California granted summary judgment to certain environmental groups and U.S.
      states that had challenged the EPA regulations, arguing that the EPA exceeded
      its authority in promulgating them. On September 18, 2006, the U.S.
      District Court issued an order invalidating the exemption in EPA’s regulations
      for all discharges incidental to the normal operation of a vessel as of
      September 30, 2008, and directing EPA to develop a system for regulating
      all discharges from vessels by that date.





Although
      the EPA may appeal this decision, if the exemption is repealed, we would be
      subject to the Clean Water Act permit requirements that could include ballast
      water treatment obligations that could increase the costs of operating in the
      United States. For example, this ruling could: require the installation of
      equipment on our vessels to treat ballast water before it is discharged: require
      the implementation of other port facility disposal arrangements or procedures
      at
      potentially substantial cost and/or otherwise restrict OPCOs vessels traffic
      in
      U.S. waters.





In
      Norway, the Norwegian Pollution Control Authority requires the installation
      of
      VOC equipment on most shuttle tankers serving the Norwegian continental shelf.
      Oil companies bear the cost to install and operate the VOC equipment onboard
      the
      shuttle tankers.





**C.
      Organizational Structure**





Please
      read Exhibit 8.1 to this Annual Report for a list of our significant
      subsidiaries as of December 31, 2006.





**D.
      Properties**





Other
      than our vessels and VOC plants mentioned above, we do not have any material
      property.





**E.
      Taxation of the Partnership**





***United
      States Taxation***





This
      discussion is based upon provisions of the U.S. Internal Revenue Code of
      1986, as amended (or the *Code* )
      as in
      effect on the date of this Annual Report, existing final and temporary
      regulations thereunder (or *Treasury
      Regulations* ),
      and
      current administrative rulings and court decisions, all
      of
      which are subject to change, possibly with retroactive effect. Changes in these
      authorities may cause the tax consequences to vary substantially from the
      consequences described below. The following discussion is for general
      information purposes only and does not purport to be a comprehensive description
      of all of the U.S. federal income tax considerations applicable to
      us.





***Election
      to be Taxed as a Corporation.*** We
      have
      elected to be taxed as a corporation for U.S. federal income tax purposes.
      As such, we are subject to U.S. federal income tax on our income to the
      extent it is from U.S. sources or otherwise is effectively connected with
      the conduct of a trade or business in the United States as discussed
      below.





***Taxation
      of Operating Income.*** We
      expect
      that substantially all of our gross income will be attributable to the
      transportation of crude oil and related products. For this purpose, gross income
      attributable to transportation (or *Transportation
      Income* )
      includes income derived from, or in connection with, the use (or hiring or
      leasing for use) of a vessel to transport cargo, or the performance of services
      directly related to the use of any vessel to transport cargo, and thus includes
      both time charter or bareboat charter income.





Transportation
      Income that is attributable to transportation that begins or ends, but that
      does
      not both begin and end, in the United States (or *U.S. Source
      International*  *Transportation
      Income* )
      will be
      considered to be 50.0% derived from sources within the United States.
      Transportation Income attributable to transportation that both begins and ends
      in the United States (or *U.S.*  *Source
      Domestic Transportation Income* )
      will be
      considered to be 100.0% derived from sources within the United States.
      Transportation Income attributable to transportation exclusively between
      non-U.S. destinations will be considered to be 100% derived from sources
      outside the United States. Transportation Income derived from sources outside
      the United States generally will not be subject to U.S. federal income
      tax.


30


Based
      on
      our and OPCO’s current operations, we expect substantially all of our
      Transportation Income to be from sources outside the United States and not
      subject to U.S. federal income tax. However, certain of our activities
      could give rise to U.S. Source International Transportation Income, and
      future expansion of our operations could result in an increase in the amount
      of
      U.S. Source International Transportation Income, as well as give rise to
      U.S. Source Domestic Transportation Income, all of which could be subject
      to U.S. federal income taxation, unless the exemption from
      U.S. taxation under Section 883 of the Code (or the *Section 883*  *Exemption* )
      applies.




***The
      Section 883 Exemption.*** In
      general, the Section 883 Exemption provides that if a
      non-U.S. corporation satisfies the requirements of Section 883 of the
      Code and the Treasury Regulations thereunder (or the *Section 883
      Regulations* ),
      it
      will not be subject to the net basis and branch taxes or 4.0% gross basis tax
      described below on its U.S. Source International Transportation Income. The
      Section 883 Exemption only applies to U.S. Source International
      Transportation Income. As discussed below, we believe that under our current
      ownership structure, the Section 883 Exemption will apply and we will not
      be taxed on our U.S. Source International Transportation Income. The
      Section 883 Exemption does not apply to U.S. Source Domestic
      Transportation Income.





A
      non-U.S. corporation will qualify for the Section 883 Exemption if,
      among other things, it is organized in a jurisdiction outside the United States
      that grants an equivalent exemption from tax to corporations organized in the
      United States (or an *Equivalent
      Exemption* )
      and it
      meets one of three ownership tests (or the *Ownership
      Test* )
      described in the Final Section 883 Regulations.





We
      are
      organized under the laws of the Republic of the Marshall Islands. The
      U.S. Treasury Department has recognized the Republic of the Marshall
      Islands as a jurisdiction that grants an Equivalent Exemption. Consequently,
      our
      U.S. Source International Transportation Income (including for this
      purpose, any such income earned by our subsidiaries that have properly elected
      to be treated as partnerships or disregarded as entities separate from us for
      U.S. federal income tax purposes) will be exempt from U.S. federal
      income taxation provided we meet the Ownership Test described in the Final
      Section 883 Regulations. We
      believe that we should satisfy the Ownership Test. However, the determination
      of
      whether we satisfy the Ownership Test at any given time depends upon a multitude
      of factors, including Teekay Shipping Corporation’s ownership of us, whether
      Teekay Shipping Corporation’s stock is publicly traded, the concentration of
      ownership of Teekay Shipping Corporation’s own stock and the satisfaction of
      various substantiation and documentation requirements. There can be no assurance
      that we will satisfy these requirements at any given time and thus that our
      U.S. Source International Shipping Income would be exempt from
      U.S. federal income taxation by reason of Section 883 in any of our
      taxable years.





***The
      Net Basis Tax and Branch Profits Tax.*** If
      we
      earn U.S. Source International Transportation Income and the
      Section 883 Exemption does not apply, such income may be treated as
      effectively connected with the conduct of a trade or business in the United
      States (or *Effectively
      Connected Income* )
      if we
      have a fixed place of business in the United States and substantially all of
      our
      U.S. Source International Transportation Income is attributable to
      regularly scheduled transportation or, in the case of bareboat charter income,
      is attributable to a fixed placed of business in the United States. Based on
      our
      current operations, none of our potential U.S. Source International
      Transportation Income is attributable to regularly scheduled transportation
      or
      is received pursuant to bareboat charters. As a result, we do not anticipate
      that any of our U.S. Source International Transportation Income will be
      treated as Effectively Connected Income. However, there is no assurance that
      we
      will not earn income pursuant to regularly scheduled transportation or bareboat
      charters attributable to a fixed place of business in the United States in
      the
      future, which would result in such income being treated as Effectively Connected
      Income.





U.S. Source
      Domestic Transportation Income generally is treated as Effectively Connected
      Income.





Any
      income we earn that is treated as Effectively Connected Income would be subject
      to U.S. federal corporate income tax (the highest statutory rate is
      currently 35.0%). In addition, if we earn income that is treated as Effectively
      Connected Income, a 30.0% branch profits tax imposed under Section 884 of
      the Code generally would apply to such income, and a branch interest tax could
      be imposed on certain interest paid or deemed paid by us.





On
      the
      sale of a vessel that has produced Effectively Connected Income, we could be
      subject to the net basis corporate income tax and to the 30.0% branch profits
      tax with respect to our gain not in excess of certain prior deductions for
      depreciation that reduced Effectively Connected Income. Otherwise, we would
      not
      be subject to U.S. federal income tax with respect to gain realized on the
      sale of a vessel, provided the sale is considered to occur outside of the United
      States under U.S. federal income tax principles.





***The
      4.0% Gross Basis Tax.*** If
      the
      Section 883 Exemption does not apply and the net basis tax does not apply,
      we would be subject to a 4.0% U.S. federal income tax on the
      U.S. source portion of our gross U.S. Source International
      Transportation Income, without benefit of deductions.





***Marshall
      Islands Taxation***





Because
      we and our controlled affiliates do not, and we do not expect that we and our
      controlled affiliates will, conduct business or operations in the Republic
      of
      the Marshall Islands, neither we nor our controlled affiliates are subject
      to
      income, capital gains, profits or other taxation under current Marshall Islands
      law. As a result, distributions by OPCO or other controlled affiliates to us
      are
      not subject to Marshall Islands taxation.





***Norway
      Taxation***





The
      following discussion is based upon the current tax laws of the Kingdom of Norway
      and regulations, the Norwegian tax administrative practice and judicial
      decisions thereunder, all as in effect as of the date of this Annual Report
      and
      subject to possible change on a retroactive basis. The following discussion
      is
      for general information purposes only and does not purport to be a comprehensive
      description of all of the Norwegian income tax considerations applicable to
      us.





Our
      Norwegian subsidiaries are subject to taxation in Norway on their income
      regardless of where the income is derived. The generally applicable Norwegian
      income tax rate is 28.0%.





***Taxation
      of Norwegian Subsidiaries Engaged in***  ***Business
      Activities.*** All
      of
      our Norwegian subsidiaries are subject to normal Norwegian taxation. Generally,
      a Norwegian resident company is taxed on its income realized for tax purposes.
      The starting point for calculating taxable income is the company’s income as
      shown on its annual accounts, calculated under generally accepted accounting
      principles and as adjusted for tax purposes. Gross income will include capital
      gains, interest, dividends from certain corporations and foreign exchange
      gains.


31


The
      Norwegian companies also are taxed on any gains resulting from the sale of
      depreciable assets. The gain on these assets is taken into income for Norwegian
      tax purposes at a rate of 20.0% per year on a declining balance
      basis.




Norway
      does not allow consolidation of the income of companies in a corporate group
      for
      Norwegian tax purposes. However, a group of companies that is ultimately owned
      more than 90.0% by a single company can transfer its Norwegian taxable income
      to
      another Norwegian resident company in the group by making a transfer to the
      other company (this is referred to as making a “group contribution”). The
      ultimate parent in the corporate group can be a foreign company.





Group
      contributions are deductible for the contributing company for tax purposes
      and
      are included in the taxable income of the receiving company in the income year
      in which the contribution is made. Group contributions are subject to the same
      rules as dividend distributions under the Norwegian Companies Act. In other
      words, group contributions are restricted to the amount that is available to
      distribute as dividends for corporate law purposes.





***Taxation
      of Dividends.*** Generally,
      dividends received by a Norwegian resident company are exempt from Norwegian
      taxation. The exemption does not apply to dividends from companies resident
      outside the European Economic Area if (a) the country of residence is a
      low-tax country or (b) the ownership of shares in the distributing company
      is considered to be a “portfolio investment” ( *i.e.* less
      than 10.0% share ownership or less than two years continuous ownership period).
      Dividends not exempt from Norwegian taxation are subject to the general 28.0%
      income tax rate when received by the Norwegian resident company. We believe
      that
      dividends received by our Norwegian subsidiaries will not be subject to
      Norwegian tax.





***Correction
      Income Tax.*** Our
      Norwegian subsidiaries may be subject to a tax, called *correction
      income tax,* on
      their
      dividend distributions. Norwegian correction tax is levied if a dividend
      distribution leads to the company’s balance sheet equity at year end being lower
      than the company’s paid-in share capital (including share premium), plus a
      calculated amount equal to 72.0% of the net positive temporary timing
      differences between the company’s book values and tax values.





As
      a
      result, correction tax is effectively levied if dividend distributions result
      in
      the company’s financial statement equity for accounting purposes being reduced
      below its equity calculated for tax purposes ( *i.e.* when
      dividends are paid out of accounting earnings that have not been subject to
      taxation in Norway). In addition to dividend distributions, correction tax
      may
      also be levied on the partial liquidation of the share capital of the company
      or
      if the company makes group contributions that are in excess of taxable income
      for the year.





***Taxation
      of Interest Paid by Norwegian Entities.*** Norway
      does not levy any tax or withholding tax on interest paid by a Norwegian
      resident company to a company that is not resident in Norway (provided that
      the
      interest rate and the debt/equity ratio are based on arms-length principles).
      Therefore, any interest paid by our Norwegian subsidiaries to companies that
      are
      not resident in Norway will not be subject to Norwegian withholding
      tax.





***Taxation
      on Distributions by Norwegian Entities.*** Norway
      levies a 25.0% withholding tax on non-residents of Norway that receive dividends
      from a Norwegian resident company. However, if the recipient of the dividend
      is
      resident in a country that has an income tax treaty with Norway or that is
      a
      member of the European Economic Area, the Norwegian withholding tax may be
      reduced or eliminated. We believe that distributions by our Norwegian
      subsidiaries will be subject to a reduced amount of Norwegian withholding tax
      or
      not be subject to Norwegian withholding tax.





***Luxembourg
      Taxation***





The
      following discussion is based upon the current tax laws of Luxembourg and
      regulations, the Luxembourg tax administrative practice and judicial decisions
      thereunder, all as in effect as of the date of this Annual Report and subject
      to
      possible change on a retroactive basis. The following discussion is for general
      information purposes only and does not purport to be a comprehensive description
      of all of the Luxembourg income tax considerations applicable to
      us.





Our
      operating subsidiary, Teekay Offshore Partners L.P. owns all of the shares
      of
      Norsk Teekay Holdings Ltd. (or *Norsk
      Teekay* ),
      a
      Marshall Islands company. Norsk Teekay owns all of the shares of Teekay European
      Holdings S.a.r.l. (or *TEHS* ),
      a
      Luxembourg company. TEHS owns all of the shares of Teekay Netherlands European
      Holdings BV (or *Teekay
      Netherlands* ),
      a
      Netherlands company.




TEHS
      was
      primarily capitalized with a discounted loan from Norsk Teekay (the proceeds
      of
      which TEHS used to purchase shares in Norsk Teekay, which were immediately
      then
      contributed to Teekay Netherlands), which we believe were compliant with the
      Luxembourg thin capitalization threshold and a fixed interest loan from OPCO.
      Its only significant assets are shares of Teekay Netherlands and a fixed
      interest loan to Navion Offshore Loading AS (or *NOL* ).





TEHS
      is
      considered a Luxembourg resident company subject to taxation in Luxembourg
      on
      its income regardless of where the income is derived. The generally applicable
      Luxembourg income tax rate is approximately 30%.





***Taxation
      of Interest Income.*** TEHS’
      loans to NOL generate interest income. However, this interest income is
      substantially offset by interest expense on the loan made by OPCO to TEHS.
      Accordingly, at TEHS’ current level of indebtedness and provided that TEHS does
      not bear any foreign exchange risk, TEHS should earn a minimum level of net
      interest income equal to 0.09375% or less of the loan balance to NOL, an
      immaterial amount that will be subject to taxation in Luxembourg. The net
      interest income generated from the loans to NOL can also, to the extent the
      interest due on the discounted loan from Norsk Teekay exceeds any dividend
      income from Teekay Netherlands during the same year be offset by interest
      expense on TEHS’ discounted loan payable to Norsk Teekay. The deduction of
      interest expense on the discounted loan is subject to recapture in the future,
      as discussed below.





***Taxation
      of Potential Foreign Currency Exchange***  ***Net
      Gain.*** TEHS
      holds it accounts in Euros, while the loan to NOL is denominated in Norwegian
      Kroners. Regardless whether they are realized or unrealized, foreign currency
      exchange gains are fully taxable in Luxembourg to the extent they are reflected
      in the accounts (under Luxembourg GAAP). Foreign currency exchange losses are
      in
      principle deductible from the taxable base of TEHS under the same conditions.
      We
      minimized such foreign exchange exposure by having the loan from OPCO also
      Norwegian Kroner denominated and with the exact same terms and conditions (same
      principal amount and same effective date and maturity save for a differential
      in
      the interest rates leading to the small net interest income noted above) as
      the
      loan to NOL. Accordingly, we believe that the foreign exchange net gain on
      the
      loan from OPCO and on the loan to NOL should be minimized in
      Luxembourg.


32


***Taxation
      of Interest Payments.*** Luxembourg
      does not levy a withholding tax on interest paid to non-residents of Luxembourg,
      such as Norsk Teekay and OPCO, unless the interest represents a right to
      participate in profits of the interest-paying entity and the debt has certain
      other characteristics or the interest payment relates to the portion of debt
      used to acquire share capital, and the debt exceeds a Luxembourg “thin
      capitalization” threshold, or the interest rate is not regarded to be at arm’s
      length. We believe that the interest paid by TEHS on the types of loans made
      to
      it by Norsk Teekay and OPCO does not represent a right to participate in its
      profits and is consistent with Luxembourg transfer pricing rules. Furthermore,
      we have capitalized TEHS to meet the “thin capitalization” threshold.
      Accordingly, we believe that interest payments made by TEHS to Norsk Teekay
      and
      OPCO are not subject to Luxembourg withholding tax.





***Taxation
      of Dividends and Capital Gains.*** Pursuant
      to Luxembourg law, dividends received by TEHS from Teekay Netherlands and
      capital gains realized on any disposal of shares of Teekay Netherlands generally
      are exempt from Luxembourg taxation if the following requirements are
      met:





·  TEHS
      is a
      capital company resident in Luxembourg and fully subject to tax in this
      country;





·  TEHS
      owns
      more than 10% of Teekay Netherlands, or alternatively, TEHS’ acquisition price
      for the shares of Teekay Netherlands equals or exceeds Euro 1.2 million for
      purposes of the dividend exemption or Euro 6.0 million for purposes of the
      capital gains exemption;





·  At
      the
      time of the dividend or disposal of shares, TEHS has owned the shares for at
      least 12 months (or, alternatively in the case of dividends, TEHS commits
      to hold the shares for at least 12 months and in the case of capital gains,
      TEHS commits to continue to hold at least 10% of the shares of Teekay
      Netherlands for at least 12 months); and




· Teekay
      Netherlands is a resident of the Netherlands for Dutch tax purposes and is
      covered by the European Union Parent-Subsidiary Directive.





TEHS
      meets the ownership threshold and has owned the shares in Teekay Netherlands
      for
      at least 12 months. In addition, assuming that Teekay Netherlands is a
      resident of the Netherlands for Dutch tax purposes and is fully subject to
      the
      Dutch general corporate tax regime (even if it has subsidiaries that may be
      subject to special shipping regimes), we believe that Teekay Netherlands is
      covered by the European Union Parent-Subsidiary Directive. Therefore, we believe
      that any dividend received on or any capital gain resulting from the disposition
      of the shares of Teekay Netherlands will be exempt from taxation in
      Luxembourg.





Notwithstanding
      this exemption, Luxembourg law does not permit the deduction of interest expense
      on loans used to purchase shares eligible for the dividend and capital gain
      exemption noted above, to the extent of the dividend received. Similarly,
      capital gains, although generally eligible for the exemption discussed above,
      are subject to Luxembourg taxation to the extent of any such related interest
      expense that has been deducted from TEHS’ taxable income (such as the net
      interest income on loans to NOL), in the year of disposal and for any previous
      year the shares have been held.





We
      intend
      to operate TEHS such that it will not dispose of its shares in Teekay
      Netherlands. Accordingly, we believe that TEHS will not be subject to Luxembourg
      dividend or capital gains taxation, and, even if it were, it would only be
      affected to the extent of the recapture of interest deductions discussed
      above.





***Taxation
      of TEHS Dividends.*** Luxembourg
      levies a 20% withholding tax on dividends paid by a Luxembourg company to a
      non-EU resident, absent an Income Tax Treaty, which would apply to dividends
      paid by TEHS to Norsk Teekay. However, we currently do not expect to cause
      TEHS
      to pay dividends, but to distribute all of its available cash through the
      payment of interest and principal on its loans owing to Norsk Teekay and/or
      OPCO. In addition, under current Luxembourg tax rules, it is possible to
      releverage the Luxembourg operations with new debt, which would allow a new
      Luxco to continue to distribute all of its available cash through payments
      of
      interest and principal on the new debt.





***Net
      Wealth Tax.*** Luxembourg
      companies are also subject to a net wealth tax, which normally is based on
      the
      company’s net asset value. Capital stock held by a company that qualifies for
      the dividend and capital gains exemption discussed above are excluded from
      net
      asset value in calculating
      this tax. Liabilities related to shareholdings excluded from the net wealth
      tax
      are not deductible from other assets subject to the net wealth tax. Furthermore,
      cash amounts held on January 1 with respect to the payments of interest or
      dividends to TEHS are subject to the net wealth tax. The cash balance on the
      last closed financial statements is generally used to determine the cash amount.
      Because the shares of Teekay Netherlands and the discounted loan from Norsk
      Teekay should be excluded from the net asset value according to the above,
      and
      taking into account that the loan to NOL should be offset by corresponding
      loan
      from OPCO, Luxco should be required to pay a nominal amount of Luxembourg net
      wealth tax.





***Netherlands
      Taxation***





The
      following discussion is based upon the current tax laws of the Kingdom of the
      Netherlands and regulations, the Dutch tax administrative practice and judicial
      decisions thereunder, all as in effect as of the date of this Annual Report
      and
      subject to possible change on a retroactive basis. The following discussion
      is
      for general information purposes only and does not purport to be a comprehensive
      description of all of the Dutch income tax considerations applicable to
      us.





Teekay
      Netherlands is capitalized solely with equity from TEHS. Its only significant
      asset are the shares of Norsk Teekay AS, which is an intermediate holding
      company and is the direct or indirect parent of various operating subsidiaries
      in Norway and Singapore, including Teekay Norway AS, NOL and Teekay Offshore
      Loading Pte Ltd.





***Taxation
      of Dividends and Capital Gains.*** Pursuant
      to Dutch law, dividends received by Teekay Netherlands from Norsk Teekay AS
      and
      capital gains realized on any disposal of the shares of Norsk Teekay AS
      generally will be exempt from Dutch taxation (the *participation
      exemption* )
      if the
      following conditions are met:





·  Teekay
      Netherlands is a shareholder of at least 5.0% of the par value of the paid
      up
      share capital of Norsk Teekay AS;





·  Norsk
      Teekay AS is subject to Norwegian profits tax;


33


·  the
      shares are not held as stock in trade; and





·  the
      shares of Norsk Teekay AS are not held as a portfolio investment.




Since
      Norsk Teekay AS is an intermediate holding company that fulfills a key position
      between the activities of its parent companies and the activities of operational
      subsidiaries, the shares in Norsk Teekay AS are not deemed to be held as a
      portfolio investment. However, shares are deemed to be held as a portfolio
      investment if the subsidiary is mainly involved in passive group financing.
      If
      the activities of the subsidiaries of Teekay Netherlands consist mostly (more
      than 50.0%) of direct or indirect financing of related entities, or the
      financing of business assets of those entities, including providing for the
      use
      or right to use those assets, the shares of the subsidiaries will be considered
      a portfolio investment.





Teekay
      Netherlands meets the ownership threshold, and we currently expect that Teekay
      Netherlands will maintain its 100.0% ownership interest in Norsk Teekay AS
      for
      the foreseeable future. In addition, assuming that Norsk Teekay AS is a resident
      of Norway for Norwegian tax purposes, we expect Norsk Teekay AS to be fully
      subject to the Norwegian general corporate tax regime. In addition, we expect
      that the shares of Norsk Teekay AS will not be held as stock in trade or as
      a
      portfolio investment. Therefore, we believe that any dividend received on or
      any
      capital gain resulting from the disposition of the shares of Norsk Teekay AS
      should be exempt from taxation in the Netherlands.





Capital
      losses on a disposition of the shares of Norsk Teekay AS will not be tax
      deductible.





***Taxation
      of Teekay Netherlands Dividends.*** In
      general, the Netherlands levies a 25.0% withholding tax on dividends paid by
      a
      Dutch company. The withholding tax is reduced to zero if the dividend is paid
      by
      Teekay Netherlands to TEHS, if TEHS meets the conditions of the European Union
      Parent-Subsidiary Directive. The Directive requires that TEHS hold at least
      10.0% of the shares of Teekay Netherlands for at least one year before the
      dividend distribution. TEHS has owned the shares of Teekay Netherlands for
      at
      least 12 months. We currently expect that TEHS will maintain its 100.0%
      ownership interest in Teekay Netherlands for the foreseeable future. Therefore,
      we believe that Dutch withholding tax will not apply to dividends paid by Teekay
      Netherlands to TEHS. In addition, TEHS should not be liable to Dutch corporate
      income tax with regards to the dividends received.





***2007
      Tax Reform in the***  ***Netherlands.*** On
      November 28, 2006 the Dutch parliament passed the Corporate Income Tax 2007
      Bill, which became effective on January 1, 2007. This new legislation affects
      the participation exemption. Under the new law, the requirements for the
      participation exemption include;





·  Teekay
      Netherlands must be a shareholder of at least 5.0% of the par value of the
      paid
      up share capital of Norsk Teekay AS; and




· the
      shares in Norsk Teekay AS must not be considered a portfolio investment in
      a
      company that is not subject to an adequate profit tax.





Whether
      or not a shareholder’s interest in a company is a “portfolio investment” is
      determined by the consolidated assets of that company. If the consolidated
      assets are predominantly free portfolio investments or consist predominantly
      of
      assets used for group financing activities, the shares would in principle be
      considered a portfolio investment. Accordingly, the assessment of the activities
      of the subsidiaries (active or passive) would remain very significant. If the
      “activities test” were not met, the participation exemption would not apply to
      that entity, unless the profits of the entity were subjected to an adequate
      profit tax. The taxation would be considered adequate if the profits are taxed
      against an effective tax rate of at least 10.0% over a taxable base determined
      according to Dutch standards.





***Singapore
      Taxation***





***Taxation
      of Singapore Companies Operating Ships***  ***in
      International Traffic.*** TNOL
      was
      incorporated and is a tax resident in Singapore for Singapore tax
      purposes *.* We
      expect that TNOL will own and operate Singapore-registered ships as well as
      non-Singapore-registered ships. It will earn charter income from these ships
      which are expected to operate in international waters outside the limits of
      the
      port of Singapore.


***Taxation
          of Charter Income from Non-Singapore-Registered Ships.*** In
          respect of the charter income that TNOL earns from its non-Singapore-registered
          ships, they are currently exempt from Singapore tax under a tax incentive
          being
          enjoyed by TNOL. TNOL was conferred the Singapore Approved International
          Shipping (or *AIS* )
          status
          with effect from January 1, 2005. The AIS status was granted for an initial
          period of 10 years subject to a review at the end of the fifth year to
          ensure that TNOL has complied with the qualifying conditions of the incentive.
          At the end of the first 10 years, TNOL can apply for a further 10-year
          extension of the incentive.





Under
      Section 13F of the Singapore Income Tax Act and the terms of the AIS incentive
      approval letter from the Maritime Port Authority of Singapore (or *MPA* )
      dated
      January 26, 2006, the types of income that would qualify for tax exemption
      include:





·  charter
      hire/freight income from the operation of non-Singapore-registered vessels
      outside the limits of the port of Singapore;





·  dividends
      from approved shipping subsidiaries;




·  gains
      from the disposition of non-Singapore-registered ships for a period of
      5 years from January 1, 2004 to December 13, 2008;
      and





·
            foreign
                exchange, interest rate swaps and other derivative gains would be
                automatically regarded as tax exempt hedging gains for period of
                5 years from January 1 2004 to December 31,
                2008.





The
      AIS
      status awarded to TNOL is subject to TNOL meeting and continuing to meet the
      following conditions:





· be
      a tax
      resident in Singapore;





·  own
      and
      operate a significant fleet of ships;





· 
implement
      the business plan agreed
      with the MPA at the time of application of the incentive or such other modified
      plans as approved by the MPA;





34


·  the
      company’s shipping operations should be controlled and managed in Singapore;




·  incur
      directly attributable business spending in Singapore an average of S$4 million
      a
      year or S$20 million over a 5 year period;





·
            support
                and make significant use of Singapore’s trade infrastructure, such as
                banking, financial, business training, arbitration, and other ancillary
                services;





· 
all
      ships chartered-in must be
      conducted on an arm's-length basis;





· 
inform
      the MPA of any changes to its
      Group shareholdings and operations;





· 
keep
      proper books and records and
      submit annual audited accounts to the MPA, together with an annual audited
      statement comparing the actual total business spending in Singapore against
      the
      projected amount within 3 months of their completion; and





· 
disclose
      such information to and
      permit such inspection of its premises by the Singapore Government, as
      required.





TNOL
      intends to operate such that substantially all of its charter income will be
      exempt from Singapore tax under the AIS incentive. It also intends to operate
      and charter out all of its non-Singapore-registered ships in international
      waters outside the limits of the port of Singapore. On this basis, it expects
      that all of its income from the charter of its non-Singapore-registered ships
      should be exempt from Singapore tax under Section 13F of the Singapore Income
      Tax Act.





***Taxation
      of Investment Income.*** Any
      investment income earned by TNOL would be subject to the normal corporate tax
      rules. With respect to the interest income earned from deposits placed outside
      Singapore, the interest will be taxable in Singapore at the prevailing corporate
      tax rate (currently 20.0%) when received or deemed received in
      Singapore.





***Taxation
      of Ship Management Income.*** In
      addition to the above, since October 2006 TNOL has provided ship management
      services to related and third party companies. Income from such activities
      does
      not qualify for exemption under the AIS incentive. Accordingly, the income
      derived from these activities is subject to tax at the prevailing corporate
      tax
      rate of 20.0%.





***Australian
      Taxation***





The
      following discussion is based upon the current tax laws of Australia and
      regulations, the Australian tax administrative practice and judicial decisions
      thereunder, all as in effect as of the date of this Annual Report and subject
      to
      possible change on a retroactive basis. The following discussion is for general
      information purposes only and does not purport to be a comprehensive description
      of all Australian income tax considerations applicable to us. This discussion
      only considers Australia income tax.





OPCO
      will
      be treated as a company for Australian tax purposes. OPCO will be the
      beneficiary of a trust, not tax resident in Australia (or the *non-resident
      trust* )
      which
      will own and operate the *Karratha
      Spirit* vessel
      in Australian waters.





As
      a
      beneficiary of the non-resident trust, OPCO will be subject to Australian tax
      on
      the taxable income of the trust derived from Australian sources. Since the
      trust
      only operates one asset, the *Karratha
      Spirit* ,
      it is
      expected that all taxable income of the trust will have an Australian
      source.





Since,
      however, OPCO is not a resident of Australia, the trustee of the non-resident
      trust is required to pay the Australian tax due, on behalf of OPCO (the
      non-resident beneficiary). This is at 30.0% of the taxable income of the
      non-resident trust.


OPCO
          is
          required to file an Australian tax return disclosing the taxable income
          related
          to the trust and receives a credit for the tax paid by the trustee. Hence,
          no
          further Australian income tax should be due by OPCO. Generally, a non-resident
          trust will be taxable on its income attributable to its operations in Australia
          calculated under generally accepted accounting principles, as adjusted
          for tax
          purposes. Gross income will include capital gains, interest and realized
          foreign
          exchange gains and losses. Non-resident trusts are subject to capital gains
          on
          the disposition of different classes of assets, including those which are
          used
          to carry on a business in Australia, and land and buildings situated in
          Australia. Capital gains can be offset by any capital losses incurred in
          the
          current year, in addition to any carried forward capital losses. Net capital
          gains generated by a non-resident trust are taxed at the general corporate
          rate
          of 30.0%.





Generally,
      a non-resident trust is allowed to deduct the expenses it incurs in a taxation
      year, to the extent the expenses are incurred to earn the Australian sourced
      income. The Australian operations of the non-resident trust is partly financed
      by debt. As such, to the extent the interest expense is allocable to the
      Australian sourced income it should generate interest deductions, subject to
      thin capitalization restrictions.





Thin
      capitalization measures apply which limit the deductibility of interest
      expenditure incurred by non-resident trusts carrying on a business in Australia.
      The measures apply to the total debt of the Australian operations of
      multinational groups such that interest deductions are denied to the extent
      that
      borrowings exceed a safe harbor ratio or, alternatively, an arm’s length debt
      amount (as so calculated under the provisions of the Australian income tax
      legislation). Broadly, the safe harbor maximum amount of Australian debt for the
      Australian operations of a non-resident trust is 75.0% of the accounting book
      value of the assets of the Australian operation after being reduced by non-debt
      liabilities (calculated on an average basis).





***Taxation
      of Interest Paid in Respect of the***  ***Australian
      Operations.*** Australia
      levies withholding tax on interest paid to a non-resident where the interest
      relates to Australian operations. Therefore, any interest paid to non-residents
      will be subject to Australian withholding tax. Withholding tax is levied on
      payments of interest made to non residents, regardless of whether the interest
      deduction is allowed pursuant to other provisions of the Australian tax
      legislation. The withholding tax rate on interest is generally 10.0%, with
      the
      exception of certain interest payments to U.S. and U.K. resident financial
      institutions, whereby the rate is reduced to 0.0%.




35




**Item
      4A. Unresolved Staff Comments**





Not
      applicable.





**Item
      5. Operating and Financial Review and Prospects**





**Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations**





**General**





We
      are an
      international provider of marine transportation and storage services to the
      offshore oil industry. We were formed in August 2006 by Teekay Shipping
      Corporation, a leading provider for marine services to the global oil and
      natural gas industries, to further develop its operations in the offshore
      market.





Prior
      to
      the closing of our initial public offering in December 2006, Teekay Shipping
      Corporation contributed entities owning and operating a fleet of shuttle
      tankers, floating storage and offtake (or *FSO* )
      units
      and conventional oil tankers to Teekay Offshore Operating L.P. (or *OPCO* ).
      Upon
      the closing of our initial public offering, we acquired from Teekay Shipping
      Corporation a 26.0% interest in OPCO, including a 25.99% limited partner
      interest held by us and a 0.01% general partner interest held through our
      ownership of OPCO’s general partner, Teekay Offshore Operating GP L.L.C. Teekay
      Shipping Corporation owns the remaining 74.0% interest in OPCO. Our 26.0%
      interest in OPCO represents our only cash-generating asset. The historical
      results discussed below and what we refer to as “Teekay Offshore Partners
      Predecessor” are the results of the entities that were contributed to OPCO. As
      discussed below under “Items You Should Consider When Evaluating Our
      Results,” the entities contributed to OPCO do not own some of the assets and
      operations they owned during certain prior periods discussed below. References
      in this Management’s Discussion and Analysis of Financial Condition and Results
      of Operations to “OPCO” when used in a historical context refer to Teekay
      Offshore Partners Predecessor, and when used in the present tense or
      prospectively refer to OPCO and its subsidiaries.





Our
      growth strategy focuses on expanding our fleet of shuttle tankers and FSO units
      under long-term, fixed-rate time charters. We intend to continue our practice
      of
      acquiring shuttle tankers and FSO units as needed for approved projects only
      after the long-term charters for the projects have been awarded to us, rather
      than ordering vessels on a speculative basis. We intend to follow this same
      practice in acquiring floating production, storage and offloading (or *FPSO* )
      units,
      which produce and process oil offshore in addition to providing storage and
      offtake. We seek to capitalize on opportunities emerging from the global
      expansion of the offshore transportation, storage and production sectors by
      selectively targeting long-term, fixed-rate time charters. We may enter into
      joint ventures and partnerships with companies that may provide increased access
      to these opportunities or may engage in vessel or business acquisitions. We
      plan
      to leverage the expertise, relationships and reputation of Teekay Shipping
      Corporation and its affiliates to pursue these growth opportunities in the
      offshore sectors and may consider other opportunities to which our competitive
      strengths are well suited. We view our conventional tanker fleet primarily
      as a
      source of stable cash flow as we expand our offshore operations.





We
      manage
      our business and analyze and report our results of operations on the basis
      of
      the following three business segments:





***Shuttle
      Tanker Segment.*** OPCO’s
      shuttle tanker fleet consists of 36 vessels that operate under fixed-rate
      contracts of affreightment, time charters and bareboat charters. Of the 36
      shuttle tankers, 24 are owned (including five through joint ventures) and 12
      are
      chartered-in. These shuttle tankers provide transportation services to energy
      companies, primarily in the North Sea and Brazil. During 2006 and 2005, this
      segment generated 72.9% and 61.2%, respectively, of our total net voyage
      revenues.




***FSO
      Segment.*** OPCO
      owns
      four FSO units, of which three operate under fixed-rate time charters and one
      operates under a fixed-rate bareboat charter. FSO units provide an on-site
      storage solution to oil field installations that have no oil storage facilities
      or that require supplemental storage. During 2006 and 2005, this segment
      generated 3.5% and 3.2%, respectively, of our total net voyage
      revenues.





***Conventional
      Tanker Segment.*** OPCO
      owns
      nine Aframax-class conventional crude oil tankers, all of which operate under
      fixed-rate time charters with Teekay Shipping Corporation. During 2006 and
      2005,
      this segment generated 23.6% and 35.6%, respectively, of total net voyage
      revenues.





**Our
      Initial Public Offering**





On
      December 19, 2006, we completed our initial public offering (or the *Offering* )
      of 8.05
      million common units at a price of $21.00 per unit. The net proceeds from the
      offering were $155.3 million. The Offering included 1.05 million common units
      sold to the underwriters in connection with the exercise of their over-allotment
      option. We used the net proceeds to repay a $134.6 million promissory to Teekay
      Shipping Corporation and to redeem 1.05 million common units from Teekay
      Shipping Corporation for $20.6 million.





**Potential
      Additional FPSO, FSO and Shuttle Tanker Projects**





In
      September and October 2006, Teekay Shipping Corporation, acquired a 64.5%
      interest in Petrojarl ASA and named it Teekay Petrojarl (or *Petrojarl* ).
      Petrojarl is one of the largest independent FPSO operators in the North Sea
      and
      deployed the first FPSO in the North Sea in 1986. Pursuant to an omnibus
      agreement we entered into in connection with the Offering, Teekay Shipping
      Corporation is obligated to offer to us (a) its interest in certain future
      FPSO
      and FSO projects it may undertake with Petrojarl and (b) if Teekay Shipping
      Corporation obtains 100% ownership of Petrojarl, existing FPSO units owned
      by
      Petrojarl.


36


We
      also
      have the opportunity to directly acquire three vessels from Teekay Shipping
      Corporation by the second quarter of 2008. Pursuant to the omnibus agreement,
      Teekay Shipping Corporation is obligated to offer to us two shuttle tankers,
      each currently undergoing conversion, and one FSO unit currently being upgraded.
      The two shuttle tankers will operate under 13-year bareboat charters with
      Petróleo Brasileiro S.A. (or *Petrobras* )
      and the
      FSO unit will operate under a seven-year time charter with a consortium of
      energy companies. If we elect to acquire any of these vessels, the purchase
      price will be the vessel’s fair market value, as agreed by Teekay Shipping
      Corporation and the conflicts committee of our general partner’s Board of
      Directors, plus the cost of converting the vessel prior to delivery. Teekay
      Shipping Corporation will be obligated to offer to us certain other shuttle
      tankers, FSO units and FPSO units it may acquire in the future. Please read
      item
      7- Major Unitholders and Related Party Transactions.


***OPCO’s
      Contracts of Affreightment and Charters***





OPCO
      generates revenues by charging customers for the transportation and storage
      of
      their crude oil using OPCO’s vessels. Historically, these services generally
      have been provided under the following basic types of contractual
      relationships:





·  *Contracts
      of affreightment* ,
      whereby
      OPCO carries an agreed quantity of cargo for a customer over a specified trade
      route within a given period of time;





·  *Time
      charters* ,
      whereby
      vessels OPCO operates and is responsible for crewing are chartered to customers
      for a fixed period of time at rates that are generally fixed, but may contain
      a
      variable component based on inflation, interest rates or current market
      rates;





·  *Bareboat
      charters* ,
      whereby
      customers charter vessels for a fixed period of time at rates that are generally
      fixed, but the customers operate the vessels with their own
      crews; and





·  *Voyage
      charters* ,
      which
      are charters for shorter intervals that are priced on a current, or “spot,”
market rate.





The
      table
      below illustrates the primary distinctions among these types of charters and
      contracts:





**Contract
                of**
              **Affreightment**
            
            **Time
                Charter**
            
            **Bareboat
                Charter**
            
            **Voyage
                Charter (1)**Typical
                contract length
            
            
            One
                year or more
            
            
            One
                year or more
            
            
            One
                year or more
            
            
            Single
                voyageHire
                rate basis(2)
            
            
            Typically
                daily
            
            
            Daily
            
            
            Daily
            
            
            VariesVoyage
                expenses(3)
            
            
            OPCO
                pays
            
            
            Customer
                pays
            
            
            Customer
                pays
            
            
            OPCO
                paysVessel
                operating expenses(3)
            
            
            OPCO
                pays
            
            
            OPCO
                pays
            
            
            Customer
                pays
            
            
            OPCO
                paysOff-hire
                (4)
            
            
            Customer
                typically does not pay
            
            
            Varies
            
            
            Customer
                typically pays
            
            
            Customer
                does not pay


__________





(1)  Under
      a
      consecutive voyage charter, the customer pays for idle time.





(2)  *“Hire”* rate
      refers to the basic payment from the charterer for the use of the
      vessel.





(3)  Defined
      below under “Important Financial and Operational Terms and Concepts.”





(4)  *“Off-hire”* refers
      to
      the time a vessel is not available for service.





**Important
      Financial and Operational Terms and Concepts**





We
      use a
      variety of financial and operational terms and concepts. These include the
      following:


***Voyage
        Revenues.*** Voyage
        revenues primarily include revenues from contracts of affreightment, time
        charters, bareboat charters and voyage charters. Voyage revenues are affected
        by
        hire rates and the number of days a vessel operates. Voyage revenues are
        also
        affected by the mix of business between contracts of affreightment, time
        charters, bareboat charters and voyage charters. Hire rates for voyage charters
        are more volatile, as they are typically tied to prevailing market rates
        at the
        time of a voyage.





***Voyage
      Expenses.*** Voyage
      expenses are all expenses unique to a particular voyage, including any bunker
      fuel expenses, port fees, cargo loading and unloading expenses, canal tolls,
      agency fees and commissions. Voyage expenses are typically paid by the customer
      under time charters and bareboat charters and by the shipowner under voyage
      charters and contracts of affreightment. When OPCO pays voyage expenses, they
      typically are added to the hire rates at an approximate cost.





***Net
      Voyage Revenues.*** Net
      voyage revenues represent voyage revenues less voyage expenses incurred by
      OPCO.
      Because the amount of voyage expenses OPCO incurs for a particular charter
      depends upon the type of charter, we use net voyage revenues to improve the
      comparability between periods of reported revenues that are generated by the
      different types of charters. We principally use net voyage revenues, a non-GAAP
      financial measure, because it provides more meaningful information to us about
      the deployment of our vessels and their performance than voyage revenues, the
      most directly comparable financial measure under accounting principles generally
      accepted in the United States (or *GAAP* ).





***Vessel
      Operating Expenses.*** Under
      all
      types of charters except for bareboat charters, the shipowner is responsible
      for
      vessel operating expenses, which include crewing, repairs and maintenance,
      insurance, stores, lube oils and communication expenses. The two largest
      components of OPCO’s vessel operating expenses are crews and repairs and
      maintenance.





Expenses
      for repairs and maintenance tend to fluctuate from period to period because
      most
      repairs and maintenance typically occur during periodic drydockings. Please
      read
“Drydocking” below. We expect these expenses to increase as the fleet matures
      and expands, particularly to the extent we acquire vessels directly through
      our
      wholly owned subsidiaries rather than through OPCO.





***Time
      Charter Hire Expenses.*** Time
      charter hire expenses represent the cost to charter-in a vessel for a fixed
      period of time.


37


***Income
      from Vessel Operations.*** To
      assist
      us in evaluating operations by segment, we sometimes analyze the income OPCO
      receives from each segment after deducting operating expenses, but prior to
      the
      deduction of interest expense, taxes, foreign currency exchange gains and losses
      and other income and losses.




***Drydocking.*** OPCO
      must
      periodically drydock each of its shuttle tankers and conventional oil tankers
      for inspection, repairs and maintenance and any modifications to comply with
      industry certification or governmental requirements. OPCO may drydock FSO units
      if it desires to qualify them for shipping classification. Generally, each
      shuttle tanker and conventional oil tanker is drydocked every two and a half
      to
      five years, depending upon the type of vessel and its age. We capitalize a
      substantial portion of the costs incurred during drydocking and amortize those
      costs on a straight-line basis from the completion of a drydocking to the
      estimated completion of the next drydocking. We expense as incurred costs for
      routine repairs and maintenance performed during drydocking that do not improve
      or extend the useful lives of the assets. The number of drydockings undertaken
      in a given period and the nature of the work performed determine the level
      of
      drydocking expenditures.





***Depreciation
      and Amortization.*** Depreciation
      and amortization expense typically consists of:





·  charges
      related to the depreciation of the historical cost of OPCO’s fleet (less an
      estimated residual value) over the estimated useful lives of the
      vessels;





·  charges
      related to the amortization of drydocking expenditures over the estimated number
      of years to the next scheduled drydocking; and





·  charges
      related to the amortization of the fair value of contracts of affreightment
      where amounts have been attributed to those items in acquisitions; these amounts
      are amortized over the period the asset is expected to contribute to future
      cash
      flows.





***Time
      Charter Equivalent Rates.*** Bulk
      shipping industry freight rates are commonly measured in the shipping industry
      at the net voyage revenues level in terms of “time charter equivalent” (or *TCE* )
      rates,
      which represent net voyage revenues divided by revenue days.





***Revenue
      Days.*** Revenue
      days are the total number of calendar days OPCO’s vessels were in its possession
      during a period, less the total number of off-hire days during the period
      associated with major repairs, or drydockings. Consequently, revenue days
      represent the total number of days available for the vessel to earn revenue.
      Idle days, which are days when the vessel is available to earn revenue, yet
      is
      not employed, are included in revenue days. We use revenue days to show changes
      in net voyage revenues between periods.





***Average
      Number of Ships.*** Historical
      average number of ships consists of the average number of owned (excluding
      vessels owned by OPCO’s five 50%-owned joint ventures) and chartered-in vessels
      that were in OPCO’s possession during a period. Following the closing of our
      initial public offering, average number of ships consists of the average number
      of chartered-in and owned vessels (including vessels owned by five of OPCO’s
      50%-owned joint ventures, as OPCO obtained control of these joint ventures
      as of
      December 1, 2006) that are in OPCO’s possession during the periods. We use
      average number of ships primarily to highlight changes in vessel operating
      expenses, time charter hire expense and depreciation and
      amortization.





***VOC
      Equipment.*** We
      assemble, install, operate and lease equipment that reduces volatile organic
      compound emissions (or *VOC
      Equipment* )
      during
      loading, transportation and storage of oil and oil products. Leasing of the
      VOC
      Equipment is accounted for as a direct financing lease, with lease payments
      received being allocated between the net investment in the lease and other
      income using the effective interest method so as to produce a constant periodic
      rate of return over the lease term.





**Seasonality**


Historically,
        the utilization of shuttle tankers in the North Sea is higher in the winter
        months, as favorable weather conditions in the summer months provide
        opportunities for repairs and maintenance to the offshore oil platforms.
        Downtime for repairs and maintenance generally reduces oil production and,
        thus,
        transportation requirements. OPCO generally has not experienced seasonality
        in
        its FSO and conventional tanker segments.





**Items You
      Should Consider When Evaluating Our Results**





You
      should consider the following factors when evaluating our historical financial
      performance and assessing our future prospects:





·
            ***Our
                cash flow will be reduced by distributions on Teekay
                Shipping******Corporation’s
                interest in OPCO.***Following
                the closing of our initial public offering, Teekay Shipping Corporation
                has a 74% limited partner interest in OPCO. OPCO’s partnership agreement
                requires it to distribute all of its available cash each quarter.
                In
                determining the amount of cash available for distribution, the Board
                of
                Directors of our general partner must approve the amount of cash
                reserves
                to be set aside, including reserves for future maintenance capital
                expenditures, working capital and other matters. Distributions to
                Teekay
                Shipping Corporation will reduce our cash flow compared to historical
                results.





·
            ***On
                July 1, 2006, OPCO transferred certain assets to Teekay
                Shipping******Corporation
                that are included in historical results of operations.***On
                July 1, 2006, prior to our initial public offering, OPCO transferred
                to Teekay Shipping Corporation a subsidiary of Norsk Teekay Holdings
                Ltd.
                (Navion Shipping Ltd.) that chartered-in approximately 25 conventional
                tankers since 2004 and subsequently time-chartered the vessels back
                to
                Teekay Shipping Corporation at charter rates that provided for a
                1.25%
                fixed profit margin. In addition, OPCO transferred to Teekay Shipping
                Corporation a 1987-built shuttle tanker (the*Nordic
                Trym*),
                OPCO’s single anchor loading equipment, a 1992-built in-chartered shuttle
                tanker (the*Borga*)
                and a 50% interest in Alta Shipping S.A., which has no material assets
                (collectively with Navion Shipping Ltd., the*Non-OPCO**Assets*).
                During 2006 and 2005, the Non-OPCO Assets accounted for approximately
                14.3% and 31.3%, respectively, of OPCO’s net voyage revenues.




38


·
            ***Amendments
                to OPCO’s joint venture agreements have resulted in
                five*** ***50%-owned joint venture companies
                being consolidated with us under GAAP.***Our historical
                results of operations prior to December 1, 2006 reflect OPCO’s investment
                in five 50%-owned joint venture companies, accounted for using the
                equity
                method, whereby the investment is carried at the original cost plus
                OPCO’s
                proportionate share of undistributed earnings. On December 1, 2006,
                the
                operating agreements for these joint ventures were amended such that
                OPCO
                obtained control of these joint ventures, resulting in the consolidation
                of these five joint venture companies in accordance with GAAP. Although
                our net income will not change due to this change in accounting,
                the
                results of the joint ventures are reflected in our income from operations,
                commencing December 1, 2006. This change also resulted in the five
                shuttle
                tankers owned by these joint ventures to be included in the number
                of
                vessels in OPCO’s owned fleet as at December 31, 2006.


·
            ***The
                size of OPCO’s fleet continues to change.***Our
                historical results of operations reflect changes in the size and
                composition of OPCO’s fleet due to certain vessel deliveries and vessel
                dispositions. For instance, in addition to the decrease in chartered-in
                vessels associated with the transfer of Navion Shipping Ltd. described
                above, the average number of owned vessels in OPCO’s shuttle tanker fleet
                decreased from 22.2 in 2005 to 20.7 in 2006. In addition, the*Navion
                Saga*is
                being converted from a conventional oil tanker to an FSO unit. When
                it
                commences operations as an FSO unit, scheduled for the second quarter
                of
                2007, OPCO’s FSO fleet will include four vessels, compared to three during
                recent years. Please read “— Results of Operations” below for further
                details about vessel dispositions and deliveries. Due to the nature
                of our
                business, we expect our fleet to continue to fluctuate in size and
                composition.




·
            ***Our
                financial results of operations reflect different time charter terms
                for
                OPCO’s nine conventional tankers.***On
                October 1, 2006, OPCO entered into new fixed-rate time charters with
                a
                subsidiary of Teekay Shipping Corporation for OPCO’s nine conventional
                tankers at rates we believe are market-based charter rates. Please
                read
                item 18 - Financial Statements: Note 11 “Related Party Transactions”. At
                various times during the previous three years, eight of these nine
                conventional tankers were employed on time charters with the same
                subsidiary of Teekay Shipping Corporation. However, the charter rates
                were
                generally lower than market-based charter rates, as they were based
                on the
                cash flow requirements of each vessel, which included operating expenses,
                loan principal and interest payments and drydock expenditures. A
                ninth
                conventional tanker was employed on voyage charters. The new fixed-rate
                time charters have increased our voyage revenues as well as provided
                more
                stable voyage revenues for these
                vessels.





·
            ***Our
                financial results of operations are affected by fluctuations in
                currency******exchange
                rates***.
                Prior to the closing of our initial public offering, OPCO settled
                its
                foreign currency denominated advances. In October 2006, Teekay Shipping
                Corporation loaned 5.6 billion Norwegian Kroner ($863.0 million)
                to a
                subsidiary of OPCO primarily for the purchase of eight Aframax-class
                conventional crude oil tankers from Teekay Shipping Corporation.
                Immediately preceding the initial public offering, this interest-bearing
                loan was sold to OPCO. Under U.S. GAAP, all foreign
                currency-denominated monetary assets and liabilities, such as cash
                and
                cash equivalents, accounts receivable, accounts payable, advances
                from
                affiliates and deferred income taxes are revalued and reported based
                on
                the prevailing exchange rate at the end of the period. Most of our
                historical foreign currency gains and losses prior to our initial
                public
                offering are attributable to this revaluation in respect of our foreign
                currency denominated advances from affiliates. In addition, a substantial
                majority of OPCO’s crewing expenses historically have been denominated in
                Norwegian Kroners, which is primarily a function of the nationality
                of the
                crew. Fluctuations in the Norwegian Kroner relative to the
                U.S. Dollar have caused fluctuations in operating results. Prior to
                our initial public offering, OPCO entered into new services agreements
                with subsidiaries of Teekay Shipping Corporation whereby the subsidiaries
                operate and crew the vessels. Under these service agreements, OPCO
                pays
                all vessel operating expenses in U.S. Dollars, and will not be
                subject to currency exchange fluctuations until 2009. Beginning in
                2009,
                payments under the service agreements will adjust to reflect any
                change in
                Teekay Shipping Corporation’s cost of providing services based on
                fluctuations in the value of the Kroner relative to the U.S. Dollar.
                We may seek to hedge this currency fluctuation risk in the future.





·
            ***We
                will incur additional general and administrative expenses.***Prior
                to the closing of our initial public offering, we, OPCO and certain
                of its
                subsidiaries entered into services agreements with subsidiaries of
                Teekay
                Shipping Corporation, pursuant to which those subsidiaries provide
                certain
                services, including strategic consulting, advisory, ship management,
                technical and administrative services. Our cost for these services
                depends
                on the amount and types of services provided during each period.
                The
                services are valued at an arm’s-length rate that will include
                reimbursement of reasonable direct or indirect expenses incurred
                to
                provide the services. We also reimburse our general partner for all
                expenses it incurs on our behalf, including CEO/CFO compensation
                and
                expenses relating to its Board of Directors, including compensation,
                travel and liability insurance costs. We may also grant equity
                compensation that would result in an expense to us. In addition,
                since our
                initial public offering on December 18, 2006, we have begun to incur
                expenses as a result of being a publicly-traded limited partnership,
                including costs associated with annual reports to unitholders and
                SEC
                filings, investor relations, NYSE annual listing fees and tax compliance
                expenses.


**Results
        of Operations**





In
      accordance with GAAP, we report gross voyage revenues in our income statements
      and include voyage expenses among our operating expenses. However, shipowners
      base economic decisions regarding the deployment of their vessels upon
      anticipated TCE rates, and industry analysts typically measure bulk shipping
      freight rates in terms of TCE rates. This is because under time charters and
      bareboat charters the customer usually pays the voyage expenses, while under
      voyage charters and contracts of affreightment the shipowner usually pays the
      voyage expenses, which typically are added to the hire rate at an approximate
      cost. Accordingly, the discussion of revenue below focuses on net voyage
      revenues ( *i.e.* voyage
      revenues less voyage expenses) and TCE rates of our three reportable segments
      where applicable.


39


The
      following tables present our operating results by reportable segment for 2006,
      2005 and 2004, and compare our net voyage revenues, a non-GAAP financial
      measure, for those periods to voyage revenues, the most directly comparable
      GAAP
      financial measure. For ease of comparison in the following tables and the
      discussion below, we have combined our results of the various time periods
      set
      forth in our consolidated statements of income (loss).





**2006**
            
            **2005**
            
            **2004****Shuttle
                Tanker Segment**
            
            **Conventional
                Tanker Segment**
            
            **FSO
                Segment**
            
            **Total**
            
            **Shuttle
                Tanker Segment**
            
            **Conventional
                Tanker Segment**
            
            **FSO
                Segment**
            
            **Total**
            
            **Shuttle
                Tanker Segment**
            
            **Conventional
                Tanker Segment**
            
            **FSO
                Segment**
            
            **Total****($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**
            
            **($000s)**Voyage
                revenues
            
            
            535,972
            
            
            150,070
            
            
            22,650
            
            
            708,692
            
            
            516,758
            
            
            266,593
            
            
            24,197
            
            
            807,548
            
            
            550,445
            
            
            411,181
            
            
            24,878
            
            
            986,504Voyage
                expenses
            
            
            88,446
            
            
            4,892
            
            
            1,085
            
            
            94,423
            
            
            68,308
            
            
            5,419
            
            
            816
            
            
            74,543
            
            
            69,362
            
            
            49,457
            
            
            -
            
            
            118,819Net
                voyage revenues
            
            
            447,526
            
            
            145,178
            
            
            21,565
            
            
            614,269
            
            
            448,450
            
            
            261,174
            
            
            23,381
            
            
            733,005
            
            
            481,083
            
            
            361,724
            
            
            24,878
            
            
            867,685Vessel
                operatingexpenses
            
            80,307
            
            
            19,378
            
            
            6,713
            
            
            106,398
            
            
            75,196
            
            
            22,679
            
            
            6,600
            
            
            104,475
            
            
            76,197
            
            
            22,790
            
            
            6,608
            
            
            105,595Time
                charter hireexpense
            
            165,614
            
            
            79,338
            
            
            -
            
            
            244,952
            
            
            169,687
            
            
            203,849
            
            
            -
            
            
            373,536
            
            
            177,576
            
            
            194,873
            
            
            -
            
            
            372,449Depreciation
                andamortization
            71,367
            
            
            21,212
            
            
            9,443
            
            
            102,022
            
            
            77,083
            
            
            21,112
            
            
            9,347
            
            
            107,542
            
            
            89,593
            
            
            20,561
            
            
            8,306
            
            
            118,460General
                andadministrative(1)
            51,921
            
            
            18,886
            
            
            1,709
            
            
            72,516
            
            
            55,010
            
            
            29,026
            
            
            1,820
            
            
            85,856
            
            
            45,403
            
            
            19,097
            
            
            1,319
            
            
            65,819Vessels
                andequipment
              writedown
                and(gain)
                loss
              on
                saleof
                vessels
            
            (4,778
            )
            
            -
            
            
            -
            
            
            (4,778
            )
            
            2,820
            
            
            -
            
            
            -
            
            
            2,820
            
            
            (3,725
            )
            
            -
            
            
            -
            
            
            (3,725
            )Restructuring
                charge
            
            
            -
            
            
            832
            
            
            -
            
            
            832
            
            
            955
            
            
            -
            
            
            -
            
            
            955
            
            
            -
            
            
            -
            
            
            -
            
            
            -Income
                (loss) from
              vessel
                operations
            
            
            83,095
            
            
            5,532
            
            
            3,700
            
            
            92,327
            
            
            67,699
            
            
            (15,492
            )
            
            5,614
            
            
            57,821
            
            
            96,039
            
            
            104,403
            
            
            8,645
            
            
            209,087





(1)  Includes
      direct general and administrative expenses and indirect general and
      administrative expenses (allocated to each segment based on estimated use of
      corporate resources).





**Year
      Ended December 31, 2006 versus Year Ended December 31,
      2005**





***Shuttle
      Tanker Segment***





The
      following table provides a summary of the changes in the average number of
      ships
      owned and chartered-in for the shuttle tanker segment:


**2006**
              (Average
                Number of Ships)
            **2005**
              (Average
                Number of Ships)
            **Percentage
                Change**
              (%)Owned
                Vessels
            20.7
            22.2
            (6.8)%Chartered-in
                Vessels
            13.2
            13.6
            (2.9)Total
            33.9
            35.8
            (5.3)%





The
      average size of the shuttle tanker fleet (including vessels chartered-in)
      decreased in 2006 compared to 2005. This decrease was primarily the result
      of:





·
            the
                sale of two older shuttle tankers in March and October 2005, respectively
                (collectively, the*2005 Shuttle Tanker Dispositions*);





·
            the
                redelivery of one chartered-in vessel back to its owner in April
                2006;





·
            the
                sale of a 1981-built shuttle tanker (the*Nordic
                Laurita*)
                in July 2006 (or the*2006 Shuttle Tanker Disposition*);
                and





·
            the
                sale in July 2006 of a time charter-in contract for a 1992-built
                in-chartered shuttle tanker (the*Borga*)
                and the sale in November 2006 of a 1987-built shuttle tanker (the*Nordic
                Trym*)
                to Teekay Shipping Corporation;





partially
      offset by





·
            the
                inclusion of two additional chartered-in vessels commencing May and
                June
                2005.





In
      addition, during March 2005 OPCO sold and leased back an older shuttle tanker.
      This had the effect of increasing the average number of chartered-in vessels
      and
      decreasing the average number of owned vessels during 2006 compared to
      2005.





***Net
      Voyage Revenues.*** Net
      voyage revenues decreased slightly to $447.5 million for 2006, from
      $448.5 million for 2005, primarily due to:




·
            a
                decrease of $5.9 million from the 2005 Shuttle Tanker Dispositions;


·
            a
                decrease of $4.5 million due to an extended drydocking of the*Nordic
                Trym*during
                the second half of 2006;





·
            a
                decrease of $3.2 million from the redelivery of one chartered-in
                vessel to
                its owner in April 2006; and





·
            a
                decrease of $2.2 million from the 2006 Shuttle Tanker Disposition;


40


partially
      offset by




·
            an
                  increase of $5.4 million from the2006transfer
                  ofexcess
                  capacitycertainofourshuttle
                  tankers servicing contracts of affreightment(due
                  to a decline in oil production at mature oil fields in the North
                  Sea)to
                  short-term time-charter contractsduring 2006 and earning,
                  which hadhigheraveragerates;





·
            an
                increase of $4.9 million due to the renewal of three vessels on time
                charter at higher daily rates during
                2006;





·
            an
                increase of $3.8 million due to the change in accounting treatment
                for the five vessels owned by OPCO’s 50%-owned joint ventures. On December
                1, 2006, the operating agreements for these joint ventures were amended,
                resulting in OPCO obtaining control of these joint ventures and
                consequently, OPCO has consolidated these entities effective December
                1,
                2006; and





·
            an
                increase of $1.5 million due to adjustments to certain daily charter
                rates based on increases from rising interest rates in accordance
                with the
                bareboat charters for certain shuttle
                tankers.





***Vessel
      Operating Expenses.*** Vessel
      operating expenses increased by 6.8% to $80.3 million for 2006, from
      $75.2 million for 2005, primarily due to:





·
            an
                increase of $5.8 million in increased salaries for crew and officers
                primarily due to a change in crew composition on one vessel upon
                the
                commencement of a new short-term time charter contract in 2005, a
                one-time
                bonus payment and general wage
                escalations;





·
            a
                total increase of $1.5 million relating to repairs and maintenance
                for certain vessels during 2006 and an increase in the cost of lubricants
                as a result of higher crude oil costs;
                and





·
            an
                increase of $1.2 million from the consolidation of the five shuttle
                tankers owned by OPCO’s 50%-owned joint ventures as of December 1,
                2006;





partially
      offset by





·
            a
                decrease of $2.8 million from the 2005 Shuttle Tanker Dispositions.





***Time-Charter
      Hire Expense.*** Time-charter
      hire expense decreased by 2.4% to $165.6 million for 2006, from
      $169.7 million for 2005, primarily due to:





·
            the
                2.9% decrease in the average number of vessels chartered-in;





partially
      offset by





·
            a
                slight increase in the average per day time-charter hire expense
                to
                $34,329 for 2006, from $34,190 for
                2005.





***Depreciation
      and Amortization.*** Depreciation
      and amortization expense decreased 7.4% to $71.4 million for 2006, from
      $77.1 million for 2005, primarily due to:





·
            a
                decrease of $4.3 million relating to the 2006 Shuttle Tanker
                Dispositions and the 2005 Shuttle Tanker Dispositions, the sale of
                the*Nordic
                Trym*in
                November 2006 and the sale and leaseback of one shuttle tanker in
                March
                2005;





·
            a
                  decrease of $2.8 million relating to a reduction in amortization from
                  the expiration during 2005 of two contracts of affreightment anddeclines
                  in projected revenue to be earnedfromour
                  remainingthecontracts
                  of affreightment.
                  Our contracts of affreightment, which wereacquired as part of the purchase of Navion AS in 2003,whicharebeingamortized
                  over their respective lives, with the amount amortized each year
                  being
                  weighted based on the projected revenue to be earned under the
                  contracts;
                  and





·
            a
                decrease of $0.4 million relating to a $12.2 million write-down
                during 2005 of the carrying value of certain offshore equipment servicing
                a marginal oil field that was prematurely shut down due to lower
                than
                expected oil production;





partially
      offset by





·
            an
                increase of $1.2 million due to the consolidation of the five shuttle
                tankers owned by OPCO’s 50%-owned joint ventures as of December 1,
                2006.





Depreciation
      and amortization expense included amortization of drydocking costs of
      $5.1 million for 2006 compared to $5.9 million for 2005, and included
      amortization of contracts of $12.1 million for 2006 compared to
      $14.8 million in 2005.


41


***Vessel
      and Equipment Writedowns and Gain (Loss)***  ***on
      Sale of Vessels.*** Vessel
      and equipment writedowns and gain (loss) on sale of vessels for 2006 was a
      net
      gain of $4.8 million, which was comprised primarily of:





·
            a
                $6.4 million gain relating to the 2006 Shuttle Tanker Disposition;
                and





·
            $0.5 million
                of amortization of a deferred gain on the sale and leaseback of an
                older
                shuttle tanker in March 2005;





partially
      offset by





·
            a
                $2.2 million writedown of certain offshore equipment servicing a
                marginal oil field that was prematurely shut down in June 2005 due
                to
                lower than expected oil production. This writedown occurred due to
                a
                reassessment of the estimated net realizable value of the equipment
                and
                follows a $12.2 million writedown in 2005 arising from the early
                termination of a contract for the equipment (some of this equipment
                was
                re-deployed on another field in October
                2005).




Vessel
      and equipment writedowns and gain (loss) on sale of vessels for 2005 was a
      net loss of $2.8 million, which was comprised of:





·
            a
                $12.2 million write-down from the previously mentioned offshore
                equipment;





partially
      offset by





·
            a
                $9.1 million gain on the 2005 Shuttle Tanker Dispositions; and





·
            $0.3 million
                of amortization of a deferred gain relating to the sale and leaseback
                of
                an older shuttle tanker in March
                2005.





***Restructuring
      Charges.*** Restructuring
      charges of $1.0 million in 2005 relate to the closure of our Sandefjord,
      Norway office. OPCO incurred no restructuring charges in 2006 in the shuttle
      tanker segment.





***Conventional
      Tanker Segment***





The
      following table provides a summary of the changes in the average number of
      ships
      owned and chartered-in for the conventional tanker segment:





**2006**
              (Average
                Number of Ships)
            **2005**
              (Average
                Number of Ships)
            **Percentage
                Change**
              (%)Owned
                Vessels
            10.0
            10.5
            (4.8)%Chartered-in
                Vessels
            12.0
            30.7
            (60.9)Total
            22.0
            41.2
            (46.6)%





The
      average size of the conventional crude oil tanker fleet (including vessels
      chartered-in) decreased in 2006 compared to 2005. This decrease was primarily
      the result of:





·
            the
                sale of a 2000-built liquid petroleum gas carrier (the*Dania
                Spirit*)
                to a subsidiary of Teekay Shipping Corporation in June 2005 (orthe*2005
                Conventional Tanker Disposition*);
                and





·
            the
                sale of Navion Shipping Ltd. to Teekay Shipping Corporation during
                July
                2006.





Navion
      Shipping Ltd. chartered-in approximately 25 conventional tankers since 2004
      and
      subsequently time-chartered the vessels back to Teekay Shipping Corporation
      at
      charter rates that provided for a 1.25% fixed profit margin in July
      2006.





***Net
      Voyage Revenues.*** Net
      voyage revenues decreased 44.4% to $145.2 million for 2006, from
      $261.2 million for 2005, primarily due to:





·
            a
                decrease of $129.1 million from the sale of Navion Shipping Ltd.;
                and





·
            a
                decrease of $2.4 million relating to the 2005 Conventional Tanker
                Disposition;




partially
      offset by




·
            an
                  increase of $15.5 million relating to an increase in the hire rate
                  earned by nine owned conventional tankers on time charters with
                  a
                  subsidiary of Teekay Shipping Corporation. Please read*Items
                  You Should Consider When Evaluating Our Results - Our financial
                  results of
                  operations reflect different time charter terms for OPCO’s nine
                  conventional tankers*.




***Vessel
      Operating Expenses.*** Vessel
      operating expenses decreased 14.5% to $19.4 million for 2006, from $22.7
      million for 2005, primarily due to:





·
            a
                $2.3 million decrease relating to one of our conventional tankers,
                which
                was on a time-charter contract during 2005 and the first half of
                2006 and
                on a bareboat contract during the second half of 2006 with a subsidiary
                of
                Teekay Shipping Corporation; and




·
            a
                $1.1 million decrease due to the 2005 Conventional Tanker Disposition.





***Time-Charter
      Hire Expense.*** Time-charter
      hire expense decreased 61.1% to $79.3 million for 2006, from
      $203.8 million for 2005, due to the sale of Navion Shipping Ltd to Teekay
      Shipping Corporation in July 2006.


42
 ***Depreciation
        and Amortization.*** Depreciation
        and amortization expense increased slightly to $21.2 million for 2006, from
        $21.1 million for 2005, primarily due to:





·
            an
                increase of $0.9 million in the amortization of drydock expenditures
                incurred during 2006 and 2005;





partially
      offset by





·
            a
                decrease of $0.6 million relating to the 2005 Conventional Tanker
                Disposition.





Depreciation
      and amortization expense included amortization of drydocking costs of
      $2.8 million for 2006 compared to $1.9 million in 2005.





***Restructuring
      Charges.*** Restructuring
      charges of $0.8 million in 2006 relate to the relocation of certain
      operational functions to Singapore.




***FSO
      Segment***





The
      following table provides a summary of the changes in the average number of
      ships
      for the FSO segment.





**2006**
              (Average
                Number of Ships)
            **2005**
              (Average
                Number of Ships)
            **Percentage
                Change**
              (%)Owned
                Vessels
            3
            3
            -





During
      2006 and 2005, OPCO operated three FSO units. A fourth FSO unit, the *Navion
      Saga* ,
      currently is trading as a conventional crude oil tanker within the conventional
      tanker segment. During the fourth quarter of 2006, the *Navion
      Saga* was
      undergoing conversion to an FSO unit. This vessel will commence a three-year
      FSO
      time charter contract beginning in the second quarter of 2007.





Net
      voyage revenues decreased 7.7% to $21.6 million for 2006, from
      $23.4 million for 2005, primarily due to a scheduled drydocking of one of
      our FSO units during 2006. Vessel operating expenses and depreciation and
      amortization in 2006 remained substantially unchanged from 2005.





***Other
      Operating Results***





***General
      and Administrative Expenses.*** General
      and administrative expenses decreased 15.6% to $72.5 million for 2006, from
      $85.9 million for 2005, primarily due to:





·
            a
                decrease of $11.4 million in allocated general and administrative
                expenses, including employee stock compensation expense, from Teekay
                Shipping Corporation as a result of the sale of Navion Shipping Ltd.
                to
                Teekay Shipping Corporation in July 2006. General and administrative
                expenses were allocated based on OPCO’s proportionate share of Teekay
                Shipping Corporation’s total ship-operating (calendar) days for each of
                the periods presented; and





·
            a
                decrease of $2.1 million relating to a reduction in costs associated
                with
                our long-term employee bonus plan.





***Interest
      Expense.*** Interest
      expense increased 74.4% to $69.4 million for 2006, from $39.8 million
      for 2005, primarily due to:





·
            an
                increase of $14.2 million in interest incurred on a Norwegian
                Kroner-denominated loan owing by a subsidiary of OPCO to Teekay Shipping
                Corporation from October 2006 until the date of our initial public
                offering in December 2006 (Teekay Shipping Corporation sold this
                loan
                receivable to OPCO immediately before our initial public
                offering);





·
            an
                increase of $7.1 million relating to additional debt of $745 million
                from a new revolving credit facility entered into during the fourth
                quarter of 2006;





·
            an
                increase of $4.6 million due to a higher average balance for one
                of OPCO’s
                existing revolving credit facilities in 2006 compared to 2005;





·
            an
                increase of $4.0 million relating to an increase in the
                weighted-average interest rate on OPCO’s floating-rate debt in 2006
                compared to 2005; and





·
            an
                increase of $1.4 million due to the consolidation of the five shuttle
                tankers owned by OPCO’s 50%-owned joint ventures as of December 1, 2006;





partially
      offset by




·
            a
                decrease of $1.9 million relating to the settlement of
                interest-bearing advances from affiliates during
                2005




***Interest
      Income.*** Interest
      income increased 17.4% to $5.4 million for 2006, from $4.6 million for
      2005, primarily due to an increase in interest rates.





***Equity
      Income From Joint Ventures.*** Equity
      income from joint ventures increased 19.2% to $6.2 million for 2006, from
      $5.2 million for 2005, primarily due to a decrease in repair and
      maintenance activity on the shuttle tankers owned by the joint ventures,
      partially offset by the consolidation of our five 50%-owned joint ventures
      as of
      December 1, 2006.


43
 ***Foreign
        Currency Exchange Gains (Losses).*** Foreign
        currency exchange losses were $66.7 million for 2006, compared to foreign
        currency exchange gains of $34.2 million for 2005. Historically, OPCO’s
        foreign currency exchange gains and losses have been due primarily to period-end
        revaluations of Norwegian Kroner-denominated advances from affiliates. In
        2006,
        the foreign currency exchange loss of $66.7 million was primarily due to
        the
        revaluation of Norwegian Kroner-denominated advances from affiliates prior
        to
        our initial public offering. Gains reflect a stronger U.S. Dollar against
        the
        Kroner on the date of revaluation or settlement compared to the rate in effect
        at the beginning of the period. Losses reflect a weaker U.S. Dollar against
        the
        Kroner on the date of revaluation or settlement compared to the rate in effect
        at the beginning of the period.  Please
        read*Items
        You Should Consider When Evaluating Our Results - Our financial results of
        operations are affected by fluctuations in currency exchange
        rates.*





***Income
      Tax Recovery (Expense).*** Income
      tax expense was $2.8 million for 2006, compared to an income tax recovery
      of $13.9 million for 2005. This $16.4 million increase in tax expense was
      primarily due to a $25.1 million increase in deferred income tax expense
      relating to unrealized foreign exchange translation gains (losses) for 2006
      and 2005, partially offset by a $4.7 million increase in deferred income tax
      recovery from the financial restructuring of our Norwegian shuttle tanker
      operations during 2006.





***Other
      Income.*** Other
      income for 2006 was $8.7 million, which was primarily comprised of
      $11.4 million of leasing income from the VOC Equipment, partially offset by
      a $2.8 million write-off of unamortized capitalized loan costs from one of
      OPCO’s revolving credit facilities that was prepaid and cancelled prior to our
      initial public offering.




Other
      income for 2005 was $9.1 million, which was primarily comprised of
      $11.0 million of leasing income from the VOC Equipment, partially offset by
      $1.9 million primarily relating to fees for early termination of certain
      ship management contracts.





***Net
      Income.*** As
      a
      result of the foregoing factors, net loss was $32.7 million for 2006,
      compared to net income of $84.7 million for 2005.





**Year
      Ended December 31, 2005 versus Year Ended December 31,
      2004**





***Shuttle
      Tanker Segment***





The
      following table provides a summary of the changes in the average number of
      ships
      owned and chartered-in for the shuttle tanker segment:





**2005**
              
              (Average
                Number of Ships)
            **2004**
              
              (Average
                Number of Ships)
            **Percentage
                Change**
              
              (%)Owned
                Vessels
            22.2
            24.5
            (9.4)%Chartered-in
                Vessels
            13.6
            13.4
            1.5Total
            35.8
            37.9
            (5.5)%





The
      average size of the shuttle tanker fleet (including vessels chartered-in)
      decreased in 2005 compared to 2004. This decrease was primarily the result
      of:





·
            the
                2005 Shuttle Tanker Dispositions and the sale of one older shuttle
                tanker
                in 2004 (or the*2004
                Shuttle Tanker Disposition*);





partially
      offset by





·
            the
                delivery of a shuttle tanker newbuilding (or the*2004
                Shuttle Tanker**Delivery*)
                in March 2004 that commenced service under a long-term bareboat charter
                in
                August 2004.





In
      addition, during March 2005 OPCO sold and leased back an older shuttle tanker.
      This had the effect of increasing the average number of chartered-in vessels
      and
      decreasing the average number of owned vessels during 2005 compared to
      2004.





***Net
      Voyage Revenues.*** Net
      voyage revenues decreased by 6.8% to $448.5 million for 2005, from
      $481.1 million for 2004, primarily due to:





·
            a
                decrease of $22.3 million from shuttle tankers servicing contracts of
                affreightment, which is explained in further detail
                below;





·
            a
                decrease of $10.3 million from the 2005 Shuttle Tanker Dispositions;





·
            a
                decrease of $1.7 million due to the 2004 Shuttle Tanker
                Disposition; and





·
            a
                decrease of $1.6 million from certain offshore equipment servicing a
                marginal oil field that was prematurely shut down in June 2005 due
                to
                lower than expected oil production;





partially
      offset by





·
            an
                increase of $1.2 million due to adjustments to the daily charter rate
                based on increases from rising interest rates in accordance with
                the
                bareboat charters for two shuttle
                tankers.





The
      $22.3 million decrease from shuttle tankers servicing contracts of
      affreightment was primarily due to a $33.9 million reduction in revenues
      from a decrease in the number of revenue days from the contracts of
      affreightment. This decrease was primarily a result of a 14.1% decline in oil
      production on all oil fields in the North Sea at which OPCO’s vessels were
      employed, the expiration of one contract of affreightment in July 2004, and
      the
      unscheduled temporary shutdowns of three oil fields in the first quarter of
      2005
      due to gas leakage and equipment problems of third parties. This reduction
      in
      revenue was partially offset by an $11.6 million increase in net voyage
      revenues earned from redeploying the idle shuttle tankers in the conventional
      spot market or short-term time charters.


44
 ***Vessel
        Operating Expenses.*** Vessel
        operating expenses decreased slightly by 1.3% to $75.2 million for 2005,
        from $76.2 million for 2004, primarily due to:





·
            a
                decrease of $4.5 million as a result of the 2005 Shuttle Tanker
                Dispositions; and





·
            a
                decrease of $1.2 million as a result of a shuttle tanker commencing a
                long-term bareboat charter in September 2004 after it had completed
                a five
                month time charter;





partially
      offset by





·
            an
                increase of $2.3 million due to increased repairs and maintenance
                relating to certain older shuttle
                tankers; and





·
            an
                increase of $1.9 million due to a weaker U.S. Dollar relative to
                the Norwegian Kroner during 2005 as compared to
                2004.





***Time-Charter
      Hire Expense.*** Time-charter
      hire expense decreased by 4.4% to $169.7 million for 2005, from
      $177.6 million for 2004, primarily due to:





·
            a
                5.8% decrease in the average per day time-charter hire expense to
                $34,190
                for 2005, from $36,277 for the same period in
                2004;




partially
      offset by





·
            a
                1.5% increase in the average number of vessels chartered-in.





The
      reduction in average per day time-charter hire expense was primarily due to
      the
      sale and leaseback of an older shuttle tanker in March 2005, which had, on
      average, a lower daily hire rate than OPCO’s other chartered-in shuttle
      tankers.





***Depreciation
      and Amortization.*** Depreciation
      and amortization expense decreased 14.0% to $77.1 million for 2005, from
      $89.6 million for 2004, primarily due to:





·
            a
                decrease of $9.9 million relating to the 2005 Shuttle Tanker
                Dispositions, the 2004 Shuttle Tanker Disposition, and the sale and
                leaseback of one shuttle tanker in
                2005;





·
            a
                decrease of $2.7 million relating to a reduction in amortization from
                the expiration during 2005 of two of OPCO’s contracts of
                affreightment; and





·
            a
                decrease of $1.5 million relating to a $12.2 million write-down
                during 2005 of the carrying value of certain offshore equipment servicing
                a marginal oil field that was prematurely shut down due to lower
                than
                expected oil production;





partially
      offset by





·
            an
                increase of $2.5 million relating to the 2004 Shuttle Tanker
                Delivery.





Depreciation
      and amortization expense included amortization of drydocking costs of
      $5.9 million for 2005, compared to $4.8 million for 2004, and included
      amortization of contracts of $14.8 million for 2005, compared to
      $18.4 million for 2004.





***Vessel
      and Equipment Writedowns and Gain (Loss)***  ***on
      Sale of Vessels.*** Vessel
      and equipment writedowns and gain (loss) on sale of vessels for 2005 was a
      net loss of $2.8 million, which was comprised of:





·
            a
                $12.2 million write-down of the carrying value of certain offshore
                equipment servicing a marginal oil field that was prematurely shut
                down in
                June 2005 (some of this equipment was re-deployed on another field
                in
                October 2005);





partially
      offset by





·
            a
                $9.1 million gain on the 2005 Shuttle Tanker Dispositions; and





·
            a
                $0.3 million gain from amortization of a deferred gain, which relates
                to the sale and leaseback of an older shuttle tanker in the first
                quarter
                of 2005.





Gain
      on
      sale of vessels for 2004 of $3.7 million represents the gain from the 2004
      Shuttle Tanker Disposition.





***Restructuring
      Charges.*** Restructuring
      charges of $1.0 million in 2005 relate to the closure of our Sandefjord,
      Norway office. OPCO incurred no restructuring charges in 2004 in the shuttle
      tanker segment.





***Conventional
      Tanker Segment***





The
      following table provides a summary of the changes in the average number of
      ships
      owned and chartered-in for the conventional tanker segment:




**2005**
              (Average
                Number of Ships)
            **2004**
              (Average
                Number of Ships)
            **Percentage
                Change**
              (%)Owned
                Vessels
            10.5
            10.3
            1.9%Chartered-in
                Vessels
            30.7
            30.4
            1.0Total
            41.2
            40.7
            1.2%




45
 The
        average size of the conventional crude oil tanker fleet (including vessels
        chartered-in) increased slightly in 2005 compared to 2004. This increase
        was
        primarily the result of:





·
            the
                delivery of a new conventional tanker in the third quarter of 2004
                (or the*2004
                Conventional Tanker Delivery*);





partially
      offset by





·
            the
                2005 Conventional Tanker Disposition.





***Net
      Voyage Revenues.*** Net
      voyage revenues decreased 27.8% to $261.2 million for 2005, from
      $361.7 million for 2004, primarily due to:





·
            a
                decrease of $45.9 million relating to a decrease in the hire rate
                earned by five owned conventional tankers on time charters with a
                subsidiary of Teekay Shipping
                Corporation;





·
            a
                decrease of $44.0 million from the change in employment of the
                chartered-in conventional tankers from spot voyage charters with
                unrelated
                parties to a subsidiary of Teekay Shipping Corporation during the
                second
                quarter of 2004;




·
            a
                decrease of $11.0 million from the change in employment of one owned
                vessel from spot voyage charters with unrelated parties during 2004
                to the
                subsequent charter of this vessel to a subsidiary of Teekay Shipping
                Corporation under the terms described
                below; and





·
            a
                decrease of $2.6 million relating to the 2005 Conventional Tanker
                Disposition;





partially
      offset by





·
            an
                increase of $3.2 million relating to the 2004 Conventional Tanker
                Delivery.





Historically,
      eight owned tankers in the conventional fleet have been chartered to a
      subsidiary of Teekay Shipping Corporation and then from this subsidiary to
      OPCO’s customers. The charter rates paid by the subsidiary of Teekay Shipping
      Corporation were based on the cash flow requirements of each vessel, which
      included operating expenses, loan principal and interest payments and drydock
      expenditures. The hire rate in 2004 was significantly higher than 2005 due
      to
      larger loan principal repayments. Prior to closing of our initial public
      offering, OPCO entered into new fixed-rate time charters with the subsidiary
      of
      Teekay Shipping Corporation for OPCO’s nine conventional tankers at rates we
      believe are market-based charter rates.





On
      July 1, 2006, OPCO transferred to Teekay Shipping Corporation the Non-OPCO
      Assets, including OPCO’s subsidiary Navion Shipping Ltd. Navion Shipping Ltd.
      chartered-in conventional tankers and subsequently time chartered them to a
      subsidiary of Teekay Shipping Corporation at a charter rate that provided for
      a
      fixed 1.25% profit margin. However, prior to the second quarter of 2004, these
      conventional tankers were primarily employed on spot voyage charters directly
      to
      our customers. On average, the spot voyage charter rates earned by these
      conventional tankers in the first quarter of 2004 were higher than the time
      charter rates earned by these vessels in the first quarter of 2005, causing
      a
      decrease in net voyage revenues during 2005 compared to 2004. As a result of the
      transfer, OPCO no longer earns net voyage revenues from the conventional tankers
      chartered-in by Navion Shipping Ltd., which were all of the conventional tankers
      chartered-in during 2004 and 2005.





***Vessel
      Operating Expenses.*** Vessel
      operating expenses decreased 0.5% to $22.7 million for 2005, from
      $22.8 million for 2004, primarily due to the 2005 Conventional Tanker
      Disposition, partially offset by the 2004 Conventional Tanker
      Delivery.





***Time-Charter
      Hire Expense.*** Time-charter
      hire expense increased 4.6% to $203.8 million for 2005, from
      $194.9 million for 2004, primarily due to a 1.0% increase in the average
      number of ships chartered-in. In addition, the average per ship per day
      time-charter hire expense increased 3.5% to $18,194 for 2005, compared to
      $17,574 for 2004, due to the expiration of a number of charter hire contracts
      in
      2004, which had daily rates that were slightly lower on average than the new
      charter hire contracts we entered into during 2005.





***Depreciation
      and Amortization.*** Depreciation
      and amortization expense increased 2.7% to $21.1 million for 2005, from
      $20.6 million for 2004, primarily due to the 2004 Conventional Tanker
      Delivery, partially offset by the 2005 Conventional Tanker Disposition.
      Depreciation and amortization expense included amortization of drydocking costs
      of $1.9 million for 2005, compared to $1.7 million for
      2004.





***FSO
      Segment***





The
      following table provides a summary of the changes in the average number of
      ships
      for the FSO segment.





**2005**
              (Average
                Number of Ships)
            **2004**
              (Average
                Number of Ships)
            **Percentage
                Change**
              (%)Owned
                Vessels
            3
            3
            -




During 2004 and 2005, OPCO operated three
      FSO
      units. However, during the period from November 2003 to April 2004, one FSO
      unit, the *Pattani
      Spirit*,
      was
      undergoing a conversion from an Aframax-size conventional crude oil tanker
      to an
      FSO unit. Although this vessel was considered to be in the FSO fleet during
      the
      conversion, it did not earn revenue during that period and, accordingly, revenue
      days for the FSO segment were 24.4% lower in 2004 compared to
      2005.


46
 ***Net
        Voyage Revenues.*** Net
        voyage revenues decreased 6.0% to $23.4 million for 2005, from
        $24.9 million for 2004, primarily due to:





·
            a
                decrease of $2.8 million due a negotiated reduction to the daily
                bareboat charter rate on one of the FSO
                units;





partially
      offset by





·
            an
                increase of $1.5 million from a full year of operations of the*Pattani**Spirit*during
                2005 compared to 2004.





***Vessel
      Operating Expenses.*** Vessel
      operating expenses remained consistent during 2005 and 2004.





***Depreciation
      and Amortization.*** Depreciation
      and amortization expense increased 12.5% to $9.3 million for 2005, from
      $8.3 million for 2004, primarily due to a full year of operations of the *Pattani
      Spirit* during
      2005 compared to 2004. Depreciation and amortization expense included
      amortization of drydocking costs of $0.4 million for both 2005 and
      2004.





***Other
      Operating Results***





***General
      and Administrative Expenses.*** General
      and administrative expenses increased 30.4% to $85.9 million for 2005, from
      $65.8 million for 2004, primarily due to:





·
            an
                increase of $8.4 million relating to the adoption of a long-term
                employee bonus plan during 2005;





·
            an
                increase of $7.2 million in allocated general and administrative
                expenses from Teekay Shipping
                Corporation;




·
            an
                increase of $4.5 million relating to the grant of restricted stock
                units of Teekay Shipping Corporation to employees in March
                2005;





·
            an
                increase of $3.1 million from the strengthening in the average
                Norwegian Kroner/U.S. Dollar exchange rate in 2005 compared to 2004;
                and





·
            an
                increase of $0.7 million in ship management fees paid to a subsidiary
                of Teekay Shipping Corporation for the 2004 Conventional Tanker Delivery
                and one FSO unit;





partially
      offset by





·
            special
                bonuses of $3.8 million accrued during 2004 in addition to regular
                bonuses under the annual bonus
                plan.





***Interest
      Expense.*** Interest
      expense decreased 9.5% to $39.8 million for 2005, from $44.0 million
      for 2004, primarily due to:





·
            a
                decrease of $6.5 million relating to the repayment of long-term
                debt; and





·
            a
                decrease of $2.4 million relating to the repayment of
                interest-bearing advances from
                affiliates;





partially
      offset by





·
            an
                increase of $4.7 million relating to an increase in the
                weighted-average interest rate on OPCO’s floating-rate
                debt.





***Interest
      Income.*** Interest
      income increased 87.3% to $4.6 million for 2005, from $2.5 million for
      2004, primarily due to an increase in average cash balances during 2005 compared
      to 2004.





***Equity
      Income From Joint Ventures.*** Equity
      income from joint ventures decreased 15.6% to $5.2 million for 2005, from
      $6.2 million for 2004, primarily due to an increase in repair and
      maintenance activity on the shuttle tankers owned by joint
      ventures.





***Gain
      on Sale of Marketable Securities.*** No
      marketable securities were sold in 2005. During 2004, all marketable securities
      were sold for proceeds of $135.4 million, which resulted in a gain on sale
      of marketable securities of $94.2 million. This gain on sale primarily
      represented the 2004 purchase and sale of a 16% interest in a Danish shipping
      company that primarily operates product tankers.





***Foreign
      Currency Exchange Gains (Losses).*** Foreign
      currency exchange gains were $34.2 million for 2005, compared to foreign
      currency exchange losses of $37.9 million for 2004. OPCO’s foreign currency
      exchange gains and losses, substantially all of which have been unrealized,
      are
      due primarily to the period-end revaluation of Norwegian Kroner-denominated
      advances from affiliates. Gains reflect a stronger U.S. Dollar against the
      Kroner on the date of revaluation compared to the rate in effect at the
      beginning of the year. Losses reflect a weaker U.S. Dollar against the
      Kroner on the date of revaluation compared to the rate in effect at the
      beginning of the year.





***Income
      Tax Recovery (Expense).*** Income
      tax recovery was $13.9 million for 2005, compared to income tax expense of
      $28.2 million for 2004, primarily due to a $28.3 million decrease in
      deferred income tax expense relating to unrealized foreign exchange translation
      gains (losses) for 2005 and 2004, and $8.4 million deferred tax recovery
      from the restructuring of Norwegian shuttle tanker operations during the first
      quarter of 2005.





***Other
      Income.*** Other
      income for 2005 was $8.9 million, which was primarily comprised of
      $11.0 million of leasing income from the VOC Equipment, partially offset by
      $1.9 million primarily relating to fees for early termination of certain
      ship management contracts and minority interest expense of
      $0.2 million.





Other
      income for 2004 was $11.9 million, which was primarily comprised of
      $8.4 million of leasing income from the VOC Equipment and $5.7 million
      of dividend income from marketable securities sold in 2004, partially offset
      by
      minority interest expense of $2.2 million.





***Net
      Income.*** As
      a
      result of the foregoing factors, net income was $84.7 million for 2005,
      compared to $213.8 million for 2004.


47


***Trends
      Relating to Income From Vessel***  ***Operations***





Our
      income from vessel operations for the conventional tanker segment increased
      to
      $5.5 million in 2006 from a loss of $15.5 million in 2005, and
      declined from $104.4 million in 2004 to a loss of $15.5 million in 2005. The
      $21.0 million increase from 2005 to 2006 was primarily due to OPCO entering
      into
      new fixed-rate time charters with a subsidiary of Teekay Shipping Corporation
      for nine conventional vessels at rates which we believe are market-based charter
      rates and are higher than the rates earned from our previous charter
      arrangements with this subsidiary of Teekay Shipping Corporation and a decrease
      in general and administrative expenses due to the transfer of Navion Shipping
      Ltd. to Teekay Shipping Corporation in July 2006. The $119.9 million decline
      from 2004 to 2005 is primarily due to a $100.5 million decrease in net voyage
      revenues from our conventional tankers on charter to a subsidiary of Teekay
      Shipping Corporation. The hire rate in 2004 was significantly higher than 2005.
      Please read our results of operations for further information regarding these
      historical charter arrangements.





Our
      income from vessel operations for the FSO segment has declined from
      $5.6 million in 2005 to $3.7 million in 2006, and from
      $8.6 million in 2004 to $5.6 million in 2005. The $1.9 million decline
      from 2005 to 2006 is primarily due to a scheduled drydocking of one of our
      FSO
      units during the second half of 2006. The $3.0 million decline from 2004 to
      2005 is primarily due to a negotiated reduction to the daily bareboat charter
      rate on one of our FSO units. Consequently, we do not expect this trend of
      decreasing income from vessel operations to continue for the FSO segment as
      we
      do not expect such a reduction in the daily charter rate to occur in the
      foreseeable future and we expect to add an additional FSO unit to our FSO
      segment beginning in the second quarter of 2007.




**Liquidity
      and Capital Resources**





***Liquidity
      and Cash Needs***





As
      at
      December 31, 2006, total cash and cash equivalents was $114.0 million, compared
      to $129.0 million at December 31, 2005. Total liquidity, including
      cash and undrawn long-term borrowings, was $429.0 million as at December
      31, 2006, down from $729.0 million as at December 31, 2005. The
      decrease in liquidity was mainly the result of settlement of advances from
      affiliates in connection with our initial public offering and scheduled
      reductions of revolving credit facilities, partially offset by cash assumed
      upon
      the consolidation of our five 50%-owned joint venture companies and cash
      generated from operations.





In
      addition to distributions on our equity interests, our primary short-term
      liquidity needs are to fund general working capital requirements and drydocking
      expenditures, while our long-term liquidity needs primarily relate to expansion
      and investment capital expenditures and other maintenance capital expenditures
      and debt repayment. Expansion capital expenditures are primarily for the
      purchase or construction of vessels to the extent the expenditures increase
      the
      operating capacity of or revenue generated by our fleet, while maintenance
      capital expenditures primarily consist of drydocking expenditures and
      expenditures to replace vessels in order to maintain the operating capacity
      of
      or revenue generated by our fleet. Investment capital expenditures are those
      capital expenditures that are neither maintenance capital expenditures nor
      expansion capital expenditures.





We
      anticipate that our primary sources of funds for our short-term liquidity needs
      will be cash flows from operations. We believe that cash flows from operations
      will be sufficient to meet our existing liquidity needs for at least the next
      12 months. Generally, our long-term sources of funds will be from cash from
      operations, long-term bank borrowings and other debt or equity financings.
      Because we and OPCO distribute all of our and its available cash, we expect
      that
      we and OPCO will rely upon external financing sources, including bank borrowings
      and the issuance of debt and equity securities, to fund acquisitions and
      expansion and investment capital expenditures, including opportunities we may
      pursue under the omnibus agreement.





***Cash
      Flows.*** The
      following table summarizes our sources and uses of cash for the periods
      presented:





**Years
                Ended December 31,****2006**
              ($000’s)
            
            **2005**
              ($000’s)Net
                cash flow from operating activities
            
            
            155,710
            
            
            152,687Net
                cash flow from financing activities
            
            
            (223,720
            )
            
            (201,554
            )Net
                cash flow from investing activities
            
            
            53,010
            
            
            34,124





***Operating
      Cash Flows.*** Net
      cash
      flow from operating activities increased to $155.7 million in 2006, from
      $152.7 million in 2005, primarily due to the timing of our cash receipts
      and payments, partially offset by an increase in expenditures for drydocking.
      Net cash flow from operating activities depends upon the timing and amount
      of
      drydocking expenditures, repairs and maintenance activity, vessel additions
      and
      dispositions, foreign currency rates, changes in interest rates, fluctuations
      in
      working capital balances and spot market hire rates. The number of vessel
      drydockings tends to be uneven between years.





***Financing
      Cash Flows.*** As
      at
      December 31, 2006, our total debt was $1,303.4 million, compared to $398.4
      million as at December 31, 2005. As at December 31, 2006, we had two long-term
      revolving credit facilities available, which, as at such date, provided for
      borrowings of up to $1,395.0 million, of which $315.0 million was
      undrawn. As at December 31, 2006, each of our five 50%-owned joint ventures
      had
      an outstanding term loan, which totaled $223.4 million. The term loans reduce
      in
      monthly or semi-annual payments with varying maturities through 2015. Please
      read Item 18 - Financial Statements: Note 7 - Long-Term Debt.


48


Prior
      to
      our initial public offering in December 2006, advances under our revolving
      credit facilities, advances from Teekay Shipping Corporation and net cash flow
      from operations were used to finance OPCO’s investments in vessels and equipment
      and direct financing leases. Historically, advances under the revolving credit
      facilities have been loaned to Teekay Shipping Corporation to temporarily
      finance vessel construction and for other general corporate purposes. In effect,
      prior to the initial public offering, these revolving credit facilities were
      used as corporate-related debt of Teekay Shipping Corporation. Net proceeds
      from
      long-term debt, prepayments of long-term debt and net advances to affiliates
      during 2006 and 2005 reflect this use. Prior to our initial public offering,
      OPCO settled its advances from affiliates, which as at December 31, 2005 totaled
      $559.3 million, compared to $17.0 million as at December 31, 2006.





Scheduled
      debt repayments were $119.9 million during 2006 compared to $29.9 million during
      2005. Repayment of capital lease obligations were $34.2 million during 2006
      compared to $1.2 million during 2005. Debt prepayments were $493.5 million
      during 2006 compared to $1,382.1 million during 2005. Please read Item 18 -
      Financial Statements: Note 7 - Long-Term Debt.




In
      October 2006, OPCO amended one of its revolving credit facilities, terminated
      the other two and entered into a new $940 million revolving credit
      facility. The existing facilities have the following terms:




·
            ***Amended
                Revolving Credit Facility***.
                This 8-year amended reducing revolving credit facility allows OPCO
                and it
                subsidiaries to borrow up to $455 million and may be used for
                acquisitions and for general partnership purposes. Obligations under
                this
                credit facility are secured by first-priority mortgages on seven
                of our
                vessels. Borrowings under the facility may be prepaid at any time
                in
                amounts of not less than $5.0 million. ·
            ***New Revolving Credit
              Facility***.
              This 8-year reducing revolving credit facility allows for borrowing
              of up
              to $940 million and may be used for acquisitions and for general
              partnership purposes. Obligations under this credit facility are secured
              by first-priority mortgages on 17 of our vessels. Borrowings under
              the
              facility may be prepaid at any time in amounts of not less than
              $5.0 million. This credit facility allows OPCO to make working
              capital borrowings and loan the proceeds to us (which we could use
              to make
              distributions, provided that such amounts are paid down
              annually).




OPCO’s
      term loans are collateralized by first-priority mortgages on the vessels to
      which the loans relate, together with other related collateral. As at December
      31, 2006, we had guaranteed $45.0 million of these term loans, which represents
      its 50% share of the outstanding vessel mortgage debt in two of these 50%-owned
      joint venture companies. Teekay Shipping Corporation and our joint venture
      partner have guaranteed the remaining $178.4 million.





Interest
      payments on the revolving credit facilities and term loans are based on LIBOR
      plus margins. At December 31, 2006, the margins ranged between 0.45% and 0.80%,
      compared to 0.60% and 0.70% at December 31, 2005.





All
      of
      the OPCO’s vessel financings are collaterized by the applicable vessels. The
      term loans used to finance the five 50%-owned joint venture shuttle tankers
      and
      OPCO’s two revolving credit facility agreements contain covenants and other
      restrictions typical of debt financing secured by vessels, including those
      that
      restrict the relevant subsidiaries from:





·  incurring
      or guaranteeing indebtedness;





·  changing
      ownership or structure, including mergers, consolidations, liquidations and
      dissolutions;





·  making
      dividends or distributions when in default of the relevant loans;





·  making
      capital expenditures in excess of specified levels;





·  making
      certain negative pledges or granting certain liens;





·  selling,
      transferring, assigning or conveying assets; or





·  entering
      into a new line of business.





In
      addition, OPCO’s two revolving credit facilities and three of the term loans
      contain covenants that require OPCO to maintain a minimum liquidity (cash,
      cash
      equivalents and undrawn committed revolving credit lines) of $75.0 million
      and at least 5.0% of our total consolidated debt.





We
      conduct our funding and treasury activities within corporate policies designed
      to minimize borrowing costs and maximize investment returns while maintaining
      the safety of the funds and appropriate levels of liquidity for our purposes.
      We
      hold cash and cash equivalents primarily in U.S. Dollars.





We
      are
      exposed to the impact of interest rate changes primarily through OPCO’s unhedged
      floating-rate borrowings. As at December 31, 2006, unhedged floating-rate
      borrowings totaled $158.4 million. Significant increases in interest rates
      could
      adversely affect operating margins, results of operations and OPCO’s ability to
      service the debt. OPCO uses interest rate swaps to reduce our exposure to market
      risk from changes in interest rates. Please
      read Item 11 - Quantitative and Qualitative Disclosures About Market
      Risk.





***Investing
      Cash Flows***





During
      2006 and 2005, OPCO incurred $31.1 million and $24.8 million,
      respectively, of vessel upgrade and conversion costs as well as purchases of
      equipment. During 2006, OPCO received proceeds of $61.7 primarily from the
      sale
      of two older shuttle tankers. During 2005, OPCO received proceeds of
      $73.2 million from the sale of three older shuttle tankers.


49


**Contractual
      Obligations and Contingencies**





The
      following table summarizes our long-term contractual obligations as at December
      31, 2006:





**Total**
            
            **2007**
            
            **2008**
              **and**
              **2009**
            
            **2010**
              **and**
              **2011**
            
            **Beyond**
              **2011**(in
                millions of U.S. dollars)Long-term
                debt(1)
            
            
            1,303.4
            
            
            17.7
            
            
            104.9
            
            
            251.2
            
            
            929.6Chartered-in
                vessels (operating leases)
            
            
            597.1
            
            
            147.7
            
            
            180.7
            
            
            137.2
            
            
            131.5Advances
                from affiliates
            
            
            17.0
            
            
            17.0
            
            
            -
            
            
            -
            
            
            -Commitment
                for volatile organic compound emissions equipment
            
            
            8.7
            
            
            8.7
            
            
            -
            
            
            -
            
            
            -**Total
                contractual obligations**
            
            
            1,926.2
            
            
            191.1
            
            
            285.6
            
            
            388.4
            
            
            1,061.1







(1)  Excludes
      expected interest payments of $77.4 million (2007), $147.4 million
      (2008 and 2009), $128.1 million (2010 and 2011) and $116.1 million
      (beyond 2011). Expected interest payments are based on LIBOR, plus margins
      which
      ranged between 0.45% and 0.80% as at December 31, 2006. The expected interest
      payments do not reflect the effect of related interest rate swaps that hedge
      certain of the floating-rate debt.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements that have or are reasonably likely to have,
      a
      current or future material effect on our financial condition, changes in
      financial condition, revenues or expenses, results of operations, liquidity,
      capital expenditures or capital resources.





**Critical
      Accounting Estimates**





We
      prepare our consolidated financial statements in accordance with GAAP, which
      require us to make estimates in the application of our accounting policies
      based
      on our best assumptions, judgments and opinions. On a regular basis, management
      of our general partner reviews the accounting policies, assumptions, estimates
      and judgments to ensure that our consolidated financial statements are presented
      fairly and in accordance with GAAP. However, because future events and their
      effects cannot be determined with certainty, actual results could differ from
      our assumptions and estimates, and such differences could be material.
      Accounting estimates and assumptions discussed in this section are those that
      we
      consider to be the most critical to an understanding of our financial statements
      because they inherently involve significant judgments and uncertainties. For
      a
      further description of our material accounting policies, please read Item 18
      -
      Financial Statements: Note 1 Summary of Significant Accounting
      Policies.




***Revenue
      Recognition***





***Description.*** We
      generate a majority of our revenues from voyages servicing contracts of
      affreightment and time charters and, to a lesser extent, bareboat charters
      and
      spot voyages. Within the shipping industry, the two methods used to account
      for
      voyage revenues and expenses are the percentage of completion and the completed
      voyage methods. Most shipping companies, including us, use the percentage of
      completion method. For each method, voyages may be calculated on either a
      load-to-load or discharge-to-discharge basis. In other words, revenues are
      recognized ratably either from the beginning of when product is loaded for
      one
      voyage to when it is loaded for another voyage, or from when product is
      discharged (unloaded) at the end of one voyage to when it is discharged
      after the next voyage. We recognize revenues from time charters and bareboat
      charters daily over the term of the charter as the applicable vessel operates
      under the charter. We do not recognize revenues during days that the vessel
      is
      off-hire.





***Judgments
      and Uncertainties.*** In
      applying the percentage of completion method, we believe that in most cases
      the
      discharge-to-discharge basis of calculating voyages more accurately reflects
      voyage results than the load-to-load basis. At the time of cargo discharge,
      we
      generally have information about the next load port and expected discharge
      port,
      whereas at the time of loading we are normally less certain what the next load
      port will be. We use this method of revenue recognition for all spot voyages.
      In
      the case of our shuttle tankers servicing contracts of affreightment, a voyage
      commences with tendering of notice of readiness at a field, within the agreed
      lifting range, and ends with tendering of notice of readiness at a field for
      the
      next lifting. We do not begin recognizing voyage revenue for any of our vessels
      until a charter has been agreed to by the customer and us, even if the vessel
      has discharged its cargo and is sailing to the anticipated load port on its
      next
      voyage.





***Effect
      if Actual Results Differ from***  ***Assumptions.*** If
      actual
      results are not consistent with our estimates in applying the percentage of
      completion method, our voyage revenues could be overstated or understated for
      any given period by the amount of such difference.





***Vessel
      Lives and Impairment***





***Description.*** The
      carrying value of each of our vessels represents its original cost at the time
      of delivery or purchase less depreciation or impairment charges. We depreciate
      our vessels on a straight-line basis over a vessel’s estimated useful life, less
      an estimated residual value. The carrying values of our vessels may not
      represent their fair market value at any point in time since the market prices
      of second-hand vessels tend to fluctuate with changes in charter rates and
      the
      cost of newbuildings. Both charter rates and newbuilding costs tend to be
      cyclical in nature. We review vessels and equipment for impairment whenever
      events or changes in circumstances indicate the carrying amount of an asset
      may
      not be recoverable. We measure the recoverability of an asset by comparing
      its
      carrying amount to future undiscounted cash flows that the asset is expected
      to
      generate over its remaining useful life.


50


***Judgments
      and Uncertainties.*** Depreciation
      is calculated using an estimated useful life of 25 years for our vessels,
      from the date the vessel was originally delivered from the shipyard, or a
      shorter period if regulations prevent us from operating the vessels for
      25 years. In the shipping industry, the use of a 25-year vessel life has
      become the prevailing standard. However, the actual life of a vessel may be
      different, with a shorter life resulting in an increase in the quarterly
      depreciation and potentially resulting in an impairment loss. The estimates
      and
      assumptions regarding expected cash flows require considerable judgment and
      are
      based upon existing contracts, historical experience, financial forecasts and
      industry trends and conditions. We are not aware of any indicators of
      impairments nor any regulatory changes or environmental liabilities that we
      anticipate will have a material impact on our current or future
      operations.





***Effect
      if Actual Results Differ from***  ***Assumptions.*** If
      we
      consider a vessel or equipment to be impaired, we recognize impairment in an
      amount equal to the excess of the carrying value of the asset over its fair
      market value. The new lower cost basis will result in a lower annual
      depreciation than before the vessel impairment.





***Drydocking***





***Description.*** We
      drydock each of our shuttle tankers and conventional oil tankers periodically
      for inspection, repairs and maintenance and for any modifications to comply
      with
      industry certification or governmental requirements. We capitalize a substantial
      portion of the costs we incur during drydocking and amortize those costs on
      a
      straight-line basis from the completion of the drydocking to the estimated
      completion of the next drydocking. We expense as incurred costs for routine
      repairs and maintenance performed during drydocking that do not improve or
      extend the useful lives of the assets.





***Judgments
      and Uncertainties.*** Amortization
      of capitalized drydock expenditures requires us to estimate the period of the
      next drydocking. While we typically drydock each vessel every two and a half
      to
      five years, we may drydock the vessels at an earlier date.





***Effect
      if Actual Results Differ from***  ***Assumptions.*** If
      we
      change our estimate of the next drydock date we will adjust our annual
      amortization of drydocking expenditures.





***Goodwill
      and Intangible Assets***





***Description.*** We
      allocate the cost of acquired companies to the identifiable tangible and
      intangible assets and liabilities acquired, with the remaining amount being
      classified as goodwill. Certain intangible assets, such as time charters, are
      amortized over time. Our future operating performance will be affected by the
      amortization of intangible assets and potential impairment charges related
      to
      goodwill. Accordingly, the allocation of purchase price to intangible assets
      and
      goodwill may significantly affect our future operating results. Goodwill and
      indefinite lived assets are not amortized, but reviewed for impairment annually,
      or more frequently if impairment indicators arise.




***Judgments
      and Uncertainties.*** The
      allocation of the purchase price of acquired companies to intangible assets
      and
      goodwill requires management to make significant estimates and assumptions,
      including estimates of future cash flows expected to be generated by the
      acquired assets and the appropriate discount rate to value these cash flows.
      In
      addition, the process of evaluating the potential impairment of goodwill and
      intangible assets is highly subjective and requires significant judgment at
      many
      points during the analysis. The fair value of our reporting units was estimated
      based on discounted expected future cash flows using a weighted-average cost
      of
      capital rate. The estimates and assumptions regarding expected cash flows and
      the discount rate require considerable judgment and are based upon existing
      contracts, historical experience, financial forecasts and industry trends and
      conditions.





***Effect
      if Actual Results Differ from***  ***Assumptions.*** In
      the
      fourth quarter of 2006, OPCO completed its annual impairment testing of goodwill
      using the methodology described above, and determined there was no impairment.
      If actual results are not consistent with assumptions and estimates, we may
      be
      exposed to a goodwill impairment charge. As at December 31, 2006 and 2005,
      the net book value of goodwill was $127.1 million and $130.5 million,
      respectively. The decrease in goodwill is due to the sale of two Norwegian
      subsidiaries from OPCO to Teekay Shipping Corporation during 2006.





Amortization
      expense of intangible assets for 2006 and 2005 was $12.1 million and
      $14.9 million, respectively. If actual results are not consistent with our
      estimates used to value our intangible assets, we may be exposed to an
      impairment charge and a decrease in the annual amortization expense of our
      intangible assets. As at December 31, 2006 and 2005, the net book value of
      intangible assets was $66.4 million and $78.5 million,
      respectively.




**Item
        6. Directors, Senior Management and Employees**
 
 **A.
        Directors and Senior Management**
 
 **Management
        of Teekay Offshore Partners L.P.**
 
 Teekay
        Offshore GP L.L.C., our general partner, manages our operations and activities.
        Unitholders are not entitled to elect the directors of our general partner
        or
        directly or indirectly participate in our management or operation.
 
 Our
        general partner owes a fiduciary duty to our unitholders. Our general partner
        is
        liable, as general partner, for all of our debts (to the extent not paid
        from
        our assets), except for indebtedness or other obligations that are expressly
        non-recourse to it. Whenever possible, our general partner intends to cause
        us
        to incur indebtedness or other obligations that are nonrecourse to
        it.
 
 The
        directors of our general partner oversee our operations. The day-to-day affairs
        of our business are managed by the officers of our general partner and key
        employees of certain of our controlled affiliates, including OPCO. Employees
        of
        certain subsidiaries of Teekay Shipping Corporation provide assistance to
        us and
        OPCO (and, we expect, to subsidiaries through which we intend to conduct
        additional operations in the future) pursuant to services agreements. Please
        see
        Item 7- Major Unitholders and Related Party transactions.
 51
 The
        Chief
        Executive Officer and Chief Financial Officer of our general partner, Peter
        Evensen, allocates his time between managing our business and affairs and
        the
        business and affairs of Teekay Shipping Corporation, Teekay GP L.L.C., the
        general partner of Teekay LNG Partners L.P. and Teekay Offshore GP L.L.C.,
        our
        general partner. Mr. Evensen is the Executive Vice President and Chief
        Strategy Officer of Teekay Shipping Corporation and the Chief Executive Officer
        and Chief Financial Officer of Teekay GP L.L.C. and of Teekay Offshore GP
        L.L.C.
        The amount of time Mr. Evensen allocates among our business and the
        businesses of Teekay Shipping Corporation and Teekay GP L.L.C. varies from
        time
        to time depending on various circumstances and needs of the businesses, such
        as
        the relative levels of strategic activities of the businesses. We believe
        Mr. Evensen devotes sufficient time to our business and affairs as is
        necessary for their proper conduct.
 
 Teekay
        Offshore Operating GP L.L.C., the general partner of OPCO, manages OPCO’s
        operations and activities. The Board of Directors of Teekay Offshore GP L.L.C.,
        our general partner, has the authority to appoint and elect the directors
        of
        Teekay Offshore Operating GP L.L.C., who in turn appoint the officers of
        Teekay
        Offshore Operating GP L.L.C. Some of the directors and officers of our general
        partner also serve as directors or executive officers of OPCO’s general partner.
        Any amendment to OPCO’s partnership agreement or to the limited liability
        company agreement of OPCO’s general partner must be approved by the conflicts
        committee of the Board of Directors of our general partner, Teekay Offshore
        GP
        L.L.C. Other actions affecting OPCO, including, among other things, the amount
        of its cash reserves, must be approved by our general partner’s Board of
        Directors on our behalf.
 
 Officers
        of our general partner and those individuals providing services to us, OPCO
        or
        our subsidiaries may face a conflict regarding the allocation of their time
        between our business and the other business interests of Teekay Shipping
        Corporation or its affiliates. Our general partner intends to seek to cause
        its
        officers to devote as much time to the management of our business and affairs
        as
        is necessary for the proper conduct of our business and affairs.
 
 **Directors
        and Executive Officers of Teekay Offshore GP L.L.C.**
 
 The
        following table provides information about the directors and executive officers
        of our general partner, Teekay Offshore GP L.L.C. Directors are elected for
        one-year terms. The business address of each of our directors and executive
        officers listed below is c/o Bayside House, Bayside Executive Park, West
        Bay Street and Blake Road, Nassau, Commonwealth of The Bahamas. Ages of the
        directors are as of December 31, 2006.
 
 **Name**
              **Age**
              **Position**C.
                  Sean Day
              57
              Chairman(1)Bjorn
                  Moller
              49
              Vice
                  Chairman(1)Peter
                  Evensen
              48
              Chief
                  Executive Officer, Chief Financial Officer and DirectorDavid
                  L. Lemmon
              64
              Director(2)Carl
                  Mikael L.L. von Mentzer
              62
              Director(2)John
                  J. Peacock
              63
              Director(2)
  (1)
        Member of Corporate Governance Committee
 
 (2)
        Member of Audit Committee and Conflicts Committee
 
 Certain
        biographical information about each of these individuals is set forth
        below.
 
 **C. Sean
        Day** has
        served as Chairman of Teekay Offshore GP L.L.C. and of Teekay Offshore Operating
        GP L.L.C. since they were formed in August and September 2006, respectively.
        Mr. Day has served as Chairman of Teekay Shipping Corporation’s Board of
        Directors since 1999. From 1989 to 1999, he was President and Chief Executive
        Officer of Navios Corporation, a large bulk shipping company based in Stamford,
        Connecticut. Prior to this, Mr. Day held a number of senior management
        positions in the shipping and finance industry. He is currently serving as
        a
        director of Kirby Corporation. Mr. Day serves as the Chairman of Teekay GP
        LLC., the general partner of Teekay LNG Partners L.P. since it was formed
        in
        November 2004. Mr.
        Day
        also serves as the Chairman of Compass Diversified Trust.
  **Bjorn
        Moller** has
        served as the Vice Chairman of Teekay Offshore GP L.L.C. and of Teekay Offshore
        Operating GP L.L.C. since they were formed in August and September 2006,
        respectively. Mr. Moller is the President and Chief Executive Officer of
        Teekay Shipping Corporation and has held those positions since April 1998.
        Mr. Moller has over 25 years’ experience in the shipping industry and
        has served in senior management positions with Teekay Shipping Corporation
        for
        more than 15 years. He has headed its overall operations since January
        1997, following his promotion to the position of Chief Operating Officer.
        Prior
        to this, Mr. Moller headed Teekay Shipping Corporation’s global chartering
        operations and business development activities. Mr. Moller has also served
        as the Vice Chairman and as a director of Teekay GP L.L.C. since it was formed
        in November 2004. In December 2006, he was appointed Chairman of the
        International Tankers Owners Pollution Federation.
 
 **Peter
        Evensen** has
        served as the Chief Executive Officer and Chief Financial Officer and as
        a
        Director of Teekay Offshore GP L.L.C. and of Teekay Offshore Operating GP
        L.L.C.
        since they were formed in August and September 2006, respectively.
        Mr. Evensen is also the Executive Vice President and Chief Strategy Officer
        of Teekay Shipping Corporation. He joined Teekay Shipping Corporation in
        May
        2003 as Senior Vice President, Treasurer and Chief Financial Officer. He
        served
        as Executive Vice President and Chief Financial Officer of Teekay Shipping
        Corporation from February 2004 until he was appointed to his current role
        in
        November 2006. Mr. Evensen has also served as Chief Executive Officer and
        Chief Financial Officer of Teekay GP L.L.C. since it was formed in November
        2004
        and as a director of Teekay GP L.L.C. since January 2005. Mr. Evensen has
        over 20 years’ experience in banking and shipping finance. Prior to joining
        Teekay Shipping Corporation, Mr. Evensen was Managing Director and Head of
        Global Shipping at J.P. Morgan Securities Inc. and worked in other senior
        positions for its predecessor firms. His international industry experience
        includes positions in New York, London and Oslo.
 
 **David
        L. Lemmon** has
        served as a Director of Teekay Offshore GP L.L.C. since December 2006. Mr.
        Lemmon currently serves on the Board of Directors of Kirby Corporation, a
        position he has held since April 2006. Mr. Lemmon was President and Chief
        Executive Officer of Colonial Pipeline Company from 1997 until his retirement
        from that company in March 2006.
 52
 **Carl
        Mikael L.L. von Mentzer** has
        served as a Director of Teekay Offshore GP L.L.C. since December 2006. Mr.
        von
        Menzer has over 30 years' experience in the shipbuilding and offshore oil
        industries. Since 1998, Mr. von Mentzer has served as a non-executive director
        of Concordia Maritime AB in Gothenburg, Sweden and since 2002 has served
        as its
        Deputy Chairman of its Board of Directors. Prior to this, Mr. von Mentzer
        served
        in executive positions with various shipping and offshore oil companies,
        including Gotaverken Ardenal AB and Safe Partners AB in Gothenburg, Sweden
        and
        OAG Ltd. in Aberdeen, Scotland. He has also previously served as a non-executive
        director for Northern Offshore Ltd., in Oslo, Norway, and GVA Consultants
        in
        Gothenburg, Sweden.
 
 **John
        J. Peacock** has
        served as a Director of Teekay Offshore GP L.L.C. since December 2006. Mr.
        Peacock is currently the President and Chief Operating Officer of Fednav
        International Ltd., positions he has held since 1998. He also serves as
        Executive Vice-President and director of Fednav Limited. Mr. Peacock joined
        Fednav Limited in 1979 as its Treasurer, and in 1984 became Vice President,
        Finance and a director of the Fednav Group of companies, a Canadian ocean-going
        dry-bulk shipowning and chartering group. Mr. Peacock has over 40 years'
        accounting experience. Prior to joining the Fednav Group, Mr. Peacock was
        a
        partner with Clarkson Gordon (now Ernst & Young) in Montreal, Canada. Mr.
        Peacock also currently serves as a director of Oceanex Inc.
 
 **Directors
        and Executive Officers of Teekay Offshore Operating GP**  **L.L.C.**
 
 The
        following table provides information about the directors and executive officers
        of Teekay Offshore Operating GP L.L.C., the general partner of OPCO. Directors
        are appointed for one-year terms. The business address of each director and
        executive officer of Teekay Offshore Operating GP L.L.C. listed below is
        c/o Bayside House, Bayside Executive Park, West Bay Street and Blake Road,
        Nassau, Commonwealth of The Bahamas. Ages of the directors are as of December
        31, 2006.
 
 **Name**
              **Age**
              **Position**C.
                  Sean Day
              57
              ChairmanBjorn
                  Moller
              49
              Vice
                  ChairmanPeter
                  Evensen
              48
              Chief
                  Executive Officer, Chief Financial Officer and
                  Director
 
 As
        described above, the directors and executive officers of Teekay Offshore
        Operating GP L.L.C. also serve as directors or executive officers of Teekay
        Offshore GP L.L.C. The business experience of these individuals is included
        above.
 
 **B.
        Compensation**
 
 **Reimbursement
        of Expenses of Our General Partner**
 
 Our
        general partner does not receive any management fee or other compensation
        for
        managing us. Our general partner and its other affiliates are reimbursed
        for
        expenses incurred on our behalf. These expenses include all expenses necessary
        or appropriate for the conduct of our business and allocable to us, as
        determined by our general partner. Our general partner did not incur any
        of such
        expenses during 2006.
  **Executive
        Compensation**
 
 We
        and
        our general partner were formed in August 2006. OPCO’s general partner was
        formed in September 2006. Neither our general partner nor OPCO’s general partner
        paid any compensation to its directors or officers or accrued any obligations
        with respect to management incentive or retirement benefits for the directors
        and officers prior to December 31, 2006. Because Peter Evensen, the Chief
        Executive Officer and Chief Financial Officer of our general partner and
        of
        OPCO’s general partner, is an employee of Teekay Shipping Corporation, his
        compensation (other than any awards under the long-term incentive plan described
        below and the 2005 long term incentive plan of Teekay LNG Partners, L.P.)
        is set
        and paid by Teekay Shipping Corporation, and we reimburse Teekay Shipping
        Corporation for time he spends on our partnership matters.
 
 The
        corporate governance committee of the Board of Directors of OPCO’s general
        partner establishes the compensation for any key employees of OPCO. Officers
        and
        employees of our general partner, OPCO’s general partner or their respective
        affiliates may participate in employee benefit plans and arrangements sponsored
        by Teekay Shipping Corporation, our general partner or their affiliates,
        including plans that may be established in the future.
 
 **Compensation
        of Directors**
 
 Officers
        of our general partner or Teekay Shipping Corporation who also serve as
        directors of our general partner or OPCO’s general partner do not receive
        additional compensation for their service as directors. Each non-management
        director receives compensation for attending meetings of the Board of Directors,
        as well as committee meetings. Non-management directors receive a director
        fee
        of $30,000 per year and common units with an aggregate maximum value of
        $15,000 per year. The Chairman receives an additional fee of $85,000, members
        of
        the audit and conflicts committees each receive a committee fee of
        $5,000 per year, and the chairs of the audit committee and conflicts
        committee receive an additional fee of $5,000 per year for serving in that
        role. In addition, each director is reimbursed for out-of-pocket expenses
        in
        connection with attending meetings of the Board of Directors or committees.
        Each
        director is fully indemnified by us for actions associated with being a director
        to the extent permitted under Marshall Islands law.
 
 Our
        directors were appointed in December 2006 and received no compensation during
        2006.
 
 **2006
        Long-Term Incentive Plan**
 
 Our
        general partner has adopted the Teekay Offshore Partners L.P. 2006 Long-Term
        Incentive Plan for employees and directors of and consultants to our general
        partner and employees and directors of and consultants to its affiliates,
        who
        perform services for us. The plan provides for the award of restricted units,
        phantom units, unit options, unit appreciation rights and other unit or
        cash-based awards. During March 2007, we granted 2,856 common units to our
        general partner’s non-employee directors and Chairman under the 2006 Long-Term
        Incentive Plan.
 53
 **C.
        Board Practices**
 
 Teekay
        Offshore GP L.L.C., our general partner, manages our operations and activities.
        Unitholders are not entitled to elect the directors of our general partner
        or
        directly or indirectly participate in our management or operation.
 
 Our
        general partner’s Board of Directors (or *the
        Board* )
        currently consists of five members. Directors
        are appointed to serve until their successor is appointed or until they resign
        or are removed.
 
 There
        are
        no service contracts between us and any of our directors providing for benefits
        upon termination of their employment or service.
 
 The
        Board
        has the following three committees: Audit Committee, Conflicts Committee,
        and
        Corporate Governance Committee. The membership of these committees and the
        function of each of the committees are described below. Each of the committees
        is currently comprised solely of independent members, except for the Corporate
        Governance Committee, and operates under a written charter adopted by the
        Board,
        other than the Conflicts Committee. The committee charters for the Audit
        Committee and Corporate Governance Committee are available under “Other
        Information - Corporate Governance” in the Investor Centre of our web site at
        www.teekayoffshore.com.
  *Audit
        Committee* .
        The
        Audit Committee of our general partner is composed of three or more directors,
        each of whom must meet the independence standards of the NYSE, the SEC and
        any
        other applicable laws and regulations governing independence from time to
        time.
        This committee is currently comprised of directors John J. Peacock (Chair),
        David L. Lemmon and Carl Mikael L.L. von Mentzer. All members of the committee
        are financially literate and the Board has determined that Mr. Lemmon
        qualifies as an audit committee financial expert.
 
 The
        Audit
        Committee assists the Board in fulfilling its responsibilities for general
        oversight of:
 
 ·
            the
                integrity of our financial statements; ·
            our
                compliance with legal and regulatory requirements; ·
            the
                qualifications and independence of our independent auditor ;
                and ·
            the
                performance of our internal audit function and our independent
                auditor. 
 *Conflicts
        Committee.* The
        Conflicts Committee of our general partner is
        composed of the same directors constituting the Audit Committee, being David
        L.
        Lemmon (Chair), John J. Peacock, and Carl Mikael L.L. von Mentzer .
        The
        members of the Conflicts Committee may not be officers or employees of our
        general partner or directors, officers or employees of its affiliates, and
        must
        meet the independence standards established by the NYSE and the SEC to serve
        on
        an audit committee of a Board of Directors and certain other requirements.
  The
        Conflicts Committee:
 
 ·
            reviews
                specific matters that the Board believes may involve conflicts of
                interest; and ·
            determines
                if the resolution of the conflict of interest is fair and reasonable
                to
                us.  Any
        matters approved by the Conflicts Committee will be conclusively deemed to
        be
        fair and reasonable to us, approved by all of our partners, and not a breach
        by
        our general partner of any duties it may owe us or our unitholders.
 
 *Corporate
        Governance Committee.* The
        Corporate Governance Committee of our general partner is composed of at least
        two directors, a majority of whom must meet the independence standards
        established by the NYSE. This committee is currently comprised of
        directors C. Sean Day (Chair) and Bjorn Moller.
 
 The
        Corporate Governance Committee:
 
 ·
            maintains
                oversight of the operation and effectiveness of the Board and its
                corporate governance. ·
            develops,
                updates and recommends to the Board corporate governance principles
                and
                policies applicable to us and our general partner and monitors compliance
                with these principles and policies; and ·
            overseesdirector
                compensation and the long-term incentive plan described
                above. 
 **D.
        Employees**
 
 **Crewing
        and Staff**
 
 As
        of
        December 31, 2006, approximately 2,100 seagoing staff served on OPCO’s vessels
        and approximately 200 staff served on shore in technical, commercial and
        administrative roles in various countries. OPCO directly employs approximately
        18% of the on-shore staff and employs no seagoing staff directly. Certain
        subsidiaries of Teekay Shipping Corporation employ the crews, who serve on
        the
        vessels pursuant to agreements with the subsidiaries, and Teekay Shipping
        Corporation subsidiaries also provide on-shore advisory, operational and
        administrative support to OPCO’s operating subsidiaries pursuant to service
        agreements. Please see Item 7- Major Unitholders and Related Party
        transactions.
 
 Teekay
        Shipping Corporation regards attracting and retaining motivated seagoing
        personnel as a top priority, and offers seafarers highly competitive employment
        packages and comprehensive benefits and opportunities for personal and career
        development, which relates to a philosophy of promoting internally.
 
 Teekay
        Shipping Corporation has entered into a Collective Bargaining Agreement with
        the
        Polish Seafarers’ Union and the Philippine Seafarers’ Union, an affiliate of the
        International Transport Workers’ Federation (or *ITF* ),
        and a
        Special Agreement with ITF London, which covers substantially all of the
        officers and seamen that operate OPCO’s Bahamian-flagged vessels. Substantially
        all officers and seamen for the Norway-flagged vessels are covered by a
        collective bargaining agreement with Norwegian unions (Norwegian Maritime
        Officers’ Association, Norwegian Union of Marine Engineers and the Norwegian
        Seafarers’ Union). We believe Teekay Shipping Corporation’s relationships with
        these labor unions are good.
 54
 Our
        commitment to training is fundamental to the development of the highest caliber
        of seafarers for marine operations. Teekay Shipping Corporation’s cadet training
        approach is designed to balance academic learning with hands-on training
        at sea.
        Teekay Shipping Corporation has relationships with training institutions
        in
        Australia, Canada, Croatia, India, Latvia, Norway, Philippines, South Africa
        and
        the United Kingdom. After receiving formal instruction at one of these
        institutions, cadet training continues on board vessels. Teekay Shipping
        Corporation also has a career development plan that was devised to ensure
        a
        continuous flow of qualified officers who are trained on its vessels and
        familiarized with its operational standards, systems and policies. We believe
        that high-quality crewing and training policies will play an increasingly
        important role in distinguishing larger independent shipping companies that
        have
        in-house or affiliate capabilities from smaller companies that must rely
        on
        outside ship managers and crewing agents on the basis of customer service
        and
        safety.
 
 **E.
        Unit Ownership**
 
 The
        following table sets forth certain information regarding beneficial ownership,
        as of March 15, 2007, of our units by all directors and officers of our general
        partner and key employees as a group. The information is not necessarily
        indicative of beneficial ownership for any other purpose. Under SEC rules
        a
        person or entity beneficially owns any units that the person or entity has
        the
        right to acquire as of May 14, 2007 (60 days after March 15, 2007) through
        the
        exercise of any unit option or other right. Unless otherwise indicated, each
        person or entity has sole voting and investment power (or shares such powers
        with his or her spouse) with respect to the units set forth in the following
        table. Information for certain holders is based on information delivered
        to
        us.
 
 **Identity
                  of Person or Group**
              **Common
                  Units**
                **Owned**
              **Percentage
                  of**
                **Common
                  Units**
                **Owned**
              **Subordinated**
                **Units
                  Owned**
              **Percentage
                  of Subordinated**
                **Units
                  Owned**
              **Percentage
                  of**
                **Total
                  Common**
                **and
                  Subordinated**
                **Units
                  Owned** (3)All
                  directors and officers as a group
                (6
                  persons) (1) (2)
              285,000
              2.91%
              -
              -
              1.45%
 (1)
              Excludes
                  units owned by Teekay Shipping Corporation, on the board of which
                  serve
                  the directors of our general partner, C. Sean Day and Bjorn Moller.
                  In
                  addition, Mr. Moller is Teekay Shipping Corporation’s President and Chief
                  Executive Officer, and Peter Evensen, our general partner’s Chief
                  Executive Officer and Chief Financial Officer and a Director, is
                  Teekay
                  Shipping Corporation’s Executive Vice President and Chief Strategy
                  Officer. 
 (2)
              Each
                  director, executive officer and key employee beneficially owns
                  less than
                  one percent of the outstanding common and subordinated
                  units. 
 (3)
              Excludes
                  the 2% general partner interest held by our general partner, a
                  wholly
                  owned subsidiary of Teekay Shipping
                  Corporation.


**Item
      7. Major Unitholders and Related Party Transactions**





**A.
      Major Unitholders**





The
      following table sets forth the beneficial ownership, of our common and
      subordinated units by each person we know to beneficially own more than 5%
      of
      the common or subordinated units. The number of units beneficially owned by
      each
      person is determined under SEC rules and the information is not necessarily
      indicative of beneficial ownership for any other purpose. Under SEC rules a
      person beneficially owns any units as to which the person has or shares voting
      or investment power. In addition, a person beneficially owns any units that
      the
      person or entity has the right to acquire as of May 14, 2007 (60 days after
      March 15, 2007) through the exercise of any unit option or other right. The
      unitholder listed below has sole voting and investment power with respect to
      the
      units set forth in the following table.





**Identity
                of Person or Group**
            
            **Common
                Units Owned**
            
            **Percentage
                of Common Units Owned**
            
            **Subordinated
                Units Owned**
            
            **Percentage
                of Subordinated Units Owned**
            
            **Percentage
                of Total**
              **Common
                and**
              **Subordinated
                Units**
              **Owned**Teekay
                Shipping Corporation(1)
            
            
            1,750,000
            
            
            17.9%
            
            
            9,800,000
            
            
            100.0%
            
            
            58.9%Luxor
                Capital Group, LP, Luxor Management, LLC, and Christian Leone, as
                a group(2)
            
            
            743,150
            
            
            7.6%
            
            
            -
            
            
            -
            
            
            3.8%Neuberger
                Berman, Inc. and Neuberger Berman, LLC, as a group(3)
            
            
            502,000
            
            
            5.1%
            
            
            -
            
            
            -
            
            
            2.6%






(1)
            Excludes
                the 2% general partner interest held by our general partner, a wholly
                owned subsidiary of Teekay Shipping
                Corporation.





(2)
            Includes
                shared voting power and shared dispositive power as to 743,150 units.
                Luxor Capital Group, LP, Luxor Management, LLC, and Christian Leone
                all
                have shared voting and dispositive power. Luxor Capital Group, LP
                serves
                as an investment manager of Luxor Capital Group, LP’s mutual funds. This
                information is based on the Schedule 13G/A filed by this group with
                the
                SEC on February 14, 2007.





(3)
            Includes
                sole voting power as to 409,250 units and shared dispositive power
                as to
                502,000 units. Both Neuberger Berman, LLC and Neuberger Berman Management
                Inc. have shared dispositive power. Neuberger Berman, LLC and Neuberger
                Berman Management Inc. serve as sub-advisor and investment manager,
                respectively, of Neuberger Berman Inc.’s mutual funds. This information is
                based on the Schedule 13G filed by this group with the SEC on February
                13,
                2007.





Our
      majority unitholders have the same voting rights as our other unitholders.
      We
      are controlled by Teekay Shipping Corporation. We are not aware of any
      arrangements, the operation of which may at a subsequent date result in a change
      in control of the Partnership.


55


**B.
      Related Party Transactions**





a)
            Pursuant
                to a Contribution, Conveyance and Assumption Agreement, prior to
                the
                closing of our initial public offering on December 19, 2006, Teekay
                Shipping Corporation sold to us a 25.99% limited partner interest
                in OPCO
                and its subsidiaries and a 100% interest in Teekay Offshore Operating
                GP
                L.L.C., which owns the 0.01% general partner interest in OPCO, in
                exchange
                for (a) the issuance to Teekay Shipping Corporation of 2,800,000
                common units and 9,800,000 subordinated units in us and a $134.6
                million
                non-interest bearing promissory note and (b) the issuance of the 2.0%
                general partner interest in us and all of our incentive distribution
                rights to Teekay Offshore GP L.L.C., a wholly owned subsidiary of
                Teekay
                Shipping Corporation. We control OPCO through our ownership of OPCO’s
                general partner, and Teekay Shipping Corporation owns the remaining
                74.0%
                interest in OPCO. We subsequently repaid the $134.6 million promissory
                note with the net proceeds from our initial public offering.





b)
            Concurrently
                with the closing of our initial public offering, we used $20.6 million
                of
                the net proceeds from our offering to redeem 1.05 million common
                units
                from Teekay Shipping Corporation. The number of units redeemed from
                Teekay
                Shipping Corporation equal the number of units for which the underwriters
                exercised their over-allotment
                option.





c)
            In
                connection with our initial public offering we entered into an omnibus
                agreement with Teekay Shipping Corporation, Teekay LNG Partners L.P.,
                our
                general partner and others. The following discussion describes provisions
                of the omnibus agreement.




*Noncompetition* .
      Under
      the omnibus agreement, each of Teekay Shipping Corporation and Teekay LNG
      Partners L.P. has agreed, and has caused their respective controlled affiliates
      other than us to agree, not to engage in, acquire or invest in any business
      that
      owns, operates or charters (a) dynamically-positioned shuttle tankers (other
      than those operating in the conventional oil tanker trade under contracts with
      a
      remaining duration of less than three years, excluding extension options),
      (b)
      FSO units or (c) FPSO units (collectively *offshore
      vessels* ).
      This
      restriction does not apply to any tankers that Teekay LNG Partners L.P.
      currently owns, operates or maintains that may be subsequently converted to
      offshore vessels. The restriction does not prevent Teekay Shipping Corporation,
      Teekay LNG Partners L.P. or any of their respective controlled affiliates from:




·
            owning,
                operating or chartering offshore vessels if the remaining duration
                of the
                time charter or contract of affreightment for the vessel, excluding
                any
                extension options, is less than three years;




·
            owning,
                operating or chartering offshore vessels and related time charters
                or
                contracts of affreightment acquired as part of a business or package
                of
                assets if a majority of the value of the total assets or business
                acquired
                is not attributable to the offshore vessels and related time charters
                and
                contracts of affreightment, as determined in good faith by Teekay
                Shipping
                Corporation’s Board of Directors or the conflicts committee of the Board
                of Directors of Teekay LNG Partners L.P.’s general partner, as applicable;
                however, if at any time Teekay Shipping Corporation or Teekay LNG
                Partners
                L.P. completes such an acquisition, it must, within 365 days of the
                closing of the transaction, offer to sell the offshore vessels and
                related
                time charters and contracts of affreightment to us for their fair
                market
                value plus any additional tax or other similar costs to Teekay Shipping
                Corporation or Teekay LNG Partners L.P. that would be required to
                transfer
                the offshore vessels and related time charters and contracts of
                affreightment to us separately from the acquired business or package
                of
                assets;




·
            owning,
                operating or chartering offshore vessels and related time charters
                and
                contracts of affreightment that relate to a tender, bid or award
                for a
                proposed offshore project that Teekay Shipping Corporation submits
                or
                receives; however, at least 365 days after the delivery date of any
                such
                offshore vessel, Teekay Shipping Corporation must offer to sell the
                vessel
                and related time charter or contract of affreightment to us, with
                the
                vessel valued (a) for newbuildings originally contracted by Teekay
                Shipping Corporation, at its “fully-built-up cost” (which represents the
                aggregate expenditures incurred (or to be incurred prior to delivery
                to
                us) by Teekay Shipping Corporation to acquire, construct and/or convert
                and bring such offshore vessel to the condition and location necessary
                for
                our intended use, plus project development costs for completed projects
                and projects that were not completed but, if completed, would have
                been
                subject to an offer to us) and (b) for any other vessels, Teekay
                Shipping
                Corporation’s cost to acquire a newbuilding from a third party or the fair
                market value of an existing vessel, as applicable, plus in each case
                any
                subsequent expenditures that would be included in the “fully-built-up
                cost” of converting the vessel prior to delivery to us;




·
            owning,
                operating or chartering offshore vessels subject to the offers to
                us
                described in the immediately preceding two paragraphs pending our
                general
                partner’s determination whether to accept such offers and pending the
                closing of any offers we accept;




·
            owning,
                operating or chartering offshore vessels and related time charters
                and
                contracts of affreightment if our general partner has previously
                advised
                Teekay Shipping Corporation or Teekay LNG Partners L.P. that our
                general
                partner’s Board of Directors has elected, with the approval of its
                conflicts committee, not to cause us or our controlled affiliates
                to
                acquire the vessels and related time charters and contracts of
                affreightment;




·
            acquiring
                up to a 9.9% equity ownership, voting or profit participation interest
                in
                any publicly-traded company that engages in, acquires or invests
                in any
                business that owns, operates or charters offshore vessels and related
                time
                charters or contracts of affreightment;




·
            owning
                a limited partner interest in OPCO or owning shares of Petrojarl;
                or




·
            providing
                ship management services relating to owning, operating or chartering
                offshore vessels and related time charters or contracts of
                affreightment.





If
      Teekay
      Shipping Corporation or Teekay LNG Partners L.P. or any of their respective
      affiliates owns, operates or charters offshore vessels pursuant to any of the
      exceptions described above, no such entity may subsequently expand that portion
      of its business other than pursuant to those exceptions.




56


In addition to the exceptions described above, unless
        Teekay
        Shipping Corporation acquires 100% of Petrojarl, Petrojarl may continue to
        own,
        operate and charter its current fleet. If Teekay Shipping Corporation acquires
        100% of Petrojarl, we would have certain rights to acquire Petrojarl’s
        fleet.


Under
      the
      omnibus agreement we have agreed, and have caused our controlled affiliates
      to
      agree, not to own, operate or charter conventional crude oil tankers. This
      restriction does not:




·
            apply
                to any conventional crude oil tankers currently owned, operated or
                chartered by us or any of our controlled affiliates, or the ownership,
                operation or chartering of any conventional crude oil tankers that
                replace
                any of those oil tankers (or*Replacement
                Oil Tankers*)
                in connection with:




-
            the destruction or
                total loss
                of the original tanker; the tanker being damaged to an extent that
                makes
                repairing it uneconomical or renders it permanently unfit for normal
                use,
                as determined in good faith by our general partner within 90 days
                after
                the occurrence of the damage; or the tanker's condemnation, confiscation,
                requisition or a similar taking of title to or use of it that continues
                for at least six months; or


-
            the
                replacement of a time charter existing on the closing of this offering,
                where the tanker that was subject to the charter has been sold or
                transferred due to the exercise by the customer of its right under
                the
                charter to cause the sale or
                transfer;




·
            prevent
                us or any of our controlled affiliates
                from:




- 
      owning, operating or chartering conventional crude oil tankers and any related
      time charters acquired as part of a business or package of assets, if a majority
      of the value of the total assets or business acquired is not attributable to
      the
      crude oil tankers and any related charters, as determined in good faith by
      the
      conflicts committee of our general partner's Board of Directors; however, if
      at
      any time we complete such an acquisition we must within 30 days of the closing
      of the acquisition offer to sell the oil tankers and time charters to Teekay
      Shipping Corporation for fair market value plus any additional tax or other
      similar costs to us that would be required to transfer the oil tankers and
      time
      charters to Teekay Shipping Corporation separately from the acquired business
      or
      package of assets;





- 
      owning, operating or chartering conventional crude oil tankers and related
      charters subject to the offer to Teekay Shipping Corporation described in the
      preceding paragraph pending its determination whether to accept such offer
      and
      pending the closing of any offer it accepts;





- 
      acquiring up to a 9.9% equity ownership, voting or profit participation interest
      in any publicly traded company that engages in, acquires or invests in any
      business that owns, operates or charters conventional crude oil tankers and
      related charters;





- 
      owning, operating or chartering conventional crude oil tankers and related
      charters if Teekay Shipping Corporation has previously advised our general
      partner that it has elected not to acquire those tankers; or





- 
      operating our shuttle tankers in conventional crude oil tanker trades under
      contracts with a


duration
      of less than three years .




If
      we or
      any of our controlled affiliates owns, operates or charters conventional crude
      oil tankers and related charters pursuant to any of the exceptions described
      above, neither we nor such affiliate may subsequently expand that portion of
      our
      or its business other than pursuant to those exceptions.





In
      addition, under the omnibus agreement, we have agreed, and have caused our
      controlled affiliates to agree, not to engage in, acquire or invest in any
      business that owns, operates or charters LNG carriers and related time charters,
      subject to certain exceptions.




*Rights
      of First Offer on Shuttle Tankers, FSO Units, FPSO Units, Conventional Oil
      Tankers and LNG Carriers.* Under
      the
      omnibus agreement, Teekay Shipping Corporation and Teekay LNG Partners L.P.
      have
      granted to us a 30-day right of first offer on any proposed (a) sale,
      transfer or other disposition of any offshore vessels that, at the time of
      the
      proposed sale, transfer or other disposition, is subject to a time charter
      or
      contract of affreightment with a remaining term, excluding extension options,
      of
      at least three years or (b) chartering-out after the closing of this
      offering of any offshore vessel pursuant to a time charter or contract of
      affreightment with a term, excluding extension options, of at least three years.
      For any such proposed chartering-out by Teekay Shipping Corporation (or any
      of
      its controlled affiliates other than us or Petrojarl), Teekay Shipping
      Corporation granted to us an alternative right to purchase the applicable vessel
      for its fair market value. Likewise, we granted similar rights of first offer
      (other than the purchase right in connection with a chartering) to Teekay
      Shipping Corporation for any conventional crude oil tankers and to Teekay LNG
      Partners L.P. for any LNG carriers we or OPCO own or might acquire or charter.
      Teekay Shipping Corporation and Teekay LNG Partners provide to and receive
      from
      one another rights similar to those relating to us, but with respect to LNG
      carriers for Teekay LNG Partners L.P. The rights of first offer under the
      omnibus agreement do not apply to (a) a sale, transfer or other disposition
      of vessels between any controlled affiliates or pursuant to the terms of any
      charter, contract of affreightment or other agreement with a charter party
      or
      the party to the contract of affreightment or (b) the re-chartering of any
      Replacement Oil Tanker to another charter party that is not an affiliate of
      the
      existing charter party.





We
      also
      have the right to purchase, for fair market value, Petrojarl’s existing offshore
      vessels and any of its joint venture interests (in each case to the extent
      involving an offshore vessel subject to a time charter or contract of
      affreightment with a remaining term of at least three years, excluding
      extension options) if Teekay Shipping Corporation acquires 100% of Petrojarl.
      Petrojarl has four FPSOs and one shuttle tanker, with only two of the FPSOs
      currently subject to contracts with a term exceeding three years. Although
      Teekay Shipping Corporation has an interest in acquiring 100% of Petrojarl,
      it
      may choose not to do so, and a purchase would be contingent on the minority
      holders’ agreement to sell.


57


d)
            We
                and certain of our subsidiaries have entered into services agreements
                with
                certain subsidiaries of Teekay Shipping Corporation, pursuant to
                which the
                Teekay Shipping Corporation subsidiaries provide to us administrative,
                advisory, technical and strategic consulting services and ship management.
                These services are provided in a commercially reasonably manner and
                upon
                the reasonable request of our general partner or our operating
                subsidiaries, as applicable. The Teekay Shipping Corporation subsidiaries
                that are parties to the services agreements may provide these services
                directly or may subcontract for certain of these services with other
                entities, including other Teekay Shipping Corporation subsidiaries.
                We pay
                an arm's-length fee for the services that includes reimbursement
                of the
                reasonable cost of any direct and indirect expenses the Teekay Shipping
                Corporation subsidiaries incur in providing these services.During the period fromDecember
                19, 2006 toended
                December 31, 2006, the Partnership incurred $0.3 million of costs
                under
                these agreements.




e)
            During
                March 2004, a subsidiary of Teekay Shipping Corporation acquired
                from
                Navion Shipping Ltd. the right to charter-in and market Navion Shipping
                Ltd.’s vessels in the spot market at a fee of 1.25% over Navion Shipping
                Ltd.’s charter-in cost.





On
      July
      1, 2006, the Predecessor sold Navion Shipping Ltd. to a subsidiary of Teekay
      Shipping Corporation for $53.7 million. The resulting gain on sale of $18.5
      million was accounted for as an equity contribution by Teekay Shipping
      Corporation.





During
      the first half of 2006 and the years ended December 31, 2005 and 2004, the
      Predecessor earned $84.8 million, $205.9 million and $156.0 million,
      respectively, of time charter revenue pursuant to this agreement with Navion
      Shipping Ltd.





During
      the first half of 2006 and the years ended December 31, 2005 and 2004, the
      Predecessor earned $5.1 million, $8.2 million and $8.7 million,
      respectively, of management fees from commercial management services provided
      to
      a subsidiary of Teekay Shipping Corporation, relating to the vessels chartered
      from Navion Shipping Ltd.





f)
            During
                2006, the Predecessor paid $11.9 million to Teekay Shipping Corporation
                for it to assume the time charter contract for one of the Predecessor’s
                in-chartered shuttle tankers, the*Borga*.
                The resulting $11.9 million loss on sale has been accounted for as
                an
                equity distribution to Teekay Shipping
                Corporation.





g)
            On
                October 1, 2006, OPCO entered into new time-charter contracts for
                its nine
                Aframax-class conventional tankers with a subsidiary of Teekay Shipping
                Corporation at market-based daily rates for terms of five to twelve
                years.
                Under the terms of eight of these nine time-charter contracts, OPCO
                is
                responsible for the bunker fuel expenses; however, OPCO adds the
                approximate amounts of these expenses to the daily hire rate. Pursuant
                to
                these time-charter contracts, OPCO earned net voyage revenues of
                $22.3
                million during the three months ended December 31,
                2006.





During
      the first nine months of 2006 and the years ended December 31, 2005 and 2004,
      seven of these nine tankers were employed on time-charter contracts with a
      subsidiary of Teekay Shipping Corporation. The rates earned by each vessel,
      which were generally lower than market rates, depended upon the cash flow
      requirements of each vessel, which included operating expenses, loan principal
      and interest payments and drydock expenditures. Pursuant to these time-charter
      contracts, the Predecessor earned voyage revenues of $24.6 million,
      $27.9 million and $70.1 million during the first nine months of 2006
      and the years ended December 31, 2005 and 2004, respectively.





h)
            Eight
                of OPCO’S Aframax conventional oil tankers and two FSO units are managed
                by subsidiaries of Teekay Shipping Corporation. Pursuant to the associated
                management services agreements, the Partnership incurred general
                and
                administrative expenses of $5.3 million, $5.4 million and
                $4.7 million during the years ended December 31, 2006, 2005 and
                2004, respectively.




i)
            In
                February 2006, Teekay Shipping Corporation announced that it has
                been
                awarded 13-year fixed-rate contracts to charter two Suezmax shuttle
                tankers and one Aframax shuttle tanker to Fronape International Company,
                a
                subsidiary of Petrobras Transporte S.A., the shipping arm of Petroleo
                Brasileiro S.A.. In connection with these contracts, Teekay Shipping
                Corporation has exercised the purchase option on a 2000-built Aframax
                tanker that previously traded as part of Teekay Shipping Corporation’s
                spot rate chartered-in fleet and has acquired a 2006-built Suezmax
                tanker,
                both of which will be converted to shuttle tankers during the first
                half
                of 2007. The purchase price for these two vessels, including conversion
                costs, is approximately $176.3 million. Pursuant to the omnibus agreement
                described above, Teekay Shipping Corporation is obligated to offer
                these
                two vessels to us within one year of each vessel’s delivery. The third
                vessel is a 2003-built Suezmax shuttle tanker from our shuttle tanker
                fleet that commenced operation under these contracts in July 2006.


j)
            In
                June 2006, Teekay Shipping Corporation and Petrojarl ASA entered
                into an
                agreement to form, as equal partners, a joint venture company called
                Teekay Petrojarl Offshore that would focus on pursuing new opportunities
                involving FPSO units, FSO units and other mobile oil production solutions.
                Each partner has agreed to pursue all such projects exclusively through
                the joint venture, other than projects existing at the time of the
                agreement or redeployment opportunities for then-existing FPSO units
                and
                FSO units, including all current FSO units in OPCO. Either party
                may
                pursue, alone or with third parties, any projects the other partner
                declines for the joint venture to pursue. The joint venture partners
                will
                share cash flow of the joint venture in proportion to their relative
                capital contributions and each partner has equal voting power on
                a
                four-person governing board. Pursuant to the omnibus agreement described
                above, Teekay Shipping Corporation, if and when Teekay Shipping
                Corporation obtains 100% interest in Petrojarl ASA, is obligated
                to offer
                to us its interest in certain FPSO projects under the joint venture
                agreement. On October 18, 2006, Teekay Shipping Corporation completed
                a tender offer for the outstanding shares of Petrojarl ASA, resulting
                in Teekay Shipping Corporation owning a majority of, and having the
                ability to control, Petrojarl ASA. On December 1, 2006, Petrojarl
                ASA was
                renamed Teekay Petrojarl ASA.





k)
            In
                January 2007, Teekay Shipping Corporation ordered two Aframax shuttle
                tanker newbuildings which are scheduled to deliver during the third
                quarter of 2010, for a total cost of approximately $240 million.
                It is
                anticipated that these vessels will be offered to us and will be
                used to
                service either new long-term, fixed-rate contracts Teekay Shipping
                Corporation may be awarded prior to delivery or our contracts of
                affreightment in the North Sea.





58


l)
            C.
                Sean Day is the Chairman of our general partner, Teekay Offshore
                GP
                L.L.C., and of Teekay Offshore Operating GP L.L.C., the general partner
                of
                OPCO. He also is the Chairman of Teekay Shipping Corporation and
                Teekay GP
                L.L.C., the general partner of Teekay LNG Partners L.P., a publicly-held
                partnership controlled by Teekay Shipping
                Corporation.




Bjorn
      Moller is the Vice Chairman of Teekay Offshore GP L.L.C., Teekay Offshore
      Operating GP L.L.C. and Teekay GP L.L.C. He also is the President and Chief
      Executive Officer and a director of Teekay Shipping Corporation.





Peter
      Evensen is the Chief Executive Officer and Chief Financial Officer and a
      director of Teekay Offshore GP L.L.C., Teekay Offshore Operating GP L.L.C.
      and
      Teekay GP L.L.C. He also is the Executive Vice President and Chief Strategy
      Officer of Teekay Shipping Corporation.





**Item
      8. Financial Information**





**A.
      Consolidated Financial Statements and Other Financial
      Information**





**Consolidated
      Financial Statements and Notes**





Please
      see Item 18 below for additional information required to be disclosed under
      this
      Item.





**Legal
      Proceedings**





From
      time
      to time we have been, and expect to continue to be, subject to legal proceedings
      and claims in the ordinary course of our business, principally personal injury
      and property casualty claims. These claims, even if lacking merit, could result
      in the expenditure of significant financial and managerial resources. We are
      not
      aware of any legal proceedings or claims that we believe will have, individually
      or in the aggregate, a material adverse effect on us.





**Cash
      Distribution Policy**





***Rationale
      for Our Cash Distribution Policy***





Our
      cash
      distribution policy reflects a basic judgment that our unitholders will be
      better served by our distributing our cash available (after deducting expenses,
      including estimated maintenance capital expenditures and reserves) rather than
      retaining it. Because we believe we will generally finance any expansion capital
      expenditures from external financing sources, we believe that our investors
      are
      best served by our distributing all of our available cash. Our cash distribution
      policy is consistent with the terms of our partnership agreement, which requires
      that we distribute all of our available cash quarterly (after deducting
      expenses, including estimated maintenance capital expenditures and
      reserves).





***Limitations
      on Cash Distributions and Our Ability to***  ***Change
      Our Cash Distribution Policy***





There
      is
      no guarantee that unitholders will receive quarterly distributions from us.
      Our
      distribution policy is subject to certain restrictions and may be changed at
      any
      time, including:





·
            Our
                unitholders have no contractual or other legal right to receive
                distributions other than the obligation under our partnership agreement
                to
                distribute available cash on a quarterly basis, which is subject
                to our
                general partner’s broad discretion to establish reserves and other
                limitations.




·
            The
                Board of Directors of OPCO’s general partner, Teekay Offshore Operating GP
                L.L.C. (subject to approval by the Board of Directors of our general
                partner), has authority to establish reserves for the prudent conduct
                of
                OPCO’s business. The establishment of these reserves could result in a
                reduction in cash distributions.





·
            While
                our partnership agreement requires us to distribute all of our available
                cash, our partnership agreement, including provisions requiring us
                to make
                cash distributions contained therein, may be amended. Although during
                the
                subordination period, with certain exceptions, our partnership agreement
                may not be amended without the approval of non-affiliated common
                unitholders, our partnership agreement can be amended with the approval
                of
                a majority of the outstanding common units after the subordination
                period
                has ended.





·
            Even
                if our cash distribution policy is not modified or revoked, the amount
                of
                distributions we pay under our cash distribution policy and the decision
                to make any distribution is determined by the Board of Directors
                of our
                general partner, taking into consideration the terms of our partnership
                agreement.





·
            Under
                Section 51 of the Marshall Islands Limited Partnership Act, we may
                not make a distribution to you if distribution would cause our liabilities
                to exceed the fair value of our
                assets.





·
            We
                may lack sufficient cash to pay distributions to our unitholders
                due to
                decreases in net voyage revenues or increases in operating expenses,
                principal and interest payments on outstanding debt, tax expenses,
                working
                capital requirements, maintenance capital expenditures or anticipated
                cash
                needs.





·
            Our
                distribution policy may be affected by restrictions on distributions
                under
                OPCO’s credit facility agreements, which contain material financial tests
                and covenants that must be satisfied. Should OPCO be unable to satisfy
                these restrictions included in the credit agreements or if OPCO is
                otherwise in default under the credit agreements, it would be prohibited
                from making cash distributions to us, which would materially hinder
                our
                ability to make cash distributions to you, notwithstanding our stated
                cash
                distribution policy.





·
            If
                we make distributions out of capital surplus, as opposed to operating
                surplus (as such terms are defined in our partnership agreement),
                such
                distributions will constitute a return of capital and will result
                in a
                reduction in the minimum quarterly distribution and the target
                distribution levels. We do not anticipate that we will make any
                distributions from capital surplus.





59


***Minimum
      Quarterly Distribution***





Common
      unitholders are entitled under our partnership agreement to receive a quarterly
      distribution of $0.35 per unit, or $1.40 per unit per year, prior to any
      distribution on our subordinated units to the extent we have sufficient cash
      from our operations after establishment of cash reserves and payment of fees
      and
      expenses, including payments to our general partner. Our general partner has
      the
      authority to determine the amount of our available cash for any quarter. This
      determination, as well as all determinations made by the general partner, must
      be made in good faith. There is no guarantee that we will pay the minimum
      quarterly distribution on the common units in any quarter, and we will be
      prohibited from making any distributions to unitholders if it would cause an
      event of default, or an event of default is existing, under our credit
      agreements.




Commencing
      after the date of our initial public offering, cash distributions declared
      during February 2007 for the quarter ended December 31, 2006, were $1.0 million,
      or $0.05 per unit, prorated for the period of December 19 to December 31, 2006.





***Subordination
      Period***





During
      the subordination period applicable to the subordinated units held by Teekay
      Shipping Corporation, the common units have the right to receive distributions
      of available cash from operating surplus in an amount equal to the minimum
      quarterly distribution, plus any arrearages in the payment of the minimum
      quarterly distribution on the common units from prior quarters, before any
      distributions of available cash from operating surplus may be made on the
      subordinated units. The purpose of the subordinated units is to increase the
      likelihood that during the subordination period there will be available cash
      to
      be distributed on the common units.





***Incentive
      Distribution Rights***





Incentive
      distribution rights represent the right to receive an increasing percentage
      of
      quarterly distributions of available cash from operating surplus (as defined
      in
      our partnership agreement) after the minimum quarterly distribution and the
      target distribution levels have been achieved. Our general partner currently
      holds the incentive distribution rights, but may transfer these rights
      separately from its general partner interest, subject to restrictions in the
      partnership agreement. Except for transfers of incentive distribution rights
      to
      an affiliate or another entity as part of our general partner's merger or
      consolidation with or into, or sale of all or substantially all of its assets
      to
      such entity, the approval of a majority of our common units (excluding common
      units held by our general partner and its affiliates), voting separately as
      a
      class, generally is required for a transfer of the incentive distributions
      rights to a third party prior to December 31, 2016.





The
      following table illustrates the percentage allocations of the additional
      available cash from operating surplus among the unitholders and our general
      partner up to the various target distribution levels. The amounts set forth
      under "Marginal Percentage Interest in Distributions'' are the percentage
      interests of the unitholders and our general partner in any available cash
      from
      operating surplus we distribute up to and including the corresponding amount
      in
      the column "Total Quarterly Distribution Target Amount,'' until available cash
      from operating surplus we distribute reaches the next target distribution level,
      if any. The percentage interests shown for the unitholders and our general
      partner for the minimum quarterly distribution are also applicable to quarterly
      distribution amounts that are less than the minimum quarterly distribution.
      The
      percentage interests shown for our general partner include its 2% general
      partner interest and assume the general partner has contributed any capital
      necessary to maintain its 2.0% general partner interest and has not transferred
      the incentive distribution rights.




**Marginal
                    Percentage Interest**
                  **in
                    Distributions****Total
                  Quarterly**
                ****Distribution
                  Target Amount****
              **Unitholders**
              **General
                  Partner**Minimum
                  Quarterly Distribution
              $0.35
              98.0%
              2.0%First
                  Target Distribution
              Up
                  to $0.4025
              98.0%
              2.0%Second
                  Target Distribution
              Above
                  $0.4025 up to $0.4375
              85.0%
              15.0%Third
                  Target Distribution
              Above
                  $0.4375 up to $0.525
              75.0%
              25.0%Thereafter
              Above
                  $0.525
              50.0%
              50.0%


**B.
      Significant Changes**





No
      significant changes have occurred since the date of the annual financial
      statements included herein.


60


**Item
      9. The Offer and Listing**





Our
      common units are traded on the New York Stock Exchange (or *NYSE* )
      under
      the symbol “TOO". The following table sets forth the high and low closing sales
      prices for our common units on the NYSE for each of the periods indicated.





**Year
                Ended**
            Dec.
                31,
              2006(1)High
            26.77Low
            21.00





**Quarter
                Ended**
            Dec.
                31,
              2006(1)High
            26.77Low
            21.00





**Months
                Ended**
            Mar.
                31,
              2007
            Feb.
                  28,
                2007
            Jan.
                31,
              2007
            Dec.
              31,
              2006(1)High
            31.66
            30.33
            28.00
            26.77Low
            29.00
            27.99
            26.00
            21.00






(1)
            Period
                beginning December 13, 2006.




**Item
      10. Additional Information**





**Memorandum
      and Articles of Association**





The
      information required to be disclosed under Item 10.B is incorporated by
      reference to the following sections of the prospectus included in Amendment
      No. 1 to our Registration Statement on Form F-1 filed with the SEC on
      December 8, 2006: "The Partnership Agreement," "Description of the Common Units
      - The Units," Conflicts of Interest and Fiduciary Duties" and "Our Cash
      Distribution Policy and Restrictions on Distributions."





**Material
      Contracts**





The
      following is a summary of each material contract, other than material contracts
      entered into in the ordinary course of business, to which we or any of our
      subsidiaries is a party, for the two years immediately preceding the date of
      this Annual Report, each of which is included in the list of exhibits in Item
      19:





a)
            Agreement,
                dated June 26, 2003, for a U.S. $455,000,000 Revolving Credit Facility
                between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various
                other
                banks. This facility bears interest at LIBOR plus a margin of 0.625%.
                The
                amount available under the facility reduces semi-annually, with a
                bullet
                reduction of $131.0 million on maturity in October 2014.The
                credit facility may be used for acquisitions and for general partnership
                purposes. Our obligations under the facility are secured by first-priority
                mortgages on seven shuttle tankers and one FSO
                unit.





b)
            Agreement,
                dated October 2, 2006, for a U.S. $940,000,000 Revolving Credit Facility
                between Teekay Offshore Operating L.P., Den Norske Bank ASA and various
                other banks. This facility bears interest at LIBOR plus a margin
                of
                0.625%. The amount available under the facility reduces semi-annually,
                with a bullet reduction of $350.0 million on maturity in October
                2014.The
                credit facility may be used for acquisitions and for general partnership
                purposes. In addition, this facility allows OPCO to make working
                capital
                borrowings and loan the proceeds to us, which we could use to make
                distributions, provided that such amounts are paid down annually.
                Our
                obligations under the facility are secured by first-priority mortgages
                on
                11 shuttle tankers and eight conventional tankers.





c)
            Omnibus
                agreement with Teekay Shipping Corporation, Teekay LNG Partners L.P,
                our
                general partner, OPCO and related parties. Please read Item 7 - Major
                Unitholders and Related Party Transactions for a summary of certain
                contract terms.




d)
            We
                and certain of our operating subsidiaries have entered into services
                agreements with certain subsidiaries of Teekay Shipping Corporation
                pursuant to which the Teekay Shipping Corporation subsidiaries provide
                us
                and our operating subsidiaries with administrative, advisory, technical
                and strategic consulting services for an arms-length fee that includes
                reimbursement of the reasonable cost of any direct and indirect expenses
                it incurs in providing these services.Please
                read Item 7 - Major Unitholders and Related Party Transactions for
                a
                summary of certain contract terms.




e)
            Contribution,
                Conveyance and Assumption Agreement. Please read Item 7 - Major
                Unitholders and Related Party Transactions for a summary of certain
                contract terms.




f)
            Teekay
                Offshore Partners L.P. 2006 Long-Term Incentive Plan. Please read
                Item 6 -
                Directors, Senior Management and Employees for a summary of certain
                plan
                terms.


61


**Exchange
      Controls and Other Limitations Affecting Unitholders**





We
      are
      not aware of any governmental laws, decrees or regulations, including foreign
      exchange controls, in the Republic of The Marshall Islands that restrict the
      export or import of capital, or that affect the remittance of dividends,
      interest or other payments to non-resident holders of our
      securities.





We
      are
      not aware of any limitations on the right of non-resident or foreign owners
      to
      hold or vote our securities imposed by the laws of the Republic of the Marshall
      Islands or our Articles of Incorporation and Bylaws.





**Taxation** **





***Marshall
      Islands Tax Consequences*** .
      Because
      we and our subsidiaries do not, and we do not expect that we and our
      subsidiaries will, conduct business or operations in the Republic of the
      Marshall Islands, and because all documentation related to our initial public
      offering was executed outside of the Republic of the Marshall Islands, under
      current Marshall Islands law, no taxes or withholdings will be imposed by the
      Republic of the Marshall Islands on distributions, including upon a return
      of
      capital, made to unitholders, so long as such persons do not reside in, maintain
      offices in, nor engage in business in the Republic of the Marshall Islands.
      Furthermore, no stamp, capital gains or other taxes will be imposed by the
      Republic of the Marshall Islands on the purchase, ownership or disposition
      by
      such persons of our common units.





***Canadian
      Federal Income Tax Consequences*** .
      The
      following discussion is a summary of the material Canadian federal income tax
      consequences under the Income Tax Act (Canada) (or the *Canada
      Tax Act* ),
      that
      we believe are relevant to holders of common units who are, at all relevant
      times, for the purposes of the Canada Tax Act and the Canada-United States
      Tax
      Convention 1980 (or the *Canada-U.S. Treaty* )
      resident in the United States and who deal at arm’s length with us and Teekay
      Shipping Corporation (or *U.S. Resident
      Holders* ).





Under
      the
      Canada Tax Act, no taxes on income (including taxable capital gains) are payable
      by U.S. Resident Holders in respect of the acquisition, holding,
      disposition or redemption of the common units, provided that we do not carry
      on
      business in Canada and such U.S. Resident Holders do not, for the purposes
      of the Canada-U.S. Treaty, otherwise have a permanent establishment or
      fixed base in Canada to which such common units pertain and, in addition, do
      not
      use or hold and are not deemed or considered to use or hold such common units
      in
      the course of carrying on a business in Canada and, in the case of any
      U.S. Resident Holders that carry on an insurance business in Canada and
      elsewhere, such U.S. Resident Holders establish that the common units are
      not effectively connected with their insurance business carried on in
      Canada.




In
      this
      connection, we believe that our activities and affairs and the activities and
      affairs of OPCO, a Marshall Island Limited Partnership in which we own a 26.0%
      limited partnership interest, are conducted in a manner that both we and OPCO
      are not carrying on business in Canada. As a result, U.S. Resident Holders
      should not be considered to be carrying on business in Canada for purposes
      of
      the Canada Tax Act solely by reason of the acquisition, holding, disposition
      or
      redemption of their common units. We intend that this is the case,
      notwithstanding that certain services will be provided to Teekay Offshore
      Partners L.P., OPCO and its operating subsidiaries indirectly through
      arrangements with a subsidiary of Teekay Shipping Corporation that is resident
      and based in the Bahamas, by Canadian service providers.  However
      we cannot assure this result.





**Documents
      on Display**





Documents
      concerning us that are referred to herein may be inspected at our principal
      executive headquarters at Bayside House, Bayside Executive Park, West Bay Street
      & Blake Road, P.O. Box AP-59212, Nassau, The Bahamas. Those documents
      electronically filed via the SEC’s Electronic Data Gathering, Analysis, and
      Retrieval (or *EDGAR* )
      system
      may also be obtained from the SEC’s website at *www.sec.gov* ,
      free of
      charge, or from the Public Reference Section at 100 F Street, NE, Washington,
      D.C. 20549, at prescribed rates. Further information on the operation of the
      SEC
      public reference rooms may be obtained by calling the SEC at 1-800-SEC-0330.




**Item
      11. Quantitative and Qualitative Disclosures About Market
      Risk**





**Interest
      Rate Risk**





We
      are
      exposed to the impact of interest rate changes primarily through OPCO’s unhedged
      floating-rate borrowings. Significant increases in interest rates could
      adversely affect operating margins, results of operations and OPCO’s ability to
      service its debt. From time to time, we OPCO uses interest rate swaps to reduce
      exposure to market risk from changes in interest rates. The principal objective
      of these contracts is to minimize the risks and costs associated with the
      floating-rate debt.




The
      tables below provide information about financial instruments as at December
      31,
      2006 that are sensitive to changes in interest rates. For debt obligations,
      the
      table presents principal payments and related weighted-average interest rates
      by
      expected maturity dates. For interest rate swaps, the table presents notional
      amounts and weighted-average interest rates by expected contractual maturity
      dates.





**Expected
                Maturity Date****2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**
            
            **Total**
            
            **Fair
                Value**
              **Asset/(Liability)**
            
            **Rate****(1)****(in
                millions of U.S. dollars, except percentages)**Long-Term
                Debt:U.S
                Dollar- denominated(2)
            
            
            17.7
            
            
            55.7
            
            
            49.2
            
            
            97.2
            
            
            154.0
            
            
            929.6
            
            
            1,303.4
            
            
            (1,303.4
            )
            
            6.0%Interest
                Rate Swaps:Contract
                Amount(3)
            
            
            297.4
            
            
            8.5
            
            
            208.5
            
            
            8.5
            
            
            8.5
            
            
            613.6
            
            
            1,145.0
            
            
            (22.4
            )
            
            4.9%Average
                Fixed Pay Rate(2)
            
            
            5.4%
            
            
            4.9%
            
            
            4.3%
            
            
            4.9%
            
            
            4.9%
            
            
            4.8%
            
            
            4.9%


_________


(1)
            Rate
                refers to the weighted-average effective interest rate for OPCO’s debt,
                including the margin paid on our floating-rate debt and the average
                fixed
                pay rate for interest rate swaps. The average fixed pay rate for
                interest
                rate swaps excludes the margin paid on the floating-rate debt, which
                as of
                December 31, 2006 ranged from 0.45% to 0.80%. (2)
            Interest payments on floating-rate debt and interest
                rate swaps are based on LIBOR. (3)
            The average variable
                receive
                rate for interest rate swaps is set quarterly at the 3-month LIBOR
                or
                semi-annually at 6-month LIBOR.


62


Counterparties
      to these financial instruments expose us to credit-related losses in the event
      of nonperformance; however, counterparties to these agreements are major
      financial institutions, and we consider the risk of loss due to nonperformance
      to be minimal. Neither we nor OPCO requires collateral from these institutions.
      Neither we nor OPCO holds or issues interest rate swaps for trading
      purposes.





**Foreign
      Currency Fluctuation Risk**





OPCO’s
      primary economic environment is the international shipping market. This market
      utilizes the U.S. Dollar as its functional currency. Consequently,
      virtually all of OPCO’s revenues and most of its operating costs are in
      U.S. Dollars. OPCO incurs certain vessel operating expenses and general and
      administrative expenses in foreign currencies, the most significant of which
      is
      the Norwegian Kroner. For 2006 and 2005, approximately 44.1% and 38.8%,
      respectively, of vessel operating costs and general and administrative expenses
      were denominated in Norwegian Kroner.





Although
      the majority of OPCO’s transactions, assets and liabilities are denominated in
      U.S. Dollars, it had Norwegian Kroner-denominated deferred income taxes of
      approximately 430.4 million ($68.8 million) at December 31, 2006.
      There is a risk that currency fluctuations will have a negative effect on the
      value of cash flows. Neither we nor OPCO has entered into any forward contracts
      to protect against currency fluctuations on any future taxes. On the closing
      of
      our initial public offering, OPCO entered into new services agreements with
      subsidiaries of Teekay Shipping Corporation whereby the subsidiaries operate
      and
      crew OPCO’s vessels. Under these service agreements, OPCO pays all vessel
      operating expenses in U.S. Dollars and will not be subject to currency
      exchange fluctuations prior to 2009. Beginning in 2009, payments under the
      service agreements will adjust to reflect any change in Teekay Shipping
      Corporation’s cost of providing services based on fluctuations in the value of
      the Norwegian Kroner relative to the U.S. Dollar. We may seek to hedge this
      currency fluctuation risk in the future.





**Item
      12. Description of Securities Other than Equity Securities**





Not
      applicable.




**PART
      II**





**Item
      13. Defaults, Dividend Arrearages and Delinquencies**





None.





**Item
      14. Material Modifications to the Rights of Unitholders and Use of Proceeds**





The
      Partnership completed its initial public offering during December 2006. For
      information regarding the use of proceeds, please read Item 18 - Financial
      Statements: Note 2 - Initial Public Offering





**Item
      15. Controls and Procedures**





Our
      general partner conducted an evaluation of our disclosure controls and
      procedures under the supervision and with the participation of our general
      partner’s Chief Executive Officer and Chief Financial Officer. Based on the
      evaluation, the Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective as of December 31,
      2006 to ensure that information required to be disclosed by us in the reports
      we
      file or submit under the Securities and Exchange Act of 1934 is accumulated
      and
      communicated to our general partner’s management, including the principal
      executive and principal financial officers, or persons performing similar
      functions, as appropriate to allow timely decisions regarding required
      disclosure.





The
      Chief
      Executive Officer and Chief Financial Officer does not expect that our
      disclosure controls or internal controls will prevent all error and all fraud.
      Although our disclosure controls and procedures were designed to provide
      reasonable assurance of achieving their objectives, a control system, no matter
      how well conceived and operated, can provide only reasonable, not absolute,
      assurance that the objectives of the system are met. Further, the design of
      a
      control system must reflect the fact that there are resource constraints, and
      the benefits of controls must be considered relative to their costs. Because
      of
      the inherent limitations in all control systems, no evaluation of controls
      can
      provide absolute assurance that all control issues and instances of fraud,
      if
      any, within us have been detected. These inherent limitations include the
      realities that judgments in decision-making can be faulty, and that breakdowns
      can occur because of simple error or mistake. Additionally, controls can be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by management override of the control. The design of any system
      of
      controls also is based partly on certain assumptions about the likelihood of
      future events, and there can be no assurance that any design will succeed in
      achieving its stated goals under all potential future
      conditions.




**Item
      16A. Audit Committee Financial Expert**





The
      Board
      of Directors of our general partner has determined that director David L.
      Lemmon qualifies as an audit committee financial expert and is independent
      under applicable NYSE and SEC standards.





**Item
      16B. Code of Ethics**





Our
      general partner has adopted Standards of Business Conduct that include a Code
      of
      Ethics for all our employees and the employees and directors of our general
      partner. This document is available under “Other Information - Corporate
      Governance” in the Investor Centre of our web site ( www.teekayoffshore.com ).
      We
      intend to disclose, under “Other Information - Corporate Governance” in the
      Investor Centre of our web site, any waivers to or amendments of the Standards
      of Business Conduct or Code of Ethics for the benefit of any directors and
      executive officers of our general partner.


63


**Item
      16C. Principal Accountant Fees and Services**





Our
      principal accountant for 2006 and 2005 was Ernst & Young LLP, Chartered
      Accountants. The following table shows the fees we or our predecessor paid
      or
      accrued for audit services provided by Ernst & Young LLP for 2006 and 2005.





**Fees**
            
            **2006**
            
            **2005**Audit
                Fees(1)
            
            $
            575,400
            
            $
            274,800Audit-Related
                Fees(2)
            
            
            40,000
            
            
            62,500Tax
                Fees(3)
            
            
            144,300
            
            
            118,300Total
            
            $
            759,700
            
            $
            455,600




(1)
            Audit
                fees represent fees for professional services provided in connection
                with
                the audit of our consolidated financial statements, review of our
                quarterly consolidated financial statements and audit services
                provided in connection with other statutory or regulatory filings,
                including professional services in connection with the review of our
                regulatory filings for our initial public offering of common units
                in
                December 2006. (2)
            Audit-related
                fees consisted primarily of accounting consultations. (3)
            For 2006 and 2005,
                respectively, tax fees principally included corporate tax compliance
                fees
                of $39,500 and $31,600, and personal and expatriate tax services
                fees of
                $94,800 and $86,700. Tax fees in 2006 also included international
                tax
                planning fees of $10,000.





The
      Audit
      Committee of our general partner’s Board of Directors has the authority to
      pre-approve permissible audit-related and non-audit services not prohibited
      by
      law to be performed by our independent auditors and associated fees. Engagements
      for proposed services either may be separately pre-approved by the Audit
      Committee or entered into pursuant to detailed pre-approval policies and
      procedures established by the Audit Committee, as long as the Audit Committee
      is
      informed on a timely basis of any engagement entered into on that basis. The
      Audit Committee separately pre-approved all engagements and fees paid to our
      principal accountant in 2006.





**Item
      16D. Exemptions from the Listing Standards for Audit Committees**




Not
      applicable.





**Item
      16E. Purchases of Units by the Issuer and Affiliated
      Purchasers**





We
      redeemed 1,050,000 common units from Teekay Shipping Corporation for $20.6
      million of net proceeds of our initial public offering. This redemption was
      done
      in connection with the underwriters exercise of their over-allotment option
      of
      1,050,000 common units.


**PART
      III**





**Item
      17. Financial Statements**





Not
      applicable.




**Item
      18. Financial Statements**





The
      following financial statements and schedule, together with the related report
      of
      Ernst & Young LLP, Independent Registered Public Accounting Firm thereon ,
      are filed as part of this Annual Report:


**Page**Report
                of Independent Registered Public Accounting Firm
            F-1**Consolidated
                Financial Statements**
              Consolidated
                Statements of Income (Loss)
            F-2Consolidated
                Balance Sheets
            F-3Consolidated
                Statements of Cash Flows
            F-4Consolidated
                Statements of Changes in Partners’ Equity/Owner’s Equity
            F-5Notes
                to the Consolidated Financial Statements
            F-7





All
      other
      schedules for which provision is made in the applicable accounting regulations
      of the SEC are not required, are inapplicable or have been disclosed in the
      Notes to the Consolidated Financial Statements and therefore have been
      omitted.


64


**Item
      19. Exhibits**





The
      following exhibits are filed as part of this Annual Report:





1.1
            Certificate
                of Limited Partnership of Teekay Offshore Partners L.P.
                (1)1.2
            First
                Amended and Restated Agreement of Limited Partnership of Teekay Offshore
                Partners L.P. (2)1.3
            Certificate
                of Formation of Teekay Offshore GP L.L.C. (1)1.4
            Amended
                and Restated Limited Liability Company Agreement of Teekay Offshore
                GP
                L.L.C. (1)1.5
            Certificate
                of Limited Partnership of Teekay Offshore Operating L.P.
                (1)1.6
            Amended
                and Restated Agreement of Limited Partnership of Teekay Offshore
                Operating
                Partners L.P. (1)1.7
            Certificate
                of Formation of Teekay Offshore Operating GP L.L.C. (1)1.8
            Amended
                and Restated Limited Liability Company Agreement of Teekay Offshore
                Operating GP L.L.C. (1)4.1
            Agreement,
                dated June 26, 2003, for a U.S $455,000,000 Revolving Credit Facility
                between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various
                other
                banks (1)4.2
            Agreement,
                dated October 2, 2006, for a U.S $940,000,000 Revolving Credit Facility
                between Teekay Offshore Operating L.P., Den Norske Bank ASA and various
                other banks (1)4.3
            Contribution,
                Conveyance and Assumption Agreement (1)4.4
            Teekay
                Offshore Partners L.P. 2006 Long-Term Incentive Plan
                (1)4.5
            Amended
                and Restated Omnibus Agreement (1)4.6
            Administrative
                Services Agreement between Teekay Offshore Operating Partners L.P.
                and
                Teekay Shipping Limited (3)4.7
            Advisory,
                Technical and Administrative Services Agreement (3)4.8
            Administrative
                Services Agreement between Teekay Offshore Partners L.P. and Teekay
                Shipping Limited (3)8.1
            List
                of Subsidiaries of Teekay Offshore Partners L.P.12.1
            Rule
                13a-14(a)/15d-14(a) Certification of Teekay Offshore Partners L.P.’s Chief
                Executive Officer12.2
            Rule
                13a-14(a)/15d-14(a) Certification of Teekay Offshore Partners L.P.’s Chief
                Financial Officer13.1
            Teekay
                Offshore Partners L.P. Certification of Peter Evensen, Chief Executive
                Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section
                1350,
                as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





(1)
            Previously
                filed as an exhibit to the Partnership’s Registration Statement on Form
                F-1 (File No. 333-139116), filed with the SEC on December 4, 2006,
                and
                hereby incorporated by reference to such Registration
                Statement.





(2)
            Previously
                filed as Appendix A to the Partnership’s Rule 424(b)(4) Prospectus filed
                with the SEC on December 14, 2006, and hereby incorporated by reference
                to
                such Prospectus.





(3)
            Previously
                filed as an exhibit to the Partnership’s Amendment No. 1 to Registration
                Statement on Form F-1 (File No. 333-139116), filed with the SEC on
                December 7, 2006, and hereby incorporated by reference to such
                Registration Statement. 65


**SIGNATURE**


The
        registrant hereby certifies that it meets all of the requirements for filing
        on
        Form 20-F and that it has duly caused and authorized the undersigned to sign
        this annual report on its behalf.
  
 TEEKAY OFFSHORE PARTNERS L.P.
                
                By:
                  Teekay Offshore GP L.L.C., its general partnerDated: April 19, 2007
              By: /s/
                  Peter Evensen
                Peter Evensen
                Chief Executive Officer and Chief Financial
                  Officer
                (Principal Financial and Accounting
                  Officer)






66





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and Unitholders of


**TEEKAY
      OFFSHORE PARTNERS L.P.**





We
      have
      audited the accompanying consolidated balance sheets of **Teekay
      Offshore Partners L.P.** (successor
      to Teekay Offshore Partners Predecessor) **and
      subsidiaries** (or
      the *Partnership* )
      as of
      December 31, 2006 and 2005, and the related consolidated statements of income
      (loss) for the years ended December 31, 2006, 2005 and 2004 aggregated as
      follows:





Year
      Ended December 31, 2006


·
            January
                1 to December 18, 2006


·
            December
                19 to December 31, 2006





Year
      Ended December 31, 2005


·
            January
                  1 to December 31, 2005




Year
      Ended December 31, 2004


·
            January
                  1 to December 31, 2004




We
      have
      also audited the consolidated statements of the changes in partners’
equity/owner’s equity and cash flows for the three years ended December 31,
      2006, 2005 and 2004. These financial statements are the responsibility of the
      Partnership's management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Partnership’s internal control over financial reporting. Our audits
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Partnership’s internal control over financial reporting. Accordingly, we express
      no such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Teekay Offshore
      Partners L.P. and subsidiaries at December 31, 2006 and 2005, and the
      consolidated results of their operations and their cash flows for each of the
      three years ended December 31, 2006 in conformity with U.S. generally accepted
      accounting principles.




As
        discussed in Note 1 to the consolidated financial statements, on January
        1,
        2006, the Partnership adopted the provisions of Statement of Financial
        Accounting Standards No. 123(R), *Share-Based
        Payment.*





Vancouver, Canada
            /s/
              Ernst & Young LLPMarch 14, 2007
            Chartered
              Accountants








F-1


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**CONSOLIDATED
      STATEMENTS OF INCOME (LOSS)**


**(in
      thousands of U.S. dollars, except unit and per unit data)**





**Year
                Ended December 31, 2006****January
                1**
              **to**
              **December
                18,**
              **2006**
              **$**
            
            **December
                19**
              **to**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended December 31,**
              **2004**
              **$****VOYAGE
                REVENUES**($150,621,
                $254,080 and $249,837 for 2006, 2005 and 2004, respectively, from
                related
                parties -*notes
                11c, 11g, 11j, 11k, 11l, 11n and 11o*)
            
            
            684,766
            
            
            23,926
            
            
            807,548
            
            
            986,504**OPERATING
                EXPENSES**Voyage
                expenses ($394, $600, $336 for 2006, 2005 and 2004, respectively,
                from
                related parties -*note
                11m*)
            
            
            91,321
            
            
            3,102
            
            
            74,543
            
            
            118,819Vessel
                operating expenses
            
            
            102,311
            
            
            4,087
            
            
            104,475
            
            
            105,595Time-charter
                hire expense
            
            
            239,311
            
            
            5,641
            
            
            373,536
            
            
            372,449Depreciation
                and amortization
            
            
            98,386
            
            
            3,636
            
            
            107,542
            
            
            118,460General
                and administrative ($5,618, $5,438 and $4,724 for 2006, 2005 and
                2004,
                respectively, from related parties -*notes
                11h and 11q)*
            
            
            70,387
            
            
            2,129
            
            
            85,856
            
            
            65,819Vessel
                and equipment writedowns and (gain) loss on sale of vessels*(note
                16)*
            
            
            (4,778
            )
            
            -
            
            
            2,820
            
            
            (3,725
            )Restructuring
                charge*(note
                10)*
            
            
            832
            
            
            -
            
            
            955
            
            
            -**Total
                operating expenses**
            
            
            597,770
            
            
            18,595
            
            
            749,727
            
            
            777,417**Income
                from vessel operations**
            
            
            86,996
            
            
            5,331
            
            
            57,821
            
            
            209,087**OTHER
                ITEMS**Interest
                expense*(notes
                6 and 7)*
            
            
            (67,225
            )
            
            (2,200
            )
            
            (39,791
            )
            
            (43,957
            )Interest
                income
            
            
            5,167
            
            
            191
            
            
            4,605
            
            
            2,459Equity
                income from joint ventures
            
            
            6,162
            
            
            -
            
            
            5,199
            
            
            6,162Gain
                on sale of marketable securities*(note
                11b)*
            
            
            -
            
            
            -
            
            
            -
            
            
            94,222Foreign
                currency exchange gain (loss)*(note
                6)*
            
            
            (66,574
            )
            
            (131
            )
            
            34,178
            
            
            (37,910
            )Income
                tax recovery (expense) (*note
                13)*
            
            
            (2,672
            )
            
            (99
            )
            
            13,873
            
            
            (28,188
            )Other
                income - net (*note
                10*)
            
            
            8,360
            
            
            309
            
            
            9,091
            
            
            14,064**Total
                other items**
            
            
            (116,782
            )
            
            (1,930
            )
            
            27,155
            
            
            6,852**Net
                income (loss) before non-controlling interest**
            
            
            (29,786
            )
            
            3,401
            
            
            84,976
            
            
            215,939Non-controlling
                interest
            
            
            (3,777
            )
            
            (2,553
            )
            
            (229
            )
            
            (2,167
            )**Net
                income (loss)**
            
            
            (33,563
            )
            
            848
            
            
            84,747
            
            
            213,772General
                partner’s interest in net income
            
            
            -
            
            
            17
            
            
            -
            
            
            -Limited
                partners’ interest (*note
                17*)Net
                income (loss)
            
            
            (33,563
            )
            
            831
            
            
            84,747
            
            
            213,772Net
                income (loss) per:•
                Common unit (basic and diluted)
            
            
            (2.66
            )
            
            0.05
            
            
            6.73
            
            
            16.97•
                Subordinated unit (basic and diluted)
            
            
            (2.66
            )
            
            0.04
            
            
            6.73
            
            
            16.97•
                Total unit (basic and diluted)
            
            
            (2.66
            )
            
            0.04
            
            
            6.73
            
            
            16.97Weighted-average
                number of units outstanding:•
                Common units (basic and diluted)
            
            
            2,800,000
            
            
            9,800,000
            
            
            2,800,000
            
            
            2,800,000•
                Subordinated units (basic and diluted)
            
            
            9,800,000
            
            
            9,800,000
            
            
            9,800,000
            
            
            9,800,000•
                Total units (basic and diluted)
            
            
            12,600,000
            
            
            19,600,000
            
            
            12,600,000
            
            
            12,600,000





*The
      accompanying notes are an integral part of the consolidated financial
      statements.*


F-2


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands of U.S. dollars)**





**As
                at**
              **December
                31,**
              **2006**
              **$**
            
            **As
                at**
              **December
                31,**
              **2005**
              **$****ASSETS****Current**Cash
                and cash equivalents*(note
                7)*
            
            
            113,986
            
            
            128,986Accounts
                receivable, net of allowance for doubtful accounts of $401(December
                31, 2005 - $987)
            
            
            24,635
            
            
            34,425Net
                investment in direct financing leases - current (*notes
                1 and 14a*)
            
            
            21,764
            
            
            20,240Prepaid
                expenses
            
            
            24,608
            
            
            36,475Other
                current assets
            
            
            7,732
            
            
            6,218**Total
                current assets**
            
            
            192,725
            
            
            226,344**Vessels
              and
              equipment***(notes
              1 and 7 )*At
                cost, less accumulated depreciation of $581,994 (December 31, 2005
                -
                $436,753)
            
            
            1,524,842
            
            
            1,265,630Vessels
                under capital leases, at cost, less accumulated depreciation of $3,308
            
            
            -
            
            
            34,434**Total
                vessels and equipment**
            
            
            1,524,842
            
            
            1,300,064Net
                investment in direct financing leases*(notes
                1 and 14a)*
            
            
            92,018
            
            
            100,996Investment
                in joint ventures*(note
                1)*
            
            
            -
            
            
            34,402Other
                assets
            
            
            38,198
            
            
            13,160Intangible
                assets - net*(note
                4)*
            
            
            66,425
            
            
            78,502Goodwill*(note
                4)*
            
            
            127,113
            
            
            130,549**Total
                assets**
            
            
            2,041,321
            
            
            1,884,017**LIABILITIES
                AND PARTNERS’ EQUITY/OWNER’S EQUITY****Current**
              Accounts
                payable
            
            
            7,366
            
            
            16,808Accrued
                liabilities (*note
                5*)
            
            
            42,987
            
            
            30,750Current
                portion of long-term debt*(note
                7)*
            
            
            17,656
            
            
            -Current
                obligation under capital lease
            
            
            -
            
            
            1,355Advances
                from affiliate*(note
                6)*
            
            
            16,951
            
            
            559,250**Total
                current liabilities**
            
            
            84,960
            
            
            608,163Long-term
                debt*(note
                7)*
            
            
            1,285,696
            
            
            398,360Long-term
                obligation under capital lease
            
            
            -
            
            
            32,890Deferred
                income taxes*(note
                13)*
            
            
            71,583
            
            
            57,884Other
                long-term liabilities
            
            
            32,163
            
            
            34,482**Total
                liabilities**
            
            
            1,474,402
            
            
            1,131,779Commitments
                and contingencies*(notes
                7, 8, 11q, 12 and 14)***Non-controlling
                interest / Minority interest**
            
            
            427,977
            
            
            11,859**Partners’
                equity/Owner’s equity**Partners’
                equity/owner’s equity
            
            
            133,642
            
            
            740,271Accumulated
                other comprehensive income
            
            
            5,300
            
            
            108**Total
                partners’ equity/owner’s equity**
            
            
            138,942
            
            
            740,379**Total
                liabilities and partners’ equity/owner’s equity**
            
            
            2,041,321
            
            
            1,884,017





*The
      accompanying notes are an integral part of the consolidated financial
      statements.*


F-3


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands of U.S. dollars)**





**Year
                Ended**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended December 31,**
              **2005**
              **$**
            
            **Year
                Ended December 31,**
              **2004**
              **$**Cash and
              cash
              equivalents provided by (used for)**OPERATING ACTIVITIES**Net
                income (loss)
            
            
            (32,715
            )
            
            84,747
            
            
            213,772Non-cash
                items:Depreciation
                and amortization
            
            
            102,022
            
            
            107,542
            
            
            118,460Gain
                on sale of vessels
            
            
            (6,928
            )
            
            (9,423
            )
            
            (3,725
            )Gain
                on sale of marketable securities
            
            
            -
            
            
            -
            
            
            (94,222
            )Loss
                on writedown of vessels and equipment
            
            
            2,150
            
            
            12,243
            
            
            -Equity
                loss (income) (net of dividends received: December 31, 2006 - $6,002;December
                31, 2005 - $2,750; December 31, 2004 - $7,500)
            
            
            (160
            )
            
            (2,449
            )
            
            1,338Deferred
                income tax expense (recovery)
            
            
            2,771
            
            
            (14,202
            )
            
            28,019Foreign
                currency exchange loss (gain) and other - net
            
            
            72,881
            
            
            (39,816
            )
            
            25,833Change
                in non-cash working capital items related to operating activities
                (*note
                15*)
            
            
            46,944
            
            
            22,951
            
            
            (37,709
            )Expenditures
                for drydocking
            
            
            (31,255
            )
            
            (8,906
            )
            
            (9,174
            )**Net
                operating cash flow**
            
            
            155,710
            
            
            152,687
            
            
            242,592**FINANCING
                ACTIVITIES**
              Proceeds
                from long-term debt
            
            
            1,290,750
            
            
            1,226,804
            
            
            403,000Capitalized
                loan costs
            
            
            (6,178
            )
            
            (639
            )
            
            (4,333
            )Scheduled
                repayments of long-term debt
            
            
            (119,900
            )
            
            (29,884
            )
            
            (58,480
            )Prepayments
                of long-term debt
            
            
            (493,527
            )
            
            (1,382,140
            )
            
            (662,715
            )Repayments
                of capital lease obligations
            
            
            (34,245
            )
            
            (1,248
            )
            
            (1,159
            )Proceeds
                from issuance of common units
            
            
            157,963
            
            
            -
            
            
            -Net
                advances from (to) affiliates
            
            
            (786,816
            )
            
            (12,829
            )
            
            256,324Equity
                distribution to Teekay Shipping Corporation
            
            
            (226,816
            )
            
            -
            
            
            -Investment
                in subsidiaries from minority owners
            
            
            -
            
            
            8,000
            
            
            -Distribution
                from subsidiaries to minority owners
            
            
            (4,224
            )
            
            (9,618
            )
            
            (2,347
            )Other
            
            
            (727
            )
            
            -
            
            
            -**Net
                financing cash flow**
            
            
            (223,720
            )
            
            (201,554
            )
            
            (69,710
            )**INVESTING
                ACTIVITIES**
              Expenditures
                for vessels and equipment
            
            
            (31,079
            )
            
            (24,760
            )
            
            (170,630
            )Proceeds
                from sale of vessels and equipment
            
            
            61,713
            
            
            73,220
            
            
            58,742Purchase
                of marketable securities
            
            
            -
            
            
            -
            
            
            (163,869
            )Proceeds
                from sale of marketable securities
            
            
            -
            
            
            -
            
            
            135,357Investment
                in direct financing leases
            
            
            (13,256
            )
            
            (23,708
            )
            
            (53,273
            )Repayment
                of direct financing leases
            
            
            19,323
            
            
            12,440
            
            
            9,381Cash
                assumed upon consolidation of joint ventures
            
            
            17,055
            
            
            -
            
            
            -Other
            
            
            (746
            )
            
            (3,068
            )
            
            (5,818
            )**Net
                investing cash flow**
            
            
            53,010
            
            
            34,124
            
            
            (190,110
            )**Decrease
                in cash and cash equivalents**
            
            
            (15,000
            )
            
            (14,743
            )
            
            (17,228
            )Cash
                and cash equivalents, beginning of the year
            
            
            128,986
            
            
            143,729
            
            
            160,957**Cash
                and cash equivalents, end of the year**
            
            
            113,896
            
            
            128,986
            
            
            143,729





Supplemental
      cash flow disclosure *(notes
      1 and 15)*


Non-cash
      financing activities ( *note
      11d* )





*The
      accompanying notes are an integral part of the consolidated financial
      statements.*


F-4


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN PARTNERS’ EQUITY/OWNER’S EQUITY**


**(in
      thousands of U.S. dollars and units)**





**OWNER’S
                EQUITY (PREDECESSOR)****Owner’s**
              **Equity**
            
            **Accumulated**
              **Other
                Comprehensive Income (Loss)**
            
            **Comprehensive
                Income**
              **(Loss)**
            
            **Total**
              **Owner’s**
              **Equity**$
            
            $
            
            $
            
            $**Balance
                as at December 31, 2003**
            
            
            530,677
            
            
            (883
            )
            
            
            
            
            529,794Net
                income
            
            
            213,772
            
            
            
            
            
            213,772
            
            
            213,772Other
                comprehensive income:Unrealized
                gain on marketable securities
            
            
            
            
            
            93,985
            
            
            93,985
            
            
            93,985Reclassification
                adjustment for gain on marketable securities included
              in net income
            
            
            
            
            
            (94,222
            )
            
            (94,222
            )
            
            (94,222
            )Unrealized
                gain on derivative instruments (*note
                12*)
            
            
            
            
            
            53
            
            
            53
            
            
            53Reclassification
                adjustment for loss on derivative instruments included in net income
                (*note
                12*)
            
            
            
            
            
            477
            
            
            477
            
            
            477Comprehensive
                income
            
            
            
            
            
            
            
            
            214,065Norwegian
                group tax contributions (*note
                11a*)
            
            
            1,415
            
            
            
            
            
            
            
            
            1,415Sale
                of chartering rights (*note
                11c*)
            
            
            5,225
            
            
            
            
            
            
            
            
            5,225Purchase
                of the*Kilimanjaro
                Spirit*from Teekay ShippingCorporation
              (*note
                11d*)
            
            
            35,291
            
            
            
            
            
            
            
            
            35,291Sale
                of marketable securities (*note
                11b*)
            
            
            (126,578
            )
            
            
            
            
            
            
            
            (126,578
            )**Balance
                as at December 31, 2004**
            
            
            659,802
            
            
            (590
            )
            
            
            
            
            659,212Net
                income
            
            
            84,747
            
            
            
            
            
            84,747
            
            
            84,747Other
                comprehensive income:Unrealized
                gain on derivative instruments (*note
                12*)
            
            
            
            
            
            792
            
            
            792
            
            
            792Reclassification
                adjustment for gain on derivativeinstruments
                included in net income (*note
                12*)
            
            
            
            
            
            (94
            )
            
            (94
            )
            
            (94
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            85,445Norwegian
                group tax contributions (*note
                11a*)
            
            
            (1,185
            )
            
            
            
            
            
            
            
            (1,185
            )Sale
                of*Dania
                Spirit*(*note
                11e*)
            
            
            (3,093
            )
            
            
            
            
            
            
            
            (3,093
            )**Balance
                as at December 31, 2005**
            
            
            740,271
            
            
            108
            
            
            
            
            
            740,379Net
                loss (January 1 to December 18, 2006)
            
            
            (33,563
            )
            
            
            
            
            (33,563
            )
            
            (33,563
            )Other
                comprehensive income:Unrealized
                gain on derivative instruments (*note
                12*)
            
            
            
            
            
            21,981
            
            
            21,981
            
            
            21,981Reclassification
                adjustment for gain on derivative instruments
                included in
              net
                income (*note
                12*)
            
            
            
            
            
            (1,706
            )
            
            (1,706
            )
            
            (1,706
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            (13,288
            )Sale
                of Navion Shipping Ltd. to Teekay ShippingCorporation
                (*note
                11c*)
            
            
            18,468
            
            
            
            
            
            
            
            
            18,468Sale
                of Norwegian subsidiaries to Teekay ShippingCorporation
                (*note
                11i*)
            
            
            23,260
            
            
            
            
            
            
            
            
            23,260Sale
                of the*Borga*to
                Teekay Shipping Corporation(*note
                11f*)
            
            
            (11,900
            )
            
            
            
            
            
            
            
            (11,900
            )Equity
                distribution to Teekay Shipping Corporation (*note
                1*)
            
            
            (226,816
            )
            
            
            
            
            
            
            
            (226,816
            )Purchase
                of a 26% interest inTeekay
                Offshore OperatingL.P.
                (*note
                1*)
            
            
            (134,629
            )
            
            
            
            
            
            
            
            (134,629
            )Reclassification
                adjustment for Teekay Shipping Corporation’s 74%
              non-controlling
                interest inTeekay
                Offshore OperatingL.P.
                (*note
                1*)
            
            
            (377,974
            )
            
            (15,083
            )
            
            
            
            
            (393,057
            )Stock
                compensation expense(*note
                1*)
            
            
            1,048
            
            
            
            
            
            
            
            
            1,048**Balance
                as at December 18, 2006**
            
            
            (1,835
            )
            
            5,300
            
            
            
            
            
            3,465





*The
      accompanying notes are an integral part of the consolidated financial
      statements.*


F-5







**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES (Note 1)**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN PARTNERS’ EQUITY/OWNER’S EQUITY**


**(in
      thousands of U.S. dollars and units)**




**PARTNERS’
                  EQUITY****Limited
                  Partners****Owner’s**
                **Equity**
                **(Predecessor)**
              
              **Common**
              
              **Subordinated**
              
              **General
                  Partner**
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Income**
              
              **Comprehensive
                  Income**
              
              **Total****$**
              
              **Units**
              
              **$******
              ****
              **Units**
              ****
              **$**
              ****
              **$**
              ****
              **$**
              ****
              **$**
              ****
              **$****Balance
                  as at****December
                  18, 2006**
              
              
              3,465
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,465Allocation
                  of Predecessor’s equity to unitholders
                *(note
                  1)*
              
              
              (3,465
              )
              
              2,800
              
              
              (400
              )
              
              9,800
              
              
              (1,398
              )
              
              (37
              )
              
              5,300
              
              
              
              
              
              -Proceeds
                  from initial public offering of limited partnership interests,
                  net of
                  offering costs of
                $13,788*(note
                  2)*
              
              
              
              
              
              8,050
              
              
              155,262
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              155,262Redemption
                  of common units from Teekay Shipping Corporation (*note
                  2*)
              
              
              
              
              
              (1,050
              )
              
              (20,633
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (20,633
              )Net
                  income (December 19 - 31, 2006)
              
              
              
              
              
              
              
              
              485
              
              
              
              
              
              346
              
              
              17
              
              
              
              
              
              848
              
              
              848**Balance
                  as at****December
                  31, 2006**
              
              
              -
              
              
              9,800
              
              
              134,714
              
              
              9,800
              
              
              (1,052
              )
              
              (20
              )
              
              5,300
              
              
              
              
              
              138,942


*The
      accompanying notes are an integral part of the consolidated financial
      statements.*





F-6


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





**1.**  **Summary
      of Significant Accounting Policies**





**Basis
      of presentation**





During
      August 2006, Teekay Shipping Corporation formed Teekay Offshore Partners L.P.,
      a
      Marshall Islands limited partnership (the *Partnership* ),
      as
      part of its strategy to expand in the marine transportation, processing and
      storage sectors of the offshore oil industry and for the Partnership to acquire,
      in connection with the Partnership’s initial public offering of its common
      units, a 26.0% interest in Teekay Offshore Operating L.P. (or *OPCO* ),
      including a 25.99% limited partner interest to be held directly by the
      Partnership and a 0.01% general partner interest to be held through its
      ownership of Teekay Offshore Operating GP L.L.C., OPCO’s sole general partner.





Prior
      to
      the closing of the Partnership’s initial public offering on December 19, 2006,
      Teekay Shipping Corporation transferred eight Aframax-class conventional crude
      oil tankers to a subsidiary of Norsk Teekay Holdings Ltd. (or *Norsk
      Teekay* )
      and one
      floating storage and offtake unit (or *FSO
      unit* )
      to
      Teekay Offshore Australia Trust. Teekay Shipping Corporation then transferred
      to
      OPCO all of the outstanding interests of four wholly-owned subsidiaries —
Norsk Teekay, Teekay Nordic Holdings Inc. (or *Teekay
      Nordic* ),
      Teekay
      Offshore Australia Trust and Pattani Spirit L.L.C. These four wholly-owned
      subsidiaries, which include the eight Aframax-class conventional crude oil
      tankers and the FSO unit, are collectively referred to as *Teekay
      Offshore Partners Predecessor* or the *Predecessor* .
      The
      excess of the price paid over the book value of these assets was $226.8 million
      and has been accounted for as an equity distribution to Teekay Shipping
      Corporation. Immediately prior to the closing of the Partnership’s initial
      public offering, Teekay Shipping Corporation sold to the Partnership the 25.99%
      limited partner interest in OPCO and its subsidiaries and a 100% interest in
      Teekay Offshore Operating GP L.L.C., which owns the 0.01% general partner
      interest in OPCO, in exchange for (a) the issuance to Teekay Shipping
      Corporation of 2,800,000 common units and 9,800,000 subordinated units of the
      Partnership and a $134.6 million non-interest bearing promissory note and
      (b) the issuance of the 2.0% general partner interest in the Partnership
      and all of the Partnership’s incentive distribution rights to Teekay Offshore GP
      L.L.C., a wholly owned subsidiary of Teekay Shipping Corporation. The
      Partnership controls OPCO through its ownership of OPCO’s general partner, and
      Teekay Shipping Corporation owns the remaining 74.0% interest in OPCO. These
      transfers represented a reorganization of entities under common control and
      were
      recorded at historical cost. Immediately preceding the public offering, the
      net
      book equity of the Partnership’s 26% share of these assets was $3.5
      million.





The
      consolidated financial statements for the periods prior to the initial public
      offering reflect the combined consolidated financial position, results of
      operations and cash flows of the Predecessor and its subsidiaries. In the
      preparation of these combined consolidated financial statements, general and
      administrative expenses were not identifiable as relating solely to the vessels.
      General and administrative expenses, consisting primarily of salaries and other
      employee related costs, office rent, legal and professional fees, and travel
      and
      entertainment, were allocated based on the Predecessor’s proportionate share of
      Teekay Shipping Corporation’s total ship-operating (calendar) days for each
      of the periods presented. Management believes this allocation reasonably
      presents the general and administrative expenses of the Predecessor.





The
      consolidated financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States. They include
      the
      accounts of the Predecessor and its subsidiaries for periods prior to December
      19, 2006. For the period commencing December 19, 2006, the consolidated
      financial statements include the accounts of Teekay Offshore Partners L.P.
      and
      its subsidiaries. In addition, the consolidated financial statements include
      the
      accounts of the Predecessor’s and the Partnership’s controlled joint ventures
      from December 1, 2006. Significant intercompany balances and transactions have
      been eliminated upon consolidation. The preparation of financial statements
      in
      conformity with accounting principles generally accepted in the United States
      requires management to make estimates and assumptions that affect the amounts
      reported in the consolidated financial statements and accompanying notes. Actual
      results could differ from those estimates.





Certain
      of the comparative figures have been reclassified to conform with the
      presentation adopted in the current period.




**Reporting
      currency**





The
      consolidated financial statements are stated in U.S. dollars because the
      Partnership operates in international shipping markets, the Partnership’s
      primary economic environment, which typically utilize the U.S. dollar as
      the functional currency. Transactions involving other currencies during the
      year
      are converted into U.S. dollars using the exchange rates in effect at the
      time of the transactions. At the balance sheet dates, monetary assets and
      liabilities that are denominated in currencies other than the U.S. dollar
      are translated to reflect the year-end exchange rates. Resulting gains or losses
      are reflected separately in the accompanying consolidated statements of income
      (loss).





**Operating
      revenues and expenses**





The
      Partnership recognizes revenues from time charters and bareboat charters daily
      over the term of the charter as the applicable vessel operates under the
      charter. The Partnership does not recognize revenue during days that the vessel
      is off-hire. Shuttle tanker voyages servicing contracts of affreightment with
      offshore oil fields commence with tendering of notice of readiness at a field,
      within the agreed lifting range, and ends with tendering of notice of readiness
      at a field for the next lifting. All other voyage revenues from voyage charters
      are recognized on a percentage of completion method. The Partnership uses a
      discharge-to-discharge basis in determining percentage of completion for all
      spot voyages, whereby it recognizes revenue ratably from when product is
      discharged (unloaded) at the end of one voyage


F-7


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





to
      when
      it is discharged after the next voyage. The Partnership does not begin
      recognizing voyage revenue until a charter has been agreed to by the customer
      and the Partnership, even if the vessel has discharged its cargo and is sailing
      to the anticipated load port on its next





voyage.
      The consolidated balance sheets reflect the deferred portion of revenues and
      expenses, which will be earned in subsequent periods. As at December 31,
      2005, the deferred portion of revenues, which are included in accrued
      liabilities, was $1.4 million. There was no deferred revenue at December 31,
      2006. As at December 31, 2006 and 2005, the deferred portion of expenses,
      which are included in prepaid expenses, was $16.4 million and $11.8
      million, respectively.





Voyage
      expenses are all expenses unique to a particular voyage, including bunker fuel
      expenses, port fees, cargo loading and unloading expenses, canal tolls, agency
      fees and commissions. Vessel operating expenses include crewing, repairs and
      maintenance, insurance, stores, lube oils and communication expenses. Pursuant
      to Emerging Issues Task Force 91-9, voyage expenses and vessel operating
      expenses are recognized when incurred. For periods prior to October 1, 2006,
      the
      Predecessor recognized voyage expenses ratably over the length of each voyage. The
      impact of recognizing voyage expenses ratably over the length of each voyage
      was
      not materially different on a quarterly and annual basis from a method of
      recognizing such costs as incurred.





**Cash
      and cash equivalents**





The
      Partnership classifies all highly-liquid investments with a maturity date of
      three months or less when purchased as cash and cash equivalents.





Cash
      interest paid during the years ended December 31, 2006, 2005 and 2004
      totaled $44.0 million, $38.1 million and $45.0 million,
      respectively.





**Vessels
      and equipment**





All
      pre-delivery costs incurred during the construction of newbuildings, including
      interest, supervision and technical costs, are capitalized. The acquisition
      cost
      and all costs incurred to restore used vessels purchased by the Partnership
      to
      the standards required to properly service the Partnership’s customers are
      capitalized. Capitalization of supervision and technical costs for the year
      ended December 31, 2004 totaled $1.2 million. No such costs were
      capitalized in any of the other periods presented.





Depreciation
      is calculated on a straight-line basis over a vessel’s estimated useful life,
      less an estimated residual value. Depreciation is calculated using an estimated
      useful life of 25 years from the date the vessel is delivered from the
      shipyard, or a shorter period if regulations prevent the Partnership from
      operating the vessel for 25 years. Depreciation of vessels and equipment
      for the periods from December 19, 2006 to December 31, 2006, January 1, 2006
      to
      December 18, 2006 and the years ended December 31, 2005 and 2004 totaled $2.9
      million, $78.9 million, $86.0 million and $94.4 million, respectively.
      Depreciation and amortization includes depreciation on all owned vessels and
      vessels accounted for as capital leases.





Interest
      costs capitalized to vessels and equipment for the year ended December 31,
      2004 was $0.3 million. No interest costs were capitalized for any of the other
      periods presented.





Generally,
      the Partnership drydocks each shuttle tanker and conventional oil tanker every
      two and a half to five years. FSO units are generally not drydocked. The
      Partnership capitalizes a substantial portion of the costs incurred during
      drydocking and amortizes those costs on a straight-line basis from the
      completion of a drydocking to the estimated completion of the next drydocking.
      The Partnership expenses as incurred costs related to routine repairs and
      maintenance performed during drydocking that do not improve or extend the useful
      lives of the assets. When significant drydocking expenditures occur prior to
      the
      expiration of the original amortization period, the remaining unamortized
      balance of the original drydocking cost are expensed in the month of the
      subsequent drydocking. Amortization of drydocking expenditures for the periods
      from December 19, 2006 to December 31, 2006, January 1, 2006 to December 18,
      2006 and the years ended December 31, 2005 and 2004 totaled $0.3 million,
      $7.8 million, $6.7 million and $5.6 million,
      respectively.





The
      Partnership reviews vessels and equipment for impairment whenever events or
      changes in circumstances indicate the carrying amount of an asset may not be
      recoverable. Recoverability of these assets is measured by comparison of their
      carrying amount to future undiscounted cash flows the assets are expected to
      generate over their remaining useful lives. If vessels and equipment are
      considered to be impaired, the impairment to be recognized equals the amount
      by
      which the carrying value of the assets exceeds their fair market value (please
      see Note 16).





**Direct
      financing leases**





The
      Partnership assembles, installs, operates and leases equipment that reduces
      volatile organic compound emissions (or *VOC
      Equipment* )
      during
      loading, transportation and storage of oil and oil products. Leasing of the
      VOC
      Equipment is accounted for as a direct financing lease with lease payments
      received by the Partnership being allocated between the net investment in the
      lease and other income using the effective interest method so as to produce
      a
      constant periodic rate of return over the lease term.


F-8


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**




**Investment
      in joint ventures**





As
      at
      December 31, 2006, the Partnership had a 50% controlling interest in five joint
      venture companies (2005 — six). Each of these joint ventures owns one
      shuttle tanker. Prior to December 1, 2006, the Partnership accounted for the
      joint ventures using the equity method, whereby the investment is carried at
      the
      Partnership’s original cost plus its proportionate share of undistributed
      earnings. On December 1, 2006, the operating agreements for these joint ventures
      were amended, which resulted in the Partnership obtaining control of these
      joint
      ventures and consequently the Partnership consolidated these entities effective
      December 1, 2006.





**Loan
      costs**





Loan
      costs, including fees, commissions and legal expenses, are presented as other
      assets and capitalized and amortized on a straight-line basis over the term
      of
      the relevant loan. Amortization of loan costs is included in interest
      expense.





**Goodwill
      and intangible assets**





Goodwill
      is not amortized, but reviewed for impairment annually or more frequently as
      impairment indicators arise. Intangible assets with finite lives are amortized
      over their useful lives.





The
      Partnership’s intangible assets, which consist of contracts of affreightment
      acquired as part of the Predecessor’s purchase of Navion AS in 2003, are
      amortized over their respective lives, with the amount amortized each year
      being
      weighted based on the projected revenue to be earned under the
      contracts.





**Derivative
      instruments**





The
      Partnership utilizes derivative financial instruments to reduce interest rate
      risks but does not hold or issue derivative financial instruments for trading
      purposes. Statement of Financial Accounting Standards (or *SFAS* )
      No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      which
      was amended in June 2000 by SFAS No. 138 and in May 2003 by
      SFAS No. 149, establishes accounting and reporting standards for
      derivative instruments and hedging activities.





Derivative
      instruments are recorded as other assets or other long-term liabilities,
      measured at fair value. Derivatives that are not hedges or are not designated
      as
      hedges are adjusted to fair value through income. If the derivative is a hedge,
      depending upon the nature of the hedge, changes in the fair value of the
      derivatives are either offset against the fair value of assets, liabilities
      or
      firm commitments through income, or recognized in other comprehensive income
      (loss) until the hedged item is recognized in income. The ineffective portion
      of
      a derivative’s change in fair value is immediately recognized into income
      (please see Note 12).





**Income
      taxes**





The
      Partnership’s Norwegian subsidiaries and Australian subsidiary are subject to
      income taxes. Deferred income taxes were $71.6 million and $57.9 million as
      at December 31, 2006 and 2005, respectively. The Partnership accounts for
      such taxes using the liability method pursuant to SFAS No. 109, *Accounting
      for Income Taxes.*





**Comprehensive
      income (loss)**





The
      Partnership follows SFAS No. 130, *Reporting
      Comprehensive Income* ,
      which
      establishes standards for reporting and displaying comprehensive income (loss)
      and its components in the consolidated financial statements.





**Change
      in accounting policy**





Effective
      January 1, 2006, the Partnership adopted the fair value recognition
      provisions of the Financial Accounting Standards Board or ( *FASB* )
      Statement No. 123(R) (or *SFAS 123(R)* ), *Share-Based
      Payment,* using
      the
“modified prospective” method. Under this transition method, compensation cost
      is recognized in the consolidated financial statements beginning with the
      effective date for all share-based payments granted after January 1, 2006
      and for all awards granted to employees prior to, but not yet vested as of
      January 1, 2006. Accordingly, prior period amounts have not been restated.





As
      a
      result of adopting SFAS 123(R) on January 1, 2006, the Partnership’s
      net income for 2006 is $1.0 million lower than if it had continued to account
      for share-based compensation under the recognition and measurement provision
      of
      APB Opinion No. 25 (or *APB
      No. 25* ), *Accounting
      for Stock Issued to Employees.*





Prior
      to
      January 1, 2006, the Partnership accounted for stock options under
      APB No. 25, using the intrinsic value method, as permitted by SFAS
      No. 123, *Accounting
      for Stock-Based Compensation.* As the
      exercise price of the Partnership’s employee stock options equals the market
      price of underlying stock on the date of grant, no compensation expense was
      recognized under APB No. 25.


F-9


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





Certain
      employees of the Partnership participate in the stock option plan of the
      Partnership’s parent, Teekay Shipping Corporation. Stock options granted under
      this plan have a 10-year term and vest equally over three years from the grant
      date. All outstanding options expire between May 28, 2006 and March 7,
      2016, ten years after the date of each respective grant.





During
      the fourth quarter of 2006, substantially all of the Partnership’s employees
      were transferred to subsidiaries of Teekay Shipping Corporation.





The
      weighted-average grant-date fair value of options granted during 2006 was $11.30
      per option. The fair value of each option granted was estimated on the date
      of
      the grant using the Black-Scholes option pricing model. The resulting
      compensation expense is being amortized over three years using the straight-line
      method. The following weighted-average assumptions were used in computing the
      fair value of the options granted: expected volatility of 31% in 2006 and 35%
      in
      2005 and 2004; expected life of five years; dividend yield of 2.0% in 2006
      and
      1.5% in 2005 and 2004; and risk-free interest rate of 4.8% in 2006, 4.1% in
      2005
      and 2.7% in 2004.





**Recent
      accounting pronouncements**





In
      July
      2006, the FASB issued Interpretation No. 48 (or *FIN 48* ), *Accounting
      for Uncertainty in Income Taxes — an interpretation of*  *FASB
      Statement No. 109.* This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in financial statements in accordance with FASB Statement
      No. 109, *Accounting
      for Income Taxes.* FIN 48 will require companies to determine whether it is
      more-likely-than-not that a tax position taken or expected to be taken in a
      tax
      return will be sustained upon examination, including resolution of any related
      appeals or litigation processes, based on the technical merits of the position.
      If a tax position meets the more-likely-than-not recognition threshold, it
      is
      measured to determine the amount of benefit to recognize in the financial
      statements based on guidance in the interpretation. FIN 48 is effective for
      fiscal years beginning after December 15, 2006. The Partnership has not
      determined the effect, if any, that the adoption of FIN 48 will have on the
      Partnership’s consolidated financial position or results of
      operations.


****


**2.**
            **Initial
                Public
                Offering**





On
      December 19, 2006, the Partnership completed its initial public offering (or
      the *Offering* )
      of 8.05
      million common units at a price of $21.00 per unit. This included 1.05 million
      common units sold to the underwriters in connection with the exercise of their
      over-allotment option. The proceeds received by the Partnership from the
      Offering and the use of those proceeds are summarized as follows:





**Proceeds
                received:**Sale
                of 8,050,000 common units at $21.00 per unit
            
            
            $169,050**Use
                of proceeds from sale of common units:**Underwriting
                and structuring fees
            
            
            $11,088Professional
                fees and other offering expenses to third parties
            
            
            2,700Repayment
                of promissory notes and redemption of 1.05 million common units from
                Teekay Shipping Corporation
            
            
            155,262$169,050





**3.**  **Segment
      Reporting**





The
      Partnership is engaged in the international marine transportation of crude
      oil
      through the operation of its oil tankers and FSO units. The Partnership’s
      revenues are earned in international markets.





The
      Partnership has three reportable segments: its shuttle tanker segment; its
      conventional tanker segment; and its FSO segment. The Partnership’s shuttle
      tanker segment consists of shuttle tankers operating primarily on fixed-rate
      contracts of affreightment, time-charter contracts or bareboat charter
      contracts. The Partnership’s conventional tanker segment consists of
      conventional tankers primarily operating on fixed-rate time-charter contracts.
      The Partnership’s FSO segment consists of its FSO units subject to fixed-rate
      time-charter contracts. Segment results are evaluated based on income from
      vessel operations. The accounting policies applied to the reportable segments
      are the same as those used in the preparation of the Partnership’s consolidated
      financial statements.

















F-10


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





The
      following table presents voyage revenues and percentage of consolidated voyage
      revenues for customers that accounted  for
      more
      than 10.0% of the Partnership’s consolidated voyage revenues during the periods
      presented.





**Year
                Ended December 31, 2006****January
                1**
              **to**
              **December
                18,**
              **2006**
            **December
                19**
              **to**
              **December
                31,**
              **2006**
            **Year
                Ended**
              **December
                31,**
              **2005**
            **Year
                Ended**
              **December
                31,**
              **2004****(U.S.
                dollars in millions)**Teekay
                Shipping Corporation subsidiaries(1).
            $141.1
                or 21%
            $4.8
                or 20%
            $253.1
                or 31%
            $396.8
                or 40%Statoil
                ASA(2)(3)
            $187.6
                or 27%
            $6.9
                or 29%
            $184.7
                or 23%
            $189.7
                or 19%






(1)
            Conventional
                tanker and FSO segments.


(2)
            Shuttle
                tanker segment.


(3)
            Statoil
                ASA is an international oil
                company.




The following tables include results for these segments
      for
      the periods presented in these consolidated financial statements.






**Year
                Ended December 31, 2006****January
                1 to December 18, 2006**
            
            **December
                19 to December 31, 2006****Shuttle
                Tanker Segment**
              **$**
            
            **Conventional**
              **Tanker
                Segment**
              **$**
            
            **FSO**
              **Segment**
              **$**
            
            **Total**
              **$**
            
            **Shuttle
                Tanker Segment**
              **$**
            
            **Conventional**
              **Tanker
                Segment**
              **$**
            
            **FSO**
              **Segment**
              **$**
            
            **Total**
              **$**Voyage
                revenues
            
            
            516,187
            
            
            146,687
            
            
            21,892
            
            
            684,766
            
            
            19,785
            
            
            3,383
            
            
            758
            
            
            23,926Voyage
                expenses
            
            
            85,451
            
            
            4,841
            
            
            1,029
            
            
            91,321
            
            
            2,995
            
            
            51
            
            
            56
            
            
            3,102Vessel
                operating expenses
            
            
            77,085
            
            
            18,754
            
            
            6,472
            
            
            102,311
            
            
            3,222
            
            
            624
            
            
            241
            
            
            4,087Time
                charter hire expense
            
            
            159,973
            
            
            79,338
            
            
            -
            
            
            239,311
            
            
            5,641
            
            
            -
            
            
            -
            
            
            5,641Depreciation
                and amortization
            
            
            68,784
            
            
            20,507
            
            
            9,095
            
            
            98,386
            
            
            2,583
            
            
            705
            
            
            348
            
            
            3,636General
                and administrative(1)
            
            
            50,058
            
            
            18,668
            
            
            1,661
            
            
            70,387
            
            
            1,863
            
            
            218
            
            
            48
            
            
            2,129Vessels
                and equipment writedowns / (gain) loss on sale of vessels
            
            
            (4,778
            )
            
            -
            
            
            -
            
            
            (4,778
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Restructuring
                charge
            
            
            -
            
            
            832
            
            
            -
            
            
            832
            
            
            -
            
            
            -
            
            
            -
            
            
            -Income
                from vessel operations
            
            
            79,614
            
            
            3,747
            
            
            3,635
            
            
            86,996
            
            
            3,481
            
            
            1,785
            
            
            65
            
            
            5,331Voyage
                revenues- intersegment
            
            
            3,794
            
            
            -
            
            
            -
            
            
            3,794
            
            
            1,294
            
            
            -
            
            
            -
            
            
            1,294Equity
                income from joint ventures
            
            
            6,162
            
            
            -
            
            
            -
            
            
            6,162
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                assets at December 31, 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,445,830
            
            
            310,699
            
            
            75,633
            
            
            1,832,162Expenditures
                for vessels and equipment
            
            
            25,055
            
            
            6,024
            
            
            -
            
            
            31,079
            
            
            -
            
            
            -
            
            
            -
            
            
            -




F-11


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





**Year
                Ended December 31, 2005**
            
            **Year
                Ended December 31, 2004****Shuttle
                Tanker Segment**
              **$**
            
            **Conventional**
              **Tanker
                Segment**
              **$**
            
            **FSO**
              **Segment**
              **$**
            
            **Total**
              **$**
            
            **Shuttle
                Tanker Segment**
              **$**
            
            **Conventional**
              **Tanker
                Segment**
              **$**
            
            **FSO**
              **Segment**
              **$**
            
            **Total**
              **$**Voyage
                revenues
            
            
            516,758
            
            
            266,593
            
            
            24,197
            
            
            807,548
            
            
            550,445
            
            
            411,181
            
            
            24,878
            
            
            986,504Voyage
                expenses
            
            
            68,308
            
            
            5,419
            
            
            816
            
            
            74,543
            
            
            69,362
            
            
            49,457
            
            
            -
            
            
            118,819Vessel
                operating expenses
            
            
            75,196
            
            
            22,679
            
            
            6,600
            
            
            104,475
            
            
            76,197
            
            
            22,790
            
            
            6,608
            
            
            105,595Time
                charter hire expense
            
            
            169,687
            
            
            203,849
            
            
            -
            
            
            373,536
            
            
            177,576
            
            
            194,873
            
            
            -
            
            
            372,449Depreciation
                and amortization
            
            
            77,083
            
            
            21,112
            
            
            9,347
            
            
            107,542
            
            
            89,593
            
            
            20,561
            
            
            8,306
            
            
            118,460General
                and administrative(1)
            
            
            55,010
            
            
            29,026
            
            
            1,820
            
            
            85,856
            
            
            45,403
            
            
            19,097
            
            
            1,319
            
            
            65,819Vessels
                and equipment writedowns / (gain) loss on sale of vessels
            
            
            2,820
            
            
            -
            
            
            -
            
            
            2,820
            
            
            (3,725
            )
            
            -
            
            
            -
            
            
            (3,725
            )Restructuring
                charge
            
            
            955
            
            
            -
            
            
            -
            
            
            955
            
            
            -
            
            
            -
            
            
            -
            
            
            -Income
                from vessel operations
            
            
            67,699
            
            
            (15,492
            )
            
            5,614
            
            
            57,821
            
            
            96,039
            
            
            104,403
            
            
            8,645
            
            
            209,087Voyage
                revenues- intersegment
            
            
            4,607
            
            
            -
            
            
            -
            
            
            4,607
            
            
            4,607
            
            
            -
            
            
            -
            
            
            4,607Equity
                income from joint ventures
            
            
            5,235
            
            
            (36
            )
            
            -
            
            
            5,199
            
            
            6,351
            
            
            (189
            )
            
            -
            
            
            6,162Investments
                in joint ventures at December 31
            
            
            33,907
            
            
            495
            
            
            -
            
            
            34,402
            
            
            30,603
            
            
            531
            
            
            -
            
            
            31,134Total
                assets at December 31
            
            
            1,277,195
            
            
            315,086
            
            
            72,472
            
            
            1,664,753
            
            
            1,408,028
            
            
            319,688
            
            
            81,176
            
            
            1,808,892Expenditures
              for vessels
              and equipment
            
            
            22,760
            
            
            2,000
            
            
            -
            
            
            24,760
            
            
            117,792
            
            
            37,003
            
            
            15,835
            
            
            170,630





(1)
            Includes
                direct general and administrative expenses and indirect general and
                administrative expenses (allocated to each segment based on estimated
                use
                of corporate resources).





A
      reconciliation of total segment assets to total assets presented in the
      consolidated balance sheets is as follows:





**December
                31, 2006**
              **$**
            
            **December 31, 2005**
              **$**Shuttle
                tanker segment
            
            
            1,445,830
            
            
            1,277,195Conventional
                tanker segment
            
            
            310,699
            
            
            315,086FSO
                segment
            
            
            75,633
            
            
            72,472Cash
                and cash equivalents
            
            
            113,986
            
            
            128,986Accounts
                receivable and other assets
            
            
            95,173
            
            
            90,278Consolidated
                total assets
            
            
            2,041,321
            
            
            1,884,017




**4.**  **Goodwill
      and Intangible Assets**




The
      changes in the carrying amount of goodwill for the year ended December 31,
      2006
      for the Partnership’s reporting segments are as follows:





**Shuttle**
              **Tanker
                Segment**
              **$**
            
            **Conventional
                Tanker**
              **Segment**
              **$**
            
            **FSO
                Segment**
              **$**
            
            **Total**
              **$**Balance
                as of December 31, 2005
            
            
            130,549
            
            
            -
            
            
            -
            
            
            130,549Goodwill
                acquired
            
            
            356
            
            
            -
            
            
            -
            
            
            356Goodwill
                disposed(1)
            
            
            (3,792
            )
            
            -
            
            
            -
            
            
            (3,792
            )Balance
                as of December 31, 2006
            
            
            127,113
            
            
            -
            
            
            -
            
            
            127,113





(1)
            Prior
                to the Offering, the Predecessor sold two of its Norwegian subsidiaries
                to
                Teekay Shipping Corporation.


F-12


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





As
      at
      December 31, 2006 and 2005, intangible assets consisted of:





**December
                31, 2006**
            
            **December
                31, 2005****Weighted-Average**
              **Amortization
                Period**
              **(years)**
            
            **Gross
                Carrying Amount**
              **$**
            
            **Accumulated**
              **Amortization**
              **$**
            
            **N****et
                Carrying Amount**
              **$**
            
            **Gross
                Carrying Amount**
              **$**
            
            **Accumulated**
              **Amortization**
              **$**
            
            **Net
                Carrying Amount**
              **$**Contracts
                of affreightment
            
            
            10.2
            
            
            124,250
            
            
            (57,825)
            
            
            66,425
            
            
            124,250
            
            
            (45,748)
            
            
            78,502





Aggregate
      amortization expense of intangible assets for the year ended December 31, 2006
      was $12.1 million ($14.9 million - 2005, $18.4 million - 2004). Amortization
      of
      intangible assets for the five fiscal years subsequent to December 31, 2006
      is
      expected to be $11.1 million (2007), $10.1 million (2008), $9.1 million (2009),
      $8.1 million (2010) and $7.0 million (2011).





**5.
      Accrued Liabilities**





**December
                31, 2006**
              **$**
            
            **December
                31, 2005**
              **$**Voyage
                and vessel
            
            
            29,825
            
            
            24,793Interest
            
            
            6,717
            
            
            712Payroll
                and benefits
            
            
            6,445
            
            
            4,290Restructuring
                costs
            
            
            -
            
            
            95542,987
            
            
            30,750




**6.**  **Advances
      from Affiliate**


**December
                31, 2006**
              **$**
            
            **December
                31, 2005**
              **$**Norwegian
                Kroner-denominated Demand Promissory Note (7.5%)
            
            
            -
            
            
            157,842Norwegian
                Kroner-denominated Demand Promissory Note (non-interest
                bearing)
            
            
            -
            
            
            6,797Australian
                Dollar-denominated Demand Promissory Note (8.0%)
            
            
            -
            
            
            18,720Other
                (non-interest bearing with no fixed terms of repayment)
            
            
            16,951
            
            
            375,89116,951
            
            
            559,250





Prior
      to
      the Offering, the Predecessor settled its Norwegian Kroner-denominated Demand
      Promissory Notes, its Australian Dollar-denominated Demand Promissory Note
      and
      other non-interest bearing advances owing to Teekay Shipping
      Corporation.





Interest
      expense incurred on these demand promissory notes for the period prior to the
      Offering (January 1 to December 18, 2006) and for the years ended December
      31,
      2005 and 2004 were $12.9 million, $14.8 million and $16.4 million
      respectively.





In
      October 2006, Teekay Shipping Corporation loaned 5.6 billion Norwegian Kroner
      ($863.0 million) to a subsidiary of OPCO primarily for the purchase of eight
      Aframax-class conventional crude oil tankers from Teekay Shipping Corporation.
      Immediately preceding the Offering, this interest-bearing loan was sold to
      OPCO.
      The interest expense incurred on this loan prior to its sale to OPCO was
      $14.1 million.





All
      Norwegian Kroner-denominated and Australian Dollar-denominated advances were
      revalued at the end of each period using the then prevailing Norwegian
      Kroner/U.S. Dollar and Australian Dollar/U.S. Dollar exchange rates.
      Due substantially to this revaluation, the Partnership recognized foreign
      exchange gains (losses) during the periods presented as follows:





**Year
                Ended December 31, 2006****January
                1**
              **to**
              **December
                18,**
              **2006**
              **$**
            **December
                19**
              **to**
              **December
                31,**
              **2006**
              **$**
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**(66,574)
            (131)
            34,178
            (37,910)


F-13


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





**7.**  **Long-Term
      Debt**


**December
                31, 2006**
              **$**
            
            **December
                31, 2005**
              **$**U.S.
                Dollar-denominated Revolving Credit Facilities due through
                2014
            
            
            1,080,000
            
            
            398,360U.S.
                Dollar-denominated Term Loans due through 2015
            
            
            223,352
            
            
            -1,303,352
            
            
            398,360Less
                current portion
            
            
            17,656
            
            
            -Total
            
            
            1,285,696
            
            
            398,360





As
      at
      December 31, 2006, the Partnership had two long-term revolving credit
      facilities (collectively, the *Revolvers* ),
      which,
      as at such date, provided for borrowings of up to $1,395.0 million, of
      which $315.0 million was undrawn. The total amount available under the
      Revolvers reduces by $91.5 million (2007), $97.3 million (2008),
      $103.3 million (2009), $109.8 million (2010), $116.6 million
      (2011) and $876.5 million (thereafter). The Revolvers require that the
      Partnership maintain a minimum level of free cash and undrawn revolving credit
      lines with at least six months to maturity. As at December 31, 2006, this
      amount was $75.0 million. The Revolvers also require that the Partnership
      and its subsidiaries maintain a minimum aggregate level of free liquidity and
      undrawn revolving credit lines. As at December 31, 2006, this amount was
      $65.2 million. The Partnership’s two Revolvers are collateralized by
      first-priority mortgages granted on 27 of the Partnership’s vessels, together
      with other related collateral, including a guarantee from certain subsidiaries
      of the Partnership for all outstanding amounts.





As
      at
      December 31, 2006, each of the Partnership’s five 50%-owned joint ventures had
      an outstanding term loan, which in the aggregate totaled $223.4 million. The
      term loans reduce in monthly or semi-annual payments with varying maturities
      through 2015. All term loans are collateralized by first-priority mortgages
      on
      the vessels to which the loans relate, together with other related collateral.
      As at December 31, 2006, the Partnership had guaranteed $45.0 million of these
      term loans, which represents its 50% share of the outstanding vessel mortgage
      debt in two of these 50%-owned joint venture companies. Teekay Shipping
      Corporation and the Partnership’s joint venture partner have guaranteed the
      remaining $178.4 million.





Interest
      payments on the Revolvers and the term loans are based on LIBOR plus margins.
      At
      December 31, 2006, the margins ranged between 0.45% and 0.80% (2005 - 0.60%
      and
      0.70%). The
      weighted-average effective interest rate on the Partnership’s long-term debt as
      at December 31, 2006 was 6.0% (December 31, 2005 — 5.1%). This
      rate does not reflect the effect of our interest rate swaps (please see Note
      12).





The
      aggregate annual long-term debt principal repayments required to be made
      subsequent to December 31, 2006 are $17.7 million (2007),
      $55.7 million (2008), $49.2 million (2009), $97.2 million (2010),
      $154.0 million (2011) and $929.6 million (thereafter).





**8.
      Operating Leases**





***Charters-out***





Time
      charters and bareboat charters of the Partnership’s vessels to customers are
      accounted for as operating leases. As at December 31, 2006, minimum
      scheduled future revenues to be received by the Partnership under time charters
      and bareboat charters then in place were approximately $1,595.7 million,
      comprised of $301.4 million (2007), $264.2 million (2008),
      $195.6 million (2009), $151.5 million (2010), $140.1 million
      (2011) and $542.9 million (thereafter).





The
      minimum scheduled future revenues should not be construed to reflect total
      charter hire revenues for any of the years.




***Charters-in***





As
      at
      December 31, 2006, minimum commitments owing by the Partnership under
      vessel operating leases by which the Partnership charters-in vessels were
      approximately $597.1 million, comprised of $147.7 million (2007),
      $106.1 million (2008) $74.6 million (2009), $74.4 million (2010),
      $62.8 million (2011) and $131.5 million
      (thereafter).


F-14


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





**9.
      Fair Value of Financial Instruments**





The
      estimated fair value of the Partnership’s financial instruments is as
      follows:




**December
                31, 2006**
            
            **December
                31, 2005****Carrying**
              **Amount**
              **$**
            
            **Fair**
              **Value**
              **$**
            
            **Carrying**
              **Amount**
              **$**
            
            **Fair**
              **Value**
              **$**Cash
                and cash equivalents
            
            
            113,986
            
            
            113,986
            
            
            128,986
            
            
            128,986Long-term
                debt
            
            
            1,303,352
            
            
            1,303,352
            
            
            398,360
            
            
            398,360Interest
                rate swap agreements(1)(2)(*note
                12*)
            
            
            22,440
            
            
            22,440
            
            
            108
            
            
            108




(1)
            The
                Partnership transacts all of its derivative instruments through
                investment-grade rated financial institutions and requires no collateral
                from these institutions.


(2)
            The
                fair value of these financial instruments, used for hedging purposes,
                is
                the estimated amount that the Partnership would receive or pay to
                terminate the agreements at the reporting date, taking into account
                current interest rates and the current credit worthiness of the swap
                counterparties.





**10.
      Restructuring Charge and Other Income - Net**





**Year
                Ended December 31, 2006****January
                1**
              **to**
              **December
                18,**
              **2006**
              **$**
            
            **December
                19**
              **to**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended December 31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**Volatile
                organic compound emissions plant leaseincome
            
            
            11,037
            
            
            408
            
            
            11,001
            
            
            8,448Dividend
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            5,679Miscellaneous
            
            
            (2,677
            )
            
            (99
            )
            
            (1,910
            )
            
            (63
            )Other
                income - net
            
            
            8,360
            
            
            309
            
            
            9,091
            
            
            14,064




During
        the year ended December 31, 2006, the Partnership relocated certain operational
        functions to Singapore. As a result, the Partnership incurred $0.8 million
        of
        restructuring costs during 2006. During the year ended December 31, 2005,
        the
        Predecessor relocated certain operational functions within Norway and closed
        its
        office in Sandefjord, Norway. As a result, the Predecessor incurred $1.0
        million
        of restructuring costs during 2005.




**11.**  **Related
      Party Transactions**





a.
            During
                2004, rate-effected income tax losses of $1.4 million that were
                generated by Norwegian subsidiaries of Teekay Shipping Corporation
                were
                transferred to the Predecessor’s Norwegian subsidiaries. The transfer of
                these income tax losses was used to reduce the Predecessor’s tax payable
                and was accounted for as an equity
                contribution.





During
      2005, rate-effected income tax losses of $1.2 million that were generated
      by the Predecessor’s Norwegian subsidiaries were transferred to the Norwegian
      subsidiaries of Teekay Shipping Corporation. The transfer of these income tax
      losses was accounted for as an equity distribution.





b.
            During
                April 2004, the Predecessor acquired 5,812,000 shares in A/S
                Dampskibsselskabet Torm from a subsidiary of Teekay Shipping Corporation
                for proceeds of $163.9 million. The excess of the proceeds paid by
                the Predecessor over Teekay Shipping Corporation’s original cost of the
                shares has been accounted for as an equity distribution of
                $126.6 million to Teekay Shipping Corporation. During the year ended
                December 31, 2004, the Predecessor sold this investment to an
                unrelated party for proceeds of $130.6 million, which resulted in a
                gain on sale of marketable securities of
                $93.3 million.




F-15


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





c.
            During
                March 2004, a subsidiary of Teekay Shipping Corporation acquired
                from
                Navion Shipping Ltd. (a subsidiary of the Predecessor) the right
                to
                charter-in and market Navion Shipping Ltd.’s vessels in the spot market at
                a fee of 1.25% over Navion Shipping Ltd.’s charter-in cost. The cost to
                obtain this right was $5.2 million and was accounted for as an equity
                contribution.





On
      July
      1, 2006, the Predecessor sold Navion Shipping Ltd. to a subsidiary of Teekay
      Shipping Corporation for $53.7 million. The resulting gain on sale of $18.5
      million was accounted for as an equity contribution by Teekay Shipping
      Corporation.





During
      the first half of 2006 and the years ended December 31, 2005 and 2004, the
      Predecessor earned $84.8 million, $205.9 million and $156.0 million,
      respectively, of time charter revenue pursuant to this agreement with Navion
      Shipping Ltd.





During
      the first half of 2006 and the years ended December 31, 2005 and 2004, the
      Predecessor earned $5.1 million, $8.2 million and $8.7 million,
      respectively, of management fees from commercial management services provided
      to
      a subsidiary of Teekay Shipping Corporation, relating to the vessels chartered
      from Navion Shipping Ltd.





d.
            During
                2004, the*Kilimanjaro
                Spirit,*a
                2004-built Aframax conventional oil tanker, was transferred by a
                subsidiary of Teekay Shipping Corporation to the Predecessor. This
                transaction was concluded between two entities under common control
                and,
                thus, the vessel acquired was recorded at its historical book value.
                The
                transfer of the vessel was accounted for as an equity contribution
                by
                Teekay Shipping Corporation.





e.
            During
                2005, the Predecessor sold the*Dania**Spirit,*a
                2000-built liquid petroleum gas carrier, to a subsidiary of Teekay
                Shipping Corporation for $18.0 million. The resulting
                $3.1 million loss on sale has been accounted for as an equity
                distribution.





f.
            During
                2006, the Predecessor paid $11.9 million to Teekay Shipping Corporation
                for it to assume the time charter contract for one of the Predecessor’s
                in-chartered shuttle tankers, the*Borga*.
                The resulting $11.9 million loss on sale was accounted for as an
                equity
                distribution to Teekay Shipping
                Corporation.





g.
            On
                October 1, 2006, OPCO entered into new time-charter contracts for
                its nine
                Aframax-class conventional tankers with a subsidiary of Teekay Shipping
                Corporation at market-based daily rates for terms of five to twelve
                years.
                Under the terms of eight of these nine time-charter contracts, OPCO
                is
                responsible for the bunker fuel expenses; however, OPCO adds the
                approximate amounts of these expenses to the daily hire rate. Pursuant
                to
                these time-charter contracts, OPCO earned net voyage revenues of
                $22.3
                million during the three months ended December 31,
                2006.





During
      the first nine months of 2006 and the years ended December 31, 2005 and 2004,
      seven of these nine tankers were employed on time-charter contracts with a
      subsidiary of Teekay Shipping Corporation. The rates earned by each vessel,
      which were generally lower than market rates, depended upon the cash flow
      requirements of each vessel, which included operating expenses, loan principal
      and interest payments and drydock expenditures. Pursuant to these time-charter
      contracts, the Predecessor earned voyage revenues of $24.6 million,
      $27.9 million and $70.1 million during the first nine months of 2006
      and the years ended December 31, 2005 and 2004, respectively.





h.
            Eight
                of OPCO’S Aframax conventional oil tankers and two FSO units have been
                managed by subsidiaries of Teekay Shipping Corporation. Pursuant
                to the
                associated management services agreements, the Partnership incurred
                general and administrative expenses of $5.3 million, $5.4 million and
                $4.7 million during the years ended December 31, 2006, 2005 and
                2004, respectively (please see Note 1).





i.
            In
                2006, prior to the Offering, OPCO sold to Teekay Shipping Corporation
                certain subsidiaries and fixed assets for $64.7 million. The
                resulting $23.3 million gain on sale was accounted for as an equity
                contribution by Teekay Shipping
                Corporation.





j.
            One
                of OPCO’s FSO units has been employed on a long-term bareboat charter with
                a subsidiary of Teekay Shipping Corporation. Pursuant to this charter
                contract, the Partnership earned voyage revenues of $5.4 million,
                $5.4 million and $3.9 million during the years ended
                December 31, 2006, 2005 and 2004, respectively.****





k.
            One
                of OPCO’s FSO units has been employed on a short-term bareboat charter
                with a subsidiary of Teekay Shipping Corporation. Pursuant to this
                charter
                contract, the Partnership has earned voyage revenues of $2.2 million
                during the last six months ended December 31,
                2006.





l.
            One
                of OPCO’s conventional tankers has been employed on a short-term bareboat
                charter with a subsidiary of Teekay Shipping Corporation. Pursuant
                to this
                charter contract, the Partnership has earned voyage revenues of
                $1.2 million during the last six months ended December 31,
                2006.





F-16


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





m.
            OPCO’s
                shuttle tankers that service its contracts of affreightment have
                been
                employed on voyage charters when OPCO has excess shuttle tanker capacity.
                For certain voyage charters, a subsidiary of Teekay Shipping Corporation
                has provided ship brokerage services to the Partnership. The Partnership
                incurred $0.4 million, $0.6 million and $0.3 million of voyage
                expenses relating to these services during the years ended
                December 31, 2006, 2005 and 2004, respectively.





n.
            OPCO’s
                shuttle tankers, which are typically employed on long-term time-charters,
                have been employed on short-term time charters with a subsidiary
                of Teekay
                Shipping Corporation where there were periods between the ending
                of one
                long-term time-charter and the beginning of another long-term
                time-charter. Pursuant to these short-term time-charters, OPCO earned
                voyage revenues of $1.2 million and $4.6 million during the
                years ended 2005 and 2004, respectively.





o.
            One
                of OPCO’s FSO units has been employed on a long-term bareboat charter with
                one of the Partnership’s joint ventures. Pursuant to the charter contract,
                the Partnership earned voyage revenues of $4.8 million, $5.4 million
                and $6.5 million during the years ended December 31, 2006, 2005
                and 2004, respectively.





p.
            The
                Partnership has entered into an omnibus agreement with Teekay Shipping
                Corporation, Teekay LNG Partners L.P., the General Partner and others
                governing, among other things, when the Partnership, Teekay Shipping
                Corporation and Teekay LNG Partners L.P. may compete with each other
                and
                certain rights of first offering on LNG carriers, oil tankers, shuttle
                tankers, FSO units and floating production, storage and offloading
                units.





q.
            The
                Partnership, OPCO and certain of OPCO’s operating subsidiaries have
                entered into services agreements with certain subsidiaries of Teekay
                Shipping Corporation, pursuant to which Teekay Shipping Corporation
                subsidiaries provide the Partnership, OPCO and the operating subsidiaries
                with administrative, advisory, technical and strategic consulting
                services
                and ship management for a reasonable, arms-length fee. During the
                period
                from December 19, 2006 to December 31, 2006, the Partnership incurred
                $0.3
                million of these costs.





**12.**  **Derivative
      Instruments and Hedging Activities**





The
      Partnership uses derivatives only for hedging purposes. The following summarizes
      the Partnership’s risk strategies with respect to market risk from changes in
      interest rates. As at December 31, 2006, the Partnership was committed to the
      following interest rate swap agreements related to its LIBOR-based debt, whereby
      certain of the Partnership’s floating-rate debt was swapped with fixed-rate
      obligations:





**Interest**
                **Rate**
                **Index**
              **Principal**
                **Amount**
                **$**
              **Fair
                  Value /**
                **Carrying**
                **Amount
                  of**
                **Liability**
                **$**
              **Weighted-**
                **Average**
                **Remaining**
                **Term**
                **(years)**
              **Fixed
                  Interest**
                **Rate**
                **(%)****(1)**U.S.
                  Dollar-denominated interest rate swaps(2)
              LIBOR
              55,000
              934
              7.5
              4.7U.S.
                  Dollar-denominated interest rate swaps
              LIBOR
              1,090,000
              21,506
              9.4
              4.9
 _________





(1)
      Excludes the margin the Partnership pays on its variable-rate debt, which as
      at
      December 2006, ranged from 0.625%
      and 0.80%.


(2)
      Principal amount reduces semiannually by $2.2 million.





The
      Partnership is exposed to credit loss in the event of non-performance by the
      counterparties to the interest rate swap agreements; however, the Partnership
      does not anticipate non-performance by any of the counterparties.





Changes
      in the fair value of the designated interest rate swaps (cash flow hedges)
      are
      recognized in other comprehensive income until the hedged item is recognized
      in
      income. The ineffective portion of a derivative's change in fair value is
      immediately recognized into income and is presented as interest expense in
      2006
      or as equity income from joint ventures in 2005 and 2004. During the year ended
      December 31, 2006, the ineffective portion of the Partnership’s interest rate
      swaps was a net gain of $0.1 million (2005 - net loss of $0.2 million; 2004
      - net loss of $0.1 million).





As
      at
      December 31, 2006, the Partnership estimated, based on then-existing
      interest rates, that it would reclassify approximately $5.8 million of net
      gain on derivative instruments from accumulated other comprehensive income
      to
      earnings during the next 12 months due to the payment of interest expense
      associated with the Partnership’s floating-rate debt.





As
      at
      December 31, 2006 and 2005, the Partnership’s accumulated other
      comprehensive income of $5.3 million and $0.1 million, respectively,
      consisted of unrealized gains on derivative instruments.


F-17


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





**13.
      Income Taxes**





The
      significant components of the Partnership’s deferred tax liabilities and assets
      are as follows:





**December
                31,**
              **2006**
              **$**
            
            **December
                31,**
              **2005**
              **$**Deferred
                tax liabilities:Vessels
                and equipment
            
            
            58,824
            
            
            51,483Long-term
                debt
            
            
            35,854
            
            
            8,120Total
                deferred tax liabilities
            
            
            94,678
            
            
            59,603Deferred
                tax assets:Goodwill
                and intangible assets
            
            
            368
            
            
            1,304Provisions
            
            
            1,012
            
            
            415Tax
                losses carried forward
            
            
            21,715
            
            
            -Total
                deferred tax assets
            
            
            23,095
            
            
            1,719Net
                deferred tax liabilities
            
            
            71,583
            
            
            57,884Current
                portion
            
            
            -
            
            
            -Long-term
                portion of net deferred tax liabilities
            
            
            71,583
            
            
            57,884




The
      components of income (loss) before income taxes follow:





**Year
                Ended December 31, 2006****January
                1**
              **to**
              **December
                18,**
              **2006**
              **$**
            
            **December
                19**
              **to**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**Foreign
            
            
            (30,891
            )
            
            947
            
            
            70,874
            
            
            241,960Domestic
            
            
            -
            
            
            -
            
            
            -
            
            
            -(30,891
            )
            
            947
            
            
            70,874
            
            
            241,960





Substantially
      all of the above foreign income (loss) resulted from the operations of companies
      that were subject to income taxes in their countries of
      incorporation.




The
      components of the provision for income taxes are as follows:





**Year
                Ended December 31, 2006****January
                1**
              **to**
              **December
                18,**
              **2006**
              **$**
            
            **December
                19**
              **to**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**Current
            
            
            (176
            )
            
            (7
            )
            
            (3,546
            )
            
            (589
            )Deferred
            
            
            (2,496
            )
            
            (92
            )
            
            17,419
            
            
            (27,599
            )Income
                tax recovery (expense)
            
            
            (2,672
            )
            
            (99
            )
            
            13,873
            
            
            (28,188
            )




Reconciliations
      of the actual income tax rate attributable to pretax income and the applicable
      statutory income tax rate are as follows:





**Year
                Ended December 31, 2006****January
                1**
              **to**
              **December
                18,**
              **2006**
              **%**
            
            **December
                19**
              **to**
              **December
                31,**
              **2006**
              **%**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **%**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **%**Actual
                income tax provision (credit) rate
            
            
            (8.6
            )
            
            10.5
            
            
            (19.6
            )
            
            11.6Income
                not subject to income taxes
            
            
            36.6
            
            
            17.5
            
            
            47.6
            
            
            16.4Applicable
                statutory income tax provision rate
            
            
            28.0
            
            
            28.0
            
            
            28.0
            
            
            28.0




At
      December 31, 2006, the Partnership’s Norwegian subsidiaries had net operating
      loss carryforwards of approximately 485.1 million Norwegian Kroner ($77.6
      million) for tax purposes, which will be available to offset future taxable
      income. These net operating loss carryfowards can be carried forward
      indefinitely.


F-18


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





**14.**  **Commitments
      and Contingencies**





**a) 
      Volatile Organic Compound Emissions Plants**





The
      Partnership has been awarded a contract by a consortium of major oil companies
      to construct and install volatile organic compound emissions plants, which
      reduce emissions during cargo operations, on certain of its shuttle tankers.
      These plants will be leased to the consortium of major oil companies. The
      construction and installation of these plants are expected to be completed
      during 2007 at a total cost of approximately $104.6 million. As at
      December 31, 2006, the Partnership had made payments towards these
      commitments of approximately $95.9 million. The remaining amount of
      $8.7 million is expected to be paid during 2007.





**b) 
      Other**





The
      Partnership enters into indemnification agreements in the ordinary course of
      business. The maximum potential amount of future payments required under these
      indemnification agreements is unlimited. However, the Partnership maintains
      what
      it believes is appropriate liability insurance that reduces its exposure and
      enables the Partnership to recover future amounts paid up to the maximum amount
      of the insurance coverage, less any deductible amounts pursuant to the terms
      of
      the respective policies, the amounts of which are not considered
      material.





**15.
      Change in Non-Cash Working Capital Items Related to Operating
      Activities**


**Year
                Ended**
              **December
                31,**
              **2006**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2005**
              **$**
            
            **Year
                Ended**
              **December
                31,**
              **2004**
              **$**Accounts
                receivable
            
            
            3,214
            
            
            13,129
            
            
            34,755Prepaid
                expenses and other assets
            
            
            10,351
            
            
            (17,471
            )
            
            (10,857
            )Accounts
                payable and accrued liabilities
            
            
            2,098
            
            
            5,429
            
            
            (11,360
            )Advances
                from (to) affiliates
            
            
            31,281
            
            
            21,864
            
            
            (50,247
            )46,944
            
            
            22,951
            
            
            (37,709
            )





**16.**  **Vessel
      Sales and Write-downs on Vessels and**  **Equipment**





**a)**
            **Vessel
                Sales**





During
      2006, the Partnership sold a 1981-built shuttle tanker. The Partnership recorded
      a gain of $6.4 million and a minority interest expense of $3.2 million relating
      to the sale.





During
      2005, the Partnership sold two shuttle tankers built in 1981 and 1986. The
      results for the year ended December 31, 2005 include a gain on sale from
      these vessels totaling $9.1 million. In addition, the Company sold and
      leased back, under an operating lease, a 1991-built shuttle tanker. The sale
      generated a $2.8 million gain, which has been deferred and is being amortized
      over the 6.5 year term of the lease. The results for 2006 and 2005 include
      $0.4
      million and $0.3 million, respectively, of amortization of this deferred
      gain.





During
      2004, the Partnership sold one 1982-built shuttle tanker. The results for 2004
      include a $3.7 million gain on sale of this vessel.





**b)**
            **Equipment
                Writedowns**





During
      2006, the Partnership incurred a $2.2 million write-down of certain offshore
      equipment. This writedown occurred due to a reassessment of the estimated net
      realizable value of this equipment and follows a $12.2 million write-down in
      2005 arising from the early termination of a contract for the
      equipment.


F-19


**TEEKAY
      OFFSHORE PARTNERS L.P. AND SUBSIDIARIES**


**(Successor
      to Teekay Offshore Partners Predecessor)**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Cont’d)**


**(all
      tabular amounts stated in thousands of U.S. dollars, except unit and per unit
      data or unless otherwise indicated)**





**17. 
      Net Income (Loss) Per Unit**





Net
      income (loss) per unit is determined by dividing net income (loss), after
      deducting the amount of net income allocated to the General Partner’s interest
      from the issuance date of the units of December 19, 2006, as described below,
      by
      the weighted-average number of units outstanding during the period. For periods
      prior to December 19, 2006, such units are deemed equal to the common and
      subordinated units received by Teekay Shipping Corporation in exchange for
      net
      assets contributed to the Partnership, or 12,600,000 units.





As
      required by Emerging Issues Task Force Issue No. 03-6, *Participating
      Securities and Two-Class Method under FASB Statement No. 128, Earnings Per
      Share* ,
      the
      general partner’s, common unit holders’ and subordinated unitholders’ interests
      in net income are calculated as if all net income for periods subsequent to
      December 19, 2006 were distributed according to the terms of the Partnership’s
      Agreement, regardless of whether those earnings would or could be distributed.
      The Partnership Agreement does not provide for the distribution of net income;
      rather, it provides for the distribution of available cash, which is a
      contractually defined term that generally means all cash on hand at the end
      of
      each quarter after establishment of cash reserves. Unlike available cash, net
      income is affected by non-cash items. Net income for the period from December
      19
      to 31, 2006 was $0.8 million. The limited partners’ interest in net income for
      this period was $0.8 million. Subsequent to December 31, 2006, cash
      distributions declared and payable on February 14, 2007 to the limited partners
      for the period of December 19 to 31, 2006 totaled $1.0 million.





Under
      the
      Partnership Agreement, the holder of the incentive distribution rights in the
      Partnership, which is currently the General Partner, has the right to receive
      an
      increasing percentage of cash distributions after the minimum quarterly
      distribution. Assuming there are no cumulative arrearages on common unit
      distributions, the target distribution levels entitle the General Partner to
      receive 2% of quarterly cash distributions up to $0.4025 per unit, 15% of
      quarterly cash distributions between $0.4025 and $0.4375 per unit, 25% of
      quarterly cash distributions between $0.4375 and $0.525 per unit, and 50% of
      quarterly cash distributions in excess of $0.525 per unit. During the period
      from December 19 to 31, 2006, net income did not exceed $0.4025 per unit
      (prorated for this period) and, consequently, the assumed distribution of net
      income did not result in the use of the increasing percentages to calculate
      the
      General Partner’s interest in net income.





Under
      the
      Partnership Agreement, during the subordination period the common units will
      have the right to receive distributions of available cash from operating surplus
      in an amount equal to the minimum quarterly distribution of $0.35 per quarter,
      plus any arrearages in the payment of the minimum quarterly distribution on
      the
      common units from prior quarters, before any distributions of available cash
      from operating surplus may be made on the subordinated units. During the period
      from December 19 to 31, 2006, net income did not exceed the minimum quarterly
      distribution of $0.35 per unit (prorated for this period) and, consequently,
      the
      assumed distribution of net income resulted in an unequal distribution of net
      income between the subordinated unit holders and common unit holders.





**18. 
      Valuation and Qualifying Accounts**





**Balance
                at beginning**
              **of****year**
              **$**
            
            **Balance
                at****end**
              **of****year**
              **$**Allowance
                for bad debts:Year
                ended December 31, 2005
            
            
            461
            
            
            987Year
                ended December 31, 2006
            
            
            987
            
            
            401Restructuring
                cost accrual:Year
                ended December 31, 2005
            
            
            -
            
            
            955Year
                ended December 31, 2006
            
            
            955
            
            
            71





**19.
      Other Information**





a)
            In
                February 2006, Teekay Shipping Corporation announced that it has
                been
                awarded 13-year fixed-rate contracts to charter two Suezmax shuttle
                tankers and one Aframax shuttle tanker to Fronape International Company,
                a
                subsidiary of Petrobras Transporte S.A., the shipping arm of Petroleo
                Brasileiro S.A.. In connection with these contracts, Teekay Shipping
                Corporation has exercised the purchase option on a 2000-built Aframax
                tanker that previously traded as part of Teekay Shipping Corporation’s
                spot rate chartered-in fleet and has acquired a 2006-built Suezmax
                tanker,
                both of which will be converted to shuttle tankers during the first
                half
                of 2007.  Pursuant to existing agreements, Teekay Shipping
                Corporation is obligated to offer these two vessels to the Partnership
                within one year of each vessel’s delivery. The third vessel is a
                2003-built Suezmax shuttle tanker from the Partnership’s shuttle tanker
                fleet that commenced operation under these contracts in July 2006.





b)
            In
                January 2007, Teekay Shipping Corporation ordered two Aframax shuttle
                tanker newbuildings which are scheduled to deliver during the third
                quarter of 2010, for a total cost of approximately $240 million.
                It is
                anticipated that these vessels will be offered to the Partnership
                and will
                be used to service either new long-term, fixed-rate contracts Teekay
                Shipping Corporation may be awarded prior to delivery or the Partnership’s
                contracts of affreightment in the North
                Sea.




F-20














**EXHIBIT
      8.1**





**LIST
      OF SIGNIFICANT SUBSIDIARIES**





The
      following is a list of Teekay Offshore Partners L.P.'s significant subsidiaries
      as at December 31, 2006:


**Name
                of Significant Subsidiary**
            **State
                or**
              **Jurisdiction of Incorporation**
            **Proportion
                of**
              **Ownership**
              **Interest**NAVION
                OFFSHORE LOADING AS.
            NORWAY
            26%NORSK
                TEEKAY AS.
            NORWAY
            26%NORSK
                TEEKAY HOLDINGS LTD.
            MARSHALL
                ISLANDS
            26%TEEKAY
                EUROPEAN HOLDINGS S.A.R.L.
            LUXEMBOURG
            26%TEEKAY
                NAVION OFFSHORE LOADING PTE. LTD.
            SINGAPORE
            26%TEEKAY
                NETHERLANDS EUROPEAN HOLDINGS BV
            NETHERLANDS
            26%TEEKAY
                NORDIC HOLDINGS INC.
            MARSHALL
                ISLANDS
            26%TEEKAY
                NORWAY AS.
            NORWAY
            26%TEEKAY
                OFFSHORE OPERATING L.P.
            MARSHALL
                ISLANDS
            26%UGLAND
                NORDIC SHIPPING AS.
            NORWAY
            26%











**EXHIBIT
      12.1**





**CERTIFICATION**





I,
      Peter
      Evensen, certify that:









1.
            I
              have reviewed this Annual Report on Form 20-F of Teekay Offshore Partners,
              L.P. (the "***Registrant***"); 2.
            Based
              on my knowledge, this report does not contain any untrue
              statement of a material fact or omit to state a material fact necessary
              to
              make the statements made, in light of the circumstances under which
              such
              statements were made, not misleading with respect to the period covered
              by
              this report; 3.
            Based
              on my knowledge, the financial statements, and other financial information
              included in this report, fairly present in all material respects the
              financial condition, results of operations and cash flows of the
              registrant as of, and for, the periods presented in this
              report; 4.
            I and the Registrant's other certifying officer
              (which is
              also myself) are responsible for establishing and maintaining disclosure
              controls and procedures (as defined in Exchange Act Rules 13a-15(e)
              and
              15d-15(e)) for the Registrant and
              have:




a)
            Designed
                such disclosure controls and procedures, or caused such disclosure
                controls and procedures to be designed under our supervision, to
                ensure
                that material information relating to the Registrant, including its
                consolidated subsidiaries, is made known to us by others within those
                entities, particularly during the period in which this report is
                being
                prepared;





b)
            Evaluated
                the effectiveness of the Registrant’s disclosure controls and procedures
                and presented in this report our conclusions about the effectiveness
                of
                the disclosure controls and procedures, as of the end of the period
                covered by this report based on such evaluation;
                and





c)
            Disclosed
                in this report any change in the Registrant’s internal control over
                financial reporting that occurred during the Registrant's most recent
                fiscal quarter (the fourth fiscal quarter in the case of an annual
                report)
                that has materially affected, or is reasonably likely to materially
                affect, the Registrant’s internal control over financial reporting;
                and




5.
            I
                and the Registrant's other certifying officer (which is also myself)
                have
                disclosed, based on our most recent evaluation of internal control
                over
                financial reporting, to the Registrant’s auditors and the audit committee
                of the board of directors of the Registrant's general partner (or
                persons
                performing the equivalent
                functions):


a)
            All
                significant deficiencies and material weaknesses in the design or
                operation of internal control over financial reporting which are
                reasonably likely to adversely affect  the Registrant's ability to
                record, process, summarize and report financial information;
                and b)
            Any fraud, whether or not material, that involves
              management or other employees who have a significant role in the
              Registrant’s internal control over financial
              reporting.











Dated: April 19, 2007
            By: /s/
                Peter
                Evensen
              Peter
                Evensen
              Chief Executive
                Officer

































**EXHIBIT
      12.2**


**CERTIFICATION**





I,
      Peter
      Evensen, certify that:




1.
            I
                have reviewed this Annual Report on Form 20-F of Teekay Offshore
                Partners,
                L.P. ("***the
                Registrant***"); 2.
            Based on my knowledge, this report does not contain
              any
              untrue statement of a material fact or omit to state a material fact
              necessary to make the statements made, in light of the circumstances
              under
              which such statements were made, not misleading with respect to the
              period
              covered by this report; 3.
            Based on my knowledge, the financial statements,
              and
              other financial information included in this report, fairly present
              in all
              material respects the financial condition, results of operations and
              cash
              flows of the registrant as of, and for, the periods presented in this
              report; 4.
            I and the Registrant's other certifying officer
              (which is
              also myself) are responsible for establishing and maintaining disclosure
              controls and procedures(as
              defined in Exchange Act Rules
              13a-15(e) and
              15d-15(e)) for the Registrant and
              have:


a)
            Designed
                such disclosure controls and procedures, or caused such disclosure
                controls and procedures to be designed under our supervision, to
                ensure
                that material information relating to the Registrant, including its
                consolidated subsidiaries, is made known to us by others within those
                entities, particularly during the period in which this report is
                being
                prepared;





b)
            Evaluated
                the effectiveness of the Registrant’s disclosure controls and procedures
                and presented in this report our conclusions about the effectiveness
                of
                the disclosure controls and procedures, as of the end of the period
                covered by this report based on such evaluation;
                and





c)
            Disclosed
                in this report any change in the Registrant’s internal control over
                financial reporting that occurred during the Registrant's most recent
                fiscal quarter (the fourth fiscal quarter in the case of an annual
                report)
                that has materially affected, or is reasonably likely to materially
                affect, the Registrant’s internal control over financial reporting;
                and




5.
            I
                and the Registrant's other certifying officer (which is also myself)
                have
                disclosed, based on our most recent evaluation of internal control
                over
                financial reporting, to the Registrant’s auditors and the audit committee
                of the board of directors of the Registrant's general partner (or
                persons
                performing the equivalent functions):  a)
            All
                significant deficiencies and material weaknesses in the design or
                operation of internal control over financial reporting which are
                reasonably likely to adversely affect the Registrant's ability to
                record,
                process, summarize and report financial information;
                and b)
            Any fraud, whether or not material, that involves
              management or other employees who have a significant role in the
              Registrant’s internal control over financial
              reporting.









Dated: April 19, 2007
            By: /s/
                Peter Evensen
              Peter Evensen
              Chief Financial
                Officer











**EXHIBIT
      13.1**





**CERTIFICATION
      PURSUANT TO**


**18
      U.S.C. SECTION 1350,**


**AS
      ADOPTED PURSUANT TO SECTION 906**


**OF
      THE SARBANES-OXLEY ACT OF 2002**





In
      connection with the Annual Report of Teekay Offshore Partners L.P. (the ***"Partnership"*** )
      on Form
      20-F for the year ended December 31, 2006 as filed with the Securities and
      Exchange Commission on the date hereof (the ***"Form
      20-F"*** ),
      I,
      Peter Evensen, Chief Executive Officer and Chief Financial Officer of the
      Partnership, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906
      of the Sarbanes-Oxley Act of 2002, that:





(1)
      The
      Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of
      the
      Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and





(2)
      The
      information contained in the Form 20-F fairly presents, in all material
      respects, the financial condition and results of operations of the
      Partnership.





Dated:
      April 19, 2007








By: /s/
      Peter Evensen


Peter
      Evensen


Chief
      Executive Officer and Chief Financial Officer