**Filed with the Securities and Exchange Commission on April 10, 2007**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 20-F**
| **o**      | **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**                                                                                                                                                |
| **o**      | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                               |
| ** ** | **or**                                                                                                                                                |
| **o**      | **Shell company report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934**                                            |
| ** ** | Date of event requiring this shell company report                                                                                                     |

 

**Commission file number: 0-00000**

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**AURELIA ENERGY N.V.**

(Exact name of Registrant as specified in its Charter)

**Netherlands Antilles**

(Jurisdiction of incorporation or organization)

**LandhuisJoonchiKaya Richard J Beaujun z/nCuraçao, Netherlands Antilles(599) 9736 6277**

(Address of Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) ofthe Act:

| **Title of Each Class** |   | **Name of Each Exchange on Which Registered** |
|-------------------------|--------|-----------------------------------------------|
| None                    |   | Not Applicable                                |

 

Securities registered or tobe registered pursuant to Section 12(g) of the Act:

**NONE**

(Title of Class)

Securities for which thereis a reporting obligation pursuant to Section 15(d) of the Act:

**10**1¤4% Senior Notes due 2012

**SeniorSubordinated Guarantees**

(Title of Class)

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of the close of the periodcovered by the annual report.

**34,000Non-Profit Sharing 5% Non-Cumulative Preference A Shares, par value U.S.$1,000per share**

**136,000Common B Shares, par value U.S.$1,000 per share**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes x No

If this report is an annual or transition report,indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of1934.

oYes x No

Note—Checking the box above will not relieve anyregistrant required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934 from their obligations under thoseSections.

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated file, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check One):

| Large accelerated filer o |   | Accelerated Filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check markwhich financial statement item the registrant has elected to follow. 

oItem 17 x Item 18

If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

o Yes x No

 

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**TABLEOF CONTENTS**
|                                                 | ** ** | ** **                                                                    | ** ** | **Page** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------|------------|
| PRESENTATION OF FINANCIAL AND OTHER INFORMATION |       |                                                                          | 3          |     |       |
| FORWARD-LOOKING  STATEMENTS                     |       |                                                                          | 4          |     |       |
| PART I                                     |       |                                                                          | 6          |     |       |
| Item 1                                          |       | IDENTITY OF  DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        |       |     | 6          |   |   |
| Item 2                                          |       | OFFER  STATISTICS AND EXPECTED TIMETABLE                                      |       |     | 6          |   |   |
| Item 3                                          |       | KEY INFORMATION                                                               |       |     | 7          |   |   |
| Item 4                                          |       | INFORMATION ON THE  COMPANY                                                   |       |     | 18         |   |   |
| Item 5                                          |       | OPERATING AND  FINANCIAL REVIEW AND PROSPECTS                                 |       |     | 39         |   |   |
| Item 6                                          |       | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   |       |     | 62         |   |   |
| Item 7                                          |       | MAJOR  SHAREHOLDER AND RELATED PARTY TRANSACTIONS                             |       |     | 66         |   |   |
| Item 8                                          |       | FINANCIAL INFORMATION                                                         |       |     | 67         |   |   |
| Item 9                                          |       | THE OFFER AND LISTING                                                         |       |     | 68         |   |   |
| Item 10                                         |       | ADDITIONAL  INFORMATION                                                       |       |     | 68         |   |   |
| Item 11                                         |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |       |     | 87         |   |   |
| Item 12                                         |       | DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES                       |       |     | 89         |   |   |
| PART II                                    |       |                                                                          | 90         |     |       |
| Item 13                                         |       | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              |       |     | 90         |   |   |
| Item 14                                         |       | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |       |     | 90         |   |   |
| Item 15                                         |       | CONTROLS AND  PROCEDURES                                                      |       |     | 90         |   |   |
| Item 16A                                        |       | AUDIT COMMITTEE  FINANCIAL EXPERT                                             |       |     | 91         |   |   |
| Item 16B                                        |       | CODE OF ETHICS                                                                |       |     | 91         |   |   |
| Item 16C                                        |       | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       |       |     | 91         |   |   |
| Item 16D                                        |       | EXEMPTIONS FROM  THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |       |     | 92         |   |   |
| Item 16E                                        |       | PURCHASES OF  EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS  |       |     | 92         |   |   |
| PART III                                   |       |                                                                          | 93         |     |       |
| Item 17                                         |       | FINANCIAL STATEMENTS                                                          |       |     | 93         |   |   |
| Item 18                                         |       | FINANCIAL STATEMENTS                                                          |       |     | 93         |   |   |
| Item 19                                         |       | EXHIBITS                                                                      |       |     | 93         |   |   |
| SIGNATURE                                       |       |                                                                          | 100        |     |       |

 

2

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**PRESENTATIONOF FINANCIAL AND OTHER INFORMATION**

We prepare our financialstatements on a consolidated basis in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”). Our auditors conducttheir audit of our consolidated financial statements in accordance with the standardsof the Public Company Accounting Oversight Board (United States). We haveincluded in this annual report selected consolidated financial information asof and for the years ended December 31, 2002, 2003, 2004, 2005 and 2006and audited consolidated financial statements as of and for the years ended December 31,2004, 2005 and 2006.

We have included in thisannual report EBITDA amounts for certain periods, because we believe thatEBITDA is a useful measure for certain investors to determine our operatingcash flow and historical ability to meet debt service and capital expenditurerequirements, and because we believe that it provides a useful measure of thelevel of profitability we achieve with our asset base. EBITDA is not a measureof financial performance under U.S. GAAP and should not be considered as analternative to cash flow from operating activities, a measure of liquidity oran alternative to net income as indicators of our operating performance or anyother measures of performance derived in accordance with U.S. GAAP. Areconciliation of the EBITDA amounts included herein to net income and net cashprovided by operating activities (which are U.S. GAAP measures) is set forthunder “Item 3: Key Information—(A) Selected Consolidated Financial Data—Notes”.

Certain monetary amountsand other figures included in this annual report have been subject to roundingadjustments. Accordingly, figures shown as totals in certain tables may not bethe arithmetic aggregation of the figures which precede them, and figuresexpressed as percentages in the text may not total 100.0% when aggregated.

Certain ratios included inthis annual report include immaterial corrections to amounts presented inreports and other documents previously filed by us with the Securities andExchange Commission.

Wehave prepared this annual report using a number of conventions, which youshould consider when reading the information contained herein. When we use theterms “we”, “us”, “our” and words of similar import or the “Company”, we arereferring to Aurelia Energy N.V., itself, or to Aurelia Energy N.V. and itsconsolidated subsidiaries, as the context requires. When we refer to “AureliaHolding N.V.”, the registered shareholder of 100.0% of our outstanding votingshares, with respect to dates on or after June 20, 2006, we are referringto the newly founded company Aurelia Holding N.V. The former Aurelia HoldingN.V. has been liquidated. When we use the terms “own” and “owns”, with respectto our FPSOs and FPSO hull, we are referring to:

·                    ownership ofboth the hull and the topsides in the case of the *Uisge Gorm*,the *Glas Dowr,* the *Munin*, the *Bleo Holm,* the *Haewene Brim*,and a 55% ownership interest in *Jotun A*, and

·                    ownership ofthe hull and topsides under construction in the case of the *Aoka Mizu,*and

·                    ownership ofthe trading vessel *Hanne Knutsen*.

References to “dollars”, “U.S.dollars” and “U.S.$” are to the currency of the United States, references to “euro”and “€”are to the single currency of the member states of the European Communitiesthat have adopted the euro as their lawful currency under the legislation ofthe European Community relating to the Economic and Monetary Union andreferences to “£” and “sterling” are to the currency of the United Kingdom. Inthis annual report, we have translated certain euro amounts into U.S. dollarsat an exchange rate of €1.00 to U.S.$1.3186 and certain sterlingamounts into U.S. dollars at an exchange rate of £1.00 to U.S.$1.9660, whichwere the noon buying rates in New York City for cable transfers in thoseforeign currencies as certified for customs purposes by the Federal ReserveBank of New York on December 31, 2006. You should not construe thesetranslations as representations that the euro or sterling amounts actuallyrepresent such U.S. dollar amounts or that we could convert these amounts intoU.S. dollars at the rates indicated. On April 10, 2007, the applicablenoon buying rates were €1.00 to U.S.$1.34 and £1.00 to U.S.$1.97.

3

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**FORWARD-LOOKINGSTATEMENTS**

This annual reportincludes forward-looking statements within the meaning of, and which havebeen made pursuant to, the U.S. Private Securities Litigation Reform Act of1995. All statements other than statements of historical fact contained in thisannual report, including, without limitation, those regarding our futurefinancial position and results of operations, our strategy, plans, objectives,goals and targets, future developments in the markets where we participate orare seeking to participate, and any statements preceded by, followed by or thatinclude the words “believe”, “expect”, “aim”, “intend”, “may”, “anticipate”, “seek”or similar expressions or the negative thereof, are forward-lookingstatements. These forward-looking statements involve known and unknownrisks, uncertainties and other factors, some of which are beyond our control,which may cause our actual results, performance or achievements, or industryresults, to be materially different from any future results, performance orachievements expressed or implied by the forward-looking statements.These forward-looking statements are based on numerous assumptionsregarding our present and future business strategies and the environment inwhich we will operate in the future. Important factors that could cause ouractual results, performance or achievements to differ materially from those inthe forward-looking statements include, among others:

·       thelevel of oil reserves contained in the oil fields on which we operate our FPSOsand the performance of those fields in general;

·       levelsof capital expenditures by the oil industry on offshore exploration andproduction activities;

·       ourfuture capital needs and our ability generally to finance the expansion of ourbusiness;

·       ourability to enter into new service and bareboat agreements for our FPSOs uponthe termination of their existing agreements;

·       theoutcome of our discussions with tax authorities with respect to our internalrestructuring and our 1997, 1998, 1999 and 2000 tax years;

·       ourability to manage currency risks;

·       ourability to comply with existing or newly implemented environmental regimes inthe countries in which we operate;

·       ourability to obtain, maintain and renew the permits and other governmental authorizationsrequired to conduct our operations;

·       ourliability for violations, known and unknown, under environmental laws;

·       ourability to complete existing and future projects on schedule and within budget;

·       ourability to comply with health and safety regulations at our facilities;

·       ourability to remain competitive and profitable;

·       theperformance of oil companies to whom we contract our FPSOs;

·       theefficacy of modifications and repairs to our FPSOs;

·       ourability to compete in a competitive and changing marketplace;

·       ourlosses from operational hazards and uninsured risks;

·       ourability to minimize the downtime of FPSOs during periods of repair,maintenance, inclement weather and turnarounds;

·       ourability to protect our know-how and intellectual property;

4

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·       theadverse impact of strikes, lock-outs and other industrial actions;

·       thepossible extensions of our service agreements and certain of our materialcontracts;

·       ourability to tie-back additional oil fields that neighbor the oil fields on whichour FPSOs operate; and

·       limitationson our operational flexibility arising under agreements governing our debt.

Additional factors that could cause actual results,performance or achievements to differ materially include, but are not limitedto, those discussed under “Item 3: Key Information—(D) Risk Factors” andelsewhere in this annual report. We caution you not to place undue reliance onthese forward-looking statements which reflect our management’s view onlyas of the date of this annual report. We undertake no obligation to update orrevise any forward-looking statements, whether as a result of newinformation, future events or otherwise. In light of these risks, uncertaintiesand assumptions, the forward-looking events discussed in this annualreport might not occur.

5

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**PART I**

**ITEM 1:**               IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

**ITEM 2:**               OFFERSTATISTICS AND EXPECTED TIMETABLE

Not applicable.

6

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**ITEM3:**               KEY INFORMATION

**(A)****         SelectedConsolidated Financial Data**

Thefollowing table presents our selected financial data on a consolidated basis asat and for each of the years ended December 31, 2002, 2003, 2004, 2005and 2006. We have extracted the following selected financial data from ouraudited consolidated financial statements, prepared in accordance withU.S. GAAP, for the periods indicated. You should read the followingselected consolidated financial data in conjunction with the informationcontained in “Item 5: Operating and Financial Review and Prospects” andour consolidated financial statements and the notes thereto included elsewherein this annual report.

| ** **                                                                         | ** ** | **As at and for the year ended December 31,**                                 | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2002**                                                                                                              | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(in U.S.$ thousands, except ratios and share and  per share amounts)** | ** ** |
| **Income Statement Data:**                                                         | ** ** | ** **                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                           |       | 262,799                                                                                                               |       | 295,780 |   | 437,665 |   | 398,990 |   | 437,912 |   |
| Operations  expenses                                                               |       | 145,309                                                                                                               |       | 185,755 |   | 314,073 |   | 255,597 |   | 246,795 |   |
| Selling, general  and administrative expenses                                      |       | 9,736                                                                                                                 |       | 9,800 |   | 9,754 |   | 11,310 |   | 13,047 |   |
| Other operating  income                                                            |       | (4,046                                                                                                                | )          | (4,014 | ) | (3,738 | ) | (30,702 | ) | — |   |
| Depreciation of  tangible fixed assets and amortization of intangible fixed assets |       | 54,038                                                                                                                |       | 61,976 |   | 72,995 |   | 94,953 |   | 106,344 |   |
| Total operating  expenses                                                          |       | 205,037                                                                                                               |       | 253,517 |   | 393,084 |   | 331,158 |   | 366,186 |   |
| Operating income                                                                   |       | 57,762                                                                                                                |       | 42,263 |   | 44,581 |   | 67,832 |   | 71,726 |   |
| Interest income                                                                    |       | 3,447                                                                                                                 |       | 3,530 |   | 3,355 |   | 3,550 |   | 1,831 |   |
| Interest expense                                                                   |       | (48,898                                                                                                               | )          | (45,120 | ) | (44,940 | ) | (54,464 | ) | (79,065 | ) |
| Currency exchange  results                                                         |       | 1,452                                                                                                                 |       | 10,841 |   | 2,924 |   | (14,873 |   | 9,931 |   |
| Total financial  income and expenses                                               |       | (43,999                                                                                                               | )          | (30,749 | ) | (38,661 | ) | (65,787 | ) | (67,303 | ) |
| Income before  income taxes                                                        |       | 13,763                                                                                                                |       | 11,514 |   | 5,920 |   | 2,045 |   | 4,423 |   |
| Income taxes                                                                       |       | (23,615                                                                                                               | )          | (1,063 | ) | (469 | ) | (16,421 | ) | (11,548 | ) |
| Income before  minority interest                                                   |       | 37,378                                                                                                                |       | 12,577 |   | 6,389 |   | 18,466 |   | 15,971 |   |
| Minority interest                                                                  |       | —                                                                                                                |       | — |   | — |   | 5,163 |   | 10,550 |   |
| Net income                                                                         |       | 37,378                                                                                                                |       | 12,577 |   | 6,389 |   | 13,303 |   | 5,421 |   |
| Number of common B  shares outstanding                                             |       | 136,000                                                                                                               |       | 136,000 |   | 136,000 |   | 136,000 |   | 136,000 |   |
| Net income per  common B shares outstanding                                        |       | 275                                                                                                                   |       | 92 |   | 47 |   | 98 |   | 40 |   |
| **Balance Sheet Data:**                                                            | ** ** | ** **                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                                         |       | 23,024                                                                                                                |       | 32,937 |   | 41,987 |   | 43,026 |   | 42,503 |   |
| Fixed assets(1)                                                                    |       | 1,018,785                                                                                                             |       | 1,026,752 |   | 977,761 |   | 1,274,961 |   | 1,409,067 |   |
| Total assets                                                                       |       | 1,279,820                                                                                                             |       | 1,321,536 |   | 1,303,520 |   | 1,529,685 |   | 1,749,010 |   |
| Total debt(2)                                                                      |       | 581,103                                                                                                               |       | 587,455 |   | 545,293 |   | 715,192 |   | 916,588 |   |
| Subordinated  Marenco loan                                                         |       | 125,849                                                                                                               |       | 134,659 |   | 142,085 |   | 147,031 |   | 153,823 |   |
| Share capital(3)                                                                   |       | 170,000                                                                                                               |       | 170,000 |   | 170,000 |   | 170,000 |   | 170,000 |   |
| Shareholders’  equity (net assets)                                            |       | 460,191                                                                                                               |       | 475,388 |   | 481,745 |   | 495,482 |   | 509,197 |   |
| **Cash Flow Data (2005 as  restated)**(4)**:**                                     | ** ** | ** **                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash provided  by operating activities                                         |       | 84,420                                                                                                                |       | 71,920 |   | 71,661 |   | 95,316 |   | 61,865 |   |
| Net cash (used in)  investing activities                                           |       | (95,105                                                                                                               | )          | (65,142 | ) | (18,744 | ) | (306,780 | ) | (233,590 | ) |
| Net cash provided  by (used in) financing activities                               |       | 20,018                                                                                                                |       | 5,807 |   | (40,282 | ) | (215,712 | ) | 162,211 |   |
| **Other Financial Data and  Ratios:**                                              | ** ** | ** **                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| EBITDA(5)                                                                          |       | 111,800                                                                                                               |       | 104,239 |   | 117,576 |   | 162,785 |   | 178,070 |   |
| Capital  expenditures, net(6)                                                      |       | 95,105                                                                                                                |       | 69,912 |   | 23,915 |   | 392,249 |   | 240,296 |   |
| Cash interest  paid(7)                                                             |       | 41,829                                                                                                                |       | 39,722 |   | 35,169 |   | 39,930 |   | 65,298 |   |
| Ratio of EBITDA to  cash interest paid                                             |       | 2.67x                                                                                                                 |       | 2.62x |   | 3.34x |   | 4.08x |   | 2.73x |   |
| Ratio of net debt  to EBITDA(8)                                                    |       | 4.99x                                                                                                                 |       | 5.32x |   | 4.28x |   | 4.13x |   | 4.91x |   |
| Ratio of earnings  to fixed charges(9)                                             |       | 1.22x                                                                                                                 |       | 1.15x |   | 1.18x |   | 1.09x |   | 1.01x |   |

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Notes:

(1)          “Fixed assets” includes tangible fixed assets aspresented in the consolidated balance sheet.

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(2)          “Totaldebt” includes all indebtedness other than the subordinated Marenco loan. Thefollowing table presents a reconciliation of total debt to our long-term bankloans, our 101¤4%Senior Notes due 2012, the short-term portion of our long-term bank loans andour short-term loan for the periods indicated.

| ** **                               | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                               | ** ** | **2002**                                                     | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(in U.S.$ thousands)**                           | ** ** |
| Long-term  bank loans                    |       | 324,733                                                      |       | 249,108 |   | 207,358 |   | 356,266 |   | 551,665 |   |
| 101¤4% Senior Notes due 2012        |       | 256,370                                                      |       | 338,347 |   | 337,935 |   | 306,810 |   | 310,381 |   |
| Current portion of  long term-bank loans |       | —                                                       |       | — |   | — |   | 52,116 |   | 51,101 |   |
| Short-term loan                          |       | —                                                       |       | — |   | — |   | — |   | 3,441 |   |
| Total debt                               |       | 581,103                                                      |       | 587,455 |   | 545,293 |   | 715,192 |   | 916,588 |   |

 

(3)          No dividends were declared in the years presented.

(4)   Cash flowsfrom operating and financing activities for 2005 have been restated to reflecta reclassification of cash flows of U.S.$13,300 from cash flows from operatingactivities to cash flows from financing activities, relating to the correctionof an unintentional error with regards to recording the effect of the change inthe fair value of interest rate swap and caps and the corresponding change inthe fair value of the hedged debt. This reclassification in the statement ofcash flows did not have an impact on cash and cash equivalents, total cashflows, statement of operations or balance sheet as of and for the year endedDecember 31, 2005. See note 34 to the Consolidated Financial Statements.

(5)          “EBITDA” is defined as operating income(loss) plus depreciation and amortization. This definition deviates from otherdefinitions of EBITDA used by some other companies, as it excludes interestincome and currency exchange results. We believe this definition is moreappropriate since it provides investors with a helpful measure for comparingour operating performance with that of other companies in our industry. EBITDAis presented as additional information because we believe that it is a usefulmeasure for certain investors to determine our operating cash flow andhistorical ability to meet debt service and capital expenditure requirements.We also believe that it provides a useful measure of the level of profitabilitywe achieve with our asset base. EBITDA is not a measure of financialperformance under U.S. GAAP and should not be considered as an alternativeto cash flow from operating activities, a measure of liquidity or analternative to net income as indicators of our operating performance or anyother measures of performance derived in accordance with U.S. GAAP. Thefollowing table presents a reconciliation of our EBITDA to net income and netcash provided by operating activities for the periods indicated.

| ** **                                                                   | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2002**                                                     | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **(in U.S.$ thousands)**                           | ** ** |
| EBITDA                                                                       |       | 111,800                                                      |       | 104,239 |   | 117,576 |   | 162,785 |   | 178,070 |   |
| Depreciation of  tangible fixed assets and amortization of intangible assets |       | (54,038                                                      | )          | (61,976 | ) | (72,995 | ) | (94,953 | ) | (106,344 | ) |
| Financial income  and expense                                                |       | (43,999                                                      | )          | (30,749 | ) | (38,661 | ) | (65,787 | ) | (67,303 | ) |
| Income taxes                                                                 |       | 23,615                                                       |       | 1,063 |   | 469 |   | 16,421 |   | 11,548 |   |
| Minority interest                                                            |       | —                                                       |       | — |   | — |   | (5,163 |   | (10,550 | ) |
| Net income                                                                   |       | 37,378                                                       |       | 12,577 |   | 6,389 |   | 13,303 |   | 5,421 |   |
| Adjustments to  reconcile net income to cash provided                        |       | 26,987                                                       |       | 57,930 |   | 74,813 |   | 107,932 |   | 120,820 |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions  |       | 20,055                                                       |       | 1,413 |   | (9,541 | ) | (12,619 | ) | (64,376 | ) |
| Net cash provided by  operating activities                                   |       | 84,420                                                       |       | 71,920 |   | 71,661 |   | 108,616 |   | 61,865 |   |

 

(6)          “Capital expenditures, net” representsadditions to fixed assets less disposals of fixed assets The following tablepresents a reconciliation of “capital expenditures, net” to additions totangible fixed assets, disposals 

8

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of tangible fixed assets and accumulated depreciationof disposals of tangible fixed assets for the periods indicated.

| ** **                                                      | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2002**                                                     | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **(in U.S.$ thousands)**                           | ** ** |
| Additions to  tangible fixed assets                             |       | 95,105                                                       |       | 77,978 |   | 25,391 |   | 392,276 |   | 240,296 |   |
| Disposals to  tangible fixed assets                             |       | —                                                       |       | (9,874 | ) | (14,802 | ) | (29 | ) | (1 | ) |
| Accumulated  depreciation of disposals of tangible fixed assets |       | —                                                       |       | 1,808 |   | 13,326 |   | 2 |   | 1 |   |
| Capital expenditures, net                                       |       | 95,105                                                       |       | 69,912 |   | 23,915 |   | 392,249 |   | 240,296 |   |

 

(7)          “Cash interest paid” is defined as interest expense,plus capitalized interest, less accrued interest on the subordinated andunsubordinated Marenco loans, less amortization of debt arrangement fees, lessamortization of premiums, discounts and deferred gains and losses on the 101¤4% Senior Notes due 2012 and less theineffective portion of hedges recognized in earnings and is disclosed as anadditional cash flow disclosure in the consolidated statements of cash flow inthe audited consolidated financial statements included in this annual report.

(8)          “Net debt” is defined as total debt as calculated inNote 2 above, less cash and cash equivalents.

(9)          “Earnings” is the amount of pre-tax income fromcontinuing operations before adjustment for minority interests in consolidatedsubsidiaries or income or loss from equity investees, plus fixed charges, plusamortization of capitalized interest, plus distributed income to equityinvestees, plus the share of pre-tax losses of equity investees for whichcharges arising from guarantees are included in fixed charges, less interestcapitalized, less preference security dividend requirements of consolidatedsubsidiaries, less the minority interest in pre-tax income of subsidiaries thathave not incurred fixed charges. “Fixed charges” means the sum of thefollowing: (a) interest expensed or capitalized, (b) amortizedpremiums, discounts and capitalized expenses related to indebtedness, (c) anestimate of the interest within rental expense, and (d) preferencesecurity dividend requirements of consolidated subsidiaries. The term “preferencesecurity dividend” is the amount of pre-tax earnings that is required to paythe dividends on outstanding preference securities, computed as the amount ofthe dividend divided by one minus the effective income tax rate applicable tocontinuing operations.

**(B)****        Capitalizationand Indebtedness**

Not applicable.

**(C)****        Reasonsfor the Offer and Use of Proceeds**

Not applicable.

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**(D)****       RiskFactors**

*We have listed below considerations that could have amaterial adverse effect on our business, financial condition or results ofoperations. Additional considerations not presently known to us or that wecurrently deem immaterial may also impair our business operations. Thesefactors should be considered carefully, together with the information andfinancial data set forth elsewhere in this annual report.*

**We depend oncapital expenditures by the offshore oil industry and reductions in such expenditureshave had and may continue to have a material adverse impact on our business.**

Demand for our products and services depends to alarge extent on the level of offshore exploration and production activity byoil companies and the level of capital expenditures by the oil industry that isdevoted to offshore operations. These factors in turn depend in part onprevailing oil prices, expectations about future prices, the cost of exploringfor, producing and delivering oil, the discovery rate of new oil reserves inoffshore areas, domestic and international political, military, regulatory andeconomic conditions, technological advances and the ability of oil companies togenerate funds for capital expenditures. Prices for oil, although relativelyhigh in recent periods, historically have been extremely volatile and havereacted to changes in the supply of and demand for oil (including changesresulting from the ability of the Organization of Petroleum Exporting Countriesto establish and maintain production quotas) and domestic and worldwideeconomic conditions and political instability in oil producing countries.Uncertainties with respect to international political, military and economicconditions may exacerbate the risk of change with respect to the foregoing,including with respect to levels of capital expenditure by oil companiesregardless of current price levels of oil.

Although our service agreements are designed tominimize the effect of fluctuations in the price of oil and levels ofexploration and production activities by oil companies, changes in the price ofoil and decreases in levels of exploration and production could affect thedecisions of oil companies to extend our existing contract periods or to enterinto new service agreements, particularly in marginal fields and fields thatare near the end of their productive lives. Furthermore, our SPM business isparticularly susceptible to levels of exploration and production activity byoil companies, because SPM systems are typically sold rather than leased.Historically, oil companies have reduced their capital expenditures on SPMsystems during periods of depressed oil prices and decreased levels ofexploration and production activities.

No assurance can be giventhat current levels of exploration and production activity and capitalexpenditures on offshore oil operations will continue or that demand for ourproducts and services will continue at the same level relative to the level ofthose activities, or will improve in future periods. We anticipate that pricesfor oil will continue to be volatile and affect the demand for and pricing ofour products and services. A material decline in oil prices or offshoreexploration and production activities could materially adversely affect ourability to extend existing contract periods, enter into new service agreementsor secure new SPM delivery contracts.

**We generate themajority of our revenues from a limited number of FPSOs and customers and theloss of revenues from any of these vessels or customers could have a materialadverse effect on our financial condition and business prospects.**

We generate the majority of our revenues from thecontract payments that we receive for the provision of FPSOs and relatedservices under our existing service agreements and bareboat agreements. OurFPSO fleet currently consists of six high specification FPSOs (*Bleo Holm*, *Uisge Gorm*, *Glas Dowr*,*Haewene Brim,**Munin*and a 55% ownership interest in *Jotun A*)that have been contracted to oil companies pursuant to service agreements andbareboat agreements. It should be noted that the terms bareboat agreement,bareboat charter and charter agreement are used interchangeable. This type ofagreement involves the provision of an FPSO whereby the charterer isresponsible for the operations, whereas under a service agreement we provideand operate the vessel.

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The loss of revenues fromany of our FPSOs or customers, whether as a result of damage or destruction ofthe vessel, our inability to meet production uptime requirements, the depletionof any of the oil fields on which they operate, the termination of theirservice agreements for any reason after the expiration of the minimum contractperiod, the inability or unwillingness of customers to make payments under anyof their service agreements, or our inability to obtain new service agreementsfor our FPSOs, could have a material adverse effect on our financial conditionand results of operation.

**Ourprojects may be subject to delays and cost overruns.**

Our FPSO and SPM projectsmay be subject to delays and cost overruns due to delays in equipmentdeliveries, unforeseen engineering problems, work stoppages, weatherinterference, unanticipated cost increases, shortages of materials or skilledlabor or labor unrest. Our FPSO projects may be particularly susceptible tocost overruns and delays due to the engineering and construction uncertaintiesinherent in the development and modification of FPSOs. Based on our experience,we believe that the cost of constructing a high specification FPSO (includingthe cost of procuring and converting a hull) ranges fromU.S.$350.0 million to U.S.$450.0 million, though larger and morecomplex FPSOs may have higher construction costs. The cost of modifying anexisting FPSO depends to a large degree on the scope and nature of the work tobe performed. In the past, we have experienced cost overruns and delays inconnection with the development and modification of our FPSO fleet. See “Item 4:Information on the Company—(B) Business Overview—FPSO Business—FPSO Fleet,FPSO Hull and Trading Vessel—*Glas Dowr*”and “Item 5: Operating and Financial Review and Prospects—(B) Liquidityand Capital Resources—Capital Expenditures”. Some of the delays and budgetoverruns that we have experienced have been due to factors beyond our control.There can be no assurances that we will not experience material cost overrunsor delays in the future. Because we bid our service agreements and SPM deliverycontracts at fixed prices, any cost overruns or delays may require us, amongother things, to seek to incur additional indebtedness to complete a projectand may make it more difficult for us to be awarded projects or to securefinancing for projects in the future. In addition, because we generally earncontract payments after the date of first oil, material project delays couldadversely affect the timing of the revenues we receive under our new serviceagreements and, consequently, could affect our ability to service anyindebtedness incurred in connection with the project. As a result, significantcost overruns or delays could have a material adverse effect on our liquidity,financial condition and results of operations. There can be no assurance thatwe would be able to fund any delays or overruns, through the incurrence ofindebtedness or otherwise, or that such funds would be provided on favorableterms.

**We are subject to competition which could limit ourability to maintain or increase our market share or to maintain our prices atprofitable levels.**

We operate in markets thatare highly competitive and subject to business cycles. Most of our serviceagreements and SPM delivery contracts are obtained through a competitivebidding process which is standard for the industry in which we operate. Wecompete with both international and local companies. While price is a majorfactor influencing whether we are awarded an FPSO or SPM contract, otherimportant factors include equipment availability, service quality,technological capacity, performance, reputation (particularly with respect tosafety and performance), customer relations, long-standing relationships andexperience of personnel. Some of our competitors may be better positioned towithstand and adjust more quickly to volatile market conditions, such asfluctuations in oil prices and exploration and production levels or changes ingovernment regulations. In addition, the FPSO market is characterized by longlead times for construction and competition in obtaining service agreements.FPSOs have few alternative uses and, because of their nature and theenvironment in which they operate, have relatively high capital costs, whetheror not operating. Because these costs are essentially fixed, and in order toavoid additional expenses associated with temporarily idling or “stacking” ourFPSOs, we may from time to time be required to bid our products and servicesfor operation or delivery at unattractive rates. See “Item 4: Informationon the Company—(B) Business Overview—Competition”. We cannot predict thefuture level of demand for our products or services.

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**Our business issubject to operational risks which may not be insured or insurable oneconomically favorable terms.**

Our operations are subject to hazards inherent in theoffshore oil industry, including blowouts, reservoir damage, loss ofproduction, loss of well control, cratering and fires, the occurrence of whichcould result in the suspension of production operations, substantial damage toor destruction of equipment and injury or death to personnel on board ourvessels. Damage to the environment could result from our operations,particularly through oil spillage or extensive uncontrolled fires. In addition,our operations are subject to maritime hazards, including capsizing, grounding,collision and loss or damage from severe weather or storms.

We maintain insurance coverage in such amounts as webelieve to be prudent against normal risks in our operations, including, amongother things, the risk of pollution and damage to vessels. Certain risks (suchas business interruptions and environmental liabilities in excess of certainlimits), however, are either not insurable or are insurable only at rates weconsider uneconomical. The cost to obtain and maintain insurance could increaseor decrease in the future for any number of reasons. Our insurance costsincreased significantly following September 11, 2001. There can be noassurance that we will continue to maintain current levels of insurance and wemay determine in the future to carry less insurance or not to insure at all. Moreover,our insurance coverage does not protect against loss of revenues, although weare required under our credit facility to obtain such insurance if the numberof FPSOs from which we receive revenues falls below three.

Depending on competitive conditions and other factors,we seek to obtain indemnity agreements from our customers who require them tohold us harmless in the event of loss of production, reservoir damage orliability for pollution that originates below the surface of the water. Wegenerally rely on these indemnities to protect us from risks which areuninsurable or insurable only at rates which we believe are uneconomical. Whenobtained, these contractual indemnifications may include cross-indemnificationprovisions, and the obligations thereunder may not be supported in all cases byadequate insurance maintained by the customer or required to be maintained byus. We have agreed to indemnify each of Amerada Hess in the case of the *Uisge Gorm* and Statoil and Conoco Phillipsin the case of the *Munin*, subjectto amount limitations in the respective service agreements, in respect ofpollution emanating from our FPSOs and certain other equipment which we havesupplied. Each of Amerada Hess and Statoil has agreed to indemnify us withrespect to the foregoing in excess of those amount limitations and in respectof pollution emanating from the field, reservoir or wells (in the case of thecurrent service agreement with Statoil relating to the *Munin*, subject to certain exceptions).Under our service agreements with PetroSA and Conoco Phillips, we have agreedto indemnify PetroSA and Conoco Phillips, respectively, subject to amountlimitations, in respect of pollution emanating from our FPSO, shuttle tankersand certain subsea and other equipment, and PetroSA and Conoco Phillips haveeach agreed to indemnify us with respect to the foregoing in excess of thoseamount limitations (subject to an exclusion in the event our insurer deniescoverage) and in respect of pollution emanating from wells and certain subseaand other equipment. In the case of the *HaeweneBrim*, we have agreed to indemnify Enterprise Oil/Shell in respect ofcertain pollution emanating from our FPSO (unrelated to oil from the field) andcertain other equipment we have supplied, and Enterprise Oil/Shell has agreedto indemnify us for pollution relating to oil from the field. In the case of *Jotun A*, and the *Bleo Holm* thecharterer has agreed to indemnify us and hold us harmless against any lien ofwhatsoever nature arising upon the vessel during the charter period, arisingout of or in relation to the operation of the vessel by the charterer,including but not limited to claims from third parties against the Companycaused by pollution or personal injury. In the case of our trading vessel the *Hanne Knutsen,*the charterer has agreed to indemnify usagainst any loss, damage or expense incurred by us arising out of or inrelation to the operation of the vessel by the charterers, and against any lienof whatsoever nature arising upon the vessel during the charter period arisingin relation to the operation of the vessel by the charterer. These indemnityarrangements may not protect us in all circumstances.

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There can be no assurancethat any insurance or contractual indemnity protection will be sufficient oreffective under all circumstances or against all hazards to which we may besubject. The occurrence of a significant event not fully insured or indemnifiedagainst or the failure of a customer to meet its indemnification obligations tous could materially and adversely affect our results of operations andfinancial condition. Moreover, there can be no assurance that we will be ableto maintain adequate insurance in the future at commercially reasonable ratesor that any particular types of coverage will continue to be available.

**We have asubstantial amount of indebtedness outstanding.**

We have and will continue to have a substantial amountof indebtedness outstanding. Our total debt (which excludes the subordinatedMarenco loan), consolidated total assets and shareholders’ equity as of December 31,2006 was U.S.$916.6 million, U.S.$1,749.1 million and U.S.$509.2 million,respectively, and our ratio of earnings to fixed charges was 1.01x for the yearended December 31, 2006.

Our substantialindebtedness could have important consequences to you. For example, it could:

·                    increaseour vulnerability to adverse general economic and industry conditions;

·                    requireus to dedicate a substantial portion of our cash flow from operations topayments on our indebtedness, thereby reducing the availability of our cashflow to fund working capital, capital expenditures and other general corporatepurposes;

·                    limitour flexibility in planning for or reacting to changes in our businesses and theindustries in which we operate;

·                    placeus at a competitive disadvantage compared to our competitors that have lessdebt;

·                    limit,along with the financial and other restrictive covenants of our indebtedness,among other things, our ability to borrow additional funds; or

·                    increasethe cost of additional financing.

In addition, certain ofour financing arrangements impose operating and financial restrictions on ourbusiness. These provisions require us to maintain minimum levels of tangiblenet worth and liquidity and ratios of operating income to gross interestexpense and net income to dividend and interest expense above certain specifiedlevels. These provisions may negatively affect our ability to react to changesin market conditions, take advantage of business opportunities we believe to bedesirable, obtain future financing, fund needed capital expenditures,significantly increase research and development expenditures, or withstand acontinuing or future downturn in our business.

**Our internalrestructuring and our Dutch tax treatment of our group companies remain subjectto review.**

Effective January 1, 2000, we entered into aninternal restructuring process. In connection with this restructuring, theeconomic interests in most of the assets and liabilities of certain non-Dutchconsolidated group companies (the “selling companies”) were sold to BluewaterHolding B.V., while legal title to the assets and liabilities transferredremained with the selling entities. The valuation of the assets and liabilitiestransferred was based on a valuation report. The sales of these economicinterests resulted in intercompany profits at the level of the sellingcompanies and the creation of a corresponding amount of (amortizable) goodwilland intercompany indebtedness at the level of Bluewater Holding B.V. The taxconsequences of our internal restructuring have been the subject of extensivediscussions with the tax authorities and of a tax audit.

In 2002 and 2003 the Dutch tax authorities issued taxassessments with respect to certain non-Dutch group members pertaining to the1997, 1998, 1999 and 2000 tax years, for a total amount of €137.9million 

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(U.S.$181.8 million),based on the position that these group companies, prior to and at the time ofthe restructuring, were residents of the Netherlands for Dutch tax purposes orhad a taxable presence in the Netherlands. We filed a letter of objection tothese assessments and engaged in further discussions with the Dutch taxauthorities, in response to which these assessments have been reduced to zero.

The Dutch tax authorities also issued assessments withrespect to one of the Dutch group companies in respect of the years 1998 and1999 based on their assertion that certain transfer pricing adjustments wererequired. These assessments claimed additional tax payments were required in anaggregate amount of €23.3 million (U.S.$30.7million). Based upon a letter of objection against these assessments andsubsequent discussions on this issue, the tax authorities have issued decisionsin February and March 2006 to eliminate these additional taxassessment amounts, thereby reducing the assessments to the amounts that areequal to amounts originally shown in the tax returns as filed.

Prior to and after the restructuring that took placein 2000 we have also had extensive discussions with the Dutch tax authoritiesconcerning the amount of goodwill and intercompany indebtedness at the level ofBluewater Holding B.V. pursuant to the restructuring transactions, and theamount of goodwill carried at one of the non-Dutch group companies at the dateit was redomiciled to the Netherlands as part of the same restructuring. In2005 we received tax assessments for these two companies for the tax year 2000based on the tax authorities’ view that no goodwill should be attributed tothese companies and that, accordingly, the amount of intercompany debt andinterest expense at the level of Bluewater Holding B.V. should be reduced. Wehave filed letters of objection against these assessments and had subsequentdiscussions with the Dutch tax authorities. In February 2006, we receiveddecision letters from the Dutch tax authorities accepting some goodwill at thelevel of the redomiciled non-Dutch group company but no goodwill at the levelof Bluewater Holding B.V., and at the same time reducing its intercompany debtand related interest expense by a corresponding amount. On March 22, 2006we started legal proceedings to have the assessments reviewed. Our appeal will beheard before the lower tax court in Haarlem on April 25, 2007.

In February 2007, we received tax assessments forBluewater Holding B.V. with respect to the years 2001 and 2002, based on thesame tax authorities’ view as mentioned above. We have filed letters ofobjection against these assessments and expect that the tax authorities willdelay a decision on these until the litigation in respect of the year 2000 has beenresolved. As is permitted under Dutch law and regulations, we intend towithhold payment of amounts in respect of contested tax assessments pendingfinal resolution of the issue.

During 2006, it has become clear from the defensepapers filed by the tax authorities with the lower tax court in Haarlem thatthe tax authorities have focused in the current litigation on variouscomponents of the valuation method that was used in tax year 2000 to establishthe enterprise value at the time of the restructuring and hence the amount ofgoodwill that arose upon the restructuring. It appears unlikely that otherpreviously disputed matters, such as the amount of goodwill already present atthe Dutch group company level mentioned above at the time of the restructuring,will become subject to judicial review during the upcoming court hearing on April 25,2007. The valuation method that was used at the time of the restructuring is inaccordance with authoritative literature on this subject and is fully supportedby independent valuation experts. The effective elimination of other previouslydisputed matters and the support from independent experts for our positionregarding the principal points of discussion, has in our view reduced the riskof a reduction of the total amount of goodwill and intercompany indebtedness atthe level of Bluewater Holding B.V.

Based upon current facts and circumstances, applicabletax law, regulation and precedent, discussions with relevant tax authoritiesand professional advisers and other relevant criteria, we estimate that it iscurrently probable that we will realize benefits of at least U.S.$592 million ofamortizable goodwill and at least U.S.$1,041 million of interest bearingintercompany debt in connection with our internal 

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restructuring at January 1,2000 and that such amounts will result in tax losses which may be carriedforward for Dutch income tax purposes, subject to the potential application ofthe thin cap rules that came into effect on January 1, 2004 and losscarry forward limitations that will come into effect for the Company on December 30,2013. We have assessed the valuation of these increased amounts of realizablebenefits in accordance with FAS 109 as disclosed in note 26.

Notwithstanding our current estimates, however, it isimpracticable to quantify with certainty at this time the effect that theoutcome of such discussions may have on our actual tax position, because suchdefinitive quantification depends on a number of possible future events,including the specific factual findings and legal and regulatory positions thatmay be taken by the Dutch tax authorities in the litigation discussed above, aswell as the outcome of such proceedings.

As of January 1, 2004 Dutch tax law containsso-called thin-capitalization, or ‘thin cap’ rules that may operate torestrict the deductibility of interest on intercompany debt (including externaldebt that is guaranteed by an affiliated company). In order, among otherthings, to defer applicability of the Dutch thin cap rules until December 30,2004 and periods thereafter, the fiscal years of all Bluewater’s Dutch groupcompanies were changed, although no assurance can be given that this measurewill be effective to preclude applicability of the thin cap rules to suchcompanies as of January 1, 2004. As the disallowed portion of the interestdeduction depends significantly on the debt-equity ratio of the relevant entityat the beginning and the end of any financial year, it is clear that theoutcome of the dispute with the Dutch tax authorities concerning the relevantgoodwill amount (and the annual amortization amount resulting therefrom) andthe corresponding intercompany debt amount will have a significant impact onthe effect of the thin cap rules on Bluewater Holding B.V.

In December 2001, U.S.$379.5 million of theintercompany indebtedness of Bluewater Holding B.V. relating to the internalrestructuring was converted to share capital, thereby reducing the amount oftax benefits that we may take advantage of in subsequent periods. At the sametime this increased the equity amount for application of the thin cap rules. InDecember 2006, a further amount of inter-company debt of Bluewater HoldingB.V. relating to the internal restructuring was converted to share capital.According to the terms of the agreement, the amount of this debt conversionwill be determined based on the total debt and equity of Bluewater Holding B.V.as at December 31, 2006, but may be revised once the final amount ofgoodwill and intercompany debt is established based on the outcome of thepending legal proceedings.

The outcome of thesediscussions and judicial proceedings, which may take a considerable period oftime, could limit our ability to take advantage of future tax savingsassociated with our internal restructuring by limiting the amount of goodwillthat we may amortize and the amount of interest that we may deduct for taxpurposes in future periods. In addition, the outcome of our dispute withrespect to thin cap rules may limit the amount of deductible interest forthe tax year 2004 and subsequent periods. While we believe that it is probablethat we will realize tax benefits in amounts that are not less than theforegoing estimates as set forth above and that it is unlikely that the outcomeof these discussions and the pending proceedings relating thereto will have amaterial adverse effect on our financial position, there can be no assurance inthis regard and we could lose some or all of the future anticipated tax savingsassociated with our internal restructuring.

**Our business issubject to governmental regulation and environmental laws with which it may bedifficult or impossible to comply and which could lead to significantliabilities.**

Our operations are subject to various governmentallaws and regulations, including those relating to equipping and operatingoffshore vessels, vessel safety, currency conversions and repatriation, oilexploration and development, taxation of foreign earnings and earnings ofexpatriate personnel and the use of local employees and suppliers by foreigncontractors. In addition, we depend on the demand for our services from the offshoreoil industry and, therefore, we are affected by changing taxes, price controlsand 

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other laws that affect theoil industry generally and offshore exploration and production specifically.The adoption of laws and regulations curtailing exploration and developmentdrilling for oil for economic or other policy reasons or practical restrictionson our ability to provide our services to our customers could adversely affectour operations by limiting demand for offshore production services. We cannot predictthe extent to which our future operations and earnings may be affected by newlegislation, new regulations or changes in existing regulations.

Our operations and assetsare also affected by various environmental protection laws and regulations,including those relating to discharges into the air and water, the handling anddisposal of waste and the health and safety of employees. The technicalrequirements of these laws and regulations are becoming increasingly complex,stringently enforced and expensive to comply with. Certain environmental lawsprovide for strict liability, rendering a party liable for environmentaldamage, personal injury and threats to health and safety without regard to itsnegligence or fault. Certain environmental laws may also expose us to joint andseveral liability for the conduct of others or for acts that complied with allapplicable laws when they were performed. Sanctions for non-compliance mayinclude revocation of permits, corrective action orders, administrative or civilpenalties and criminal prosecution. As a result, there can be no assurancesthat we will be able to comply with these laws in the future or that we willnot be subject to liabilities that could adversely affect our financialcondition or results of operation.

**Our efforts toprotect our intellectual property rights or to defend ourselves against anyclaims of infringement may be costly and, if unsuccessful, we may be barredfrom using our technology.**

Our results of operations depend in part upon ourability to develop and protect proprietary technology and operational know-how.We rely on a combination of patents and trade secret laws to establish andprotect our proprietary technology. As a result, we enter into confidentialityagreements with our employees, contractors, customers and potential customersand limit access to and distribution of our technology. However, we cannotassure you that the actions we take will be adequate to deter themisappropriation or the independent third party development of technology thatis substantially similar to ours. In particular, loss of employees inpossession of operational and technical know-how to competitors could result insuch information falling into the hands of our competitors, and it may bedifficult for us to prove its use by those competitors and enforce our rightsin it.

Our strategy for filingpatent applications is based principally around protecting our designs inselected jurisdictions which we consider to be important. However, ownership ofour own patents or applications does not guarantee us freedom to operate overpreviously filed patents of others. In addition, the laws of certain foreigncountries do not protect proprietary rights to the same extent as the laws ofthe Netherlands, the Netherlands Antilles or the United States. Enforcingintellectual property rights against others or defending ourselves againstclaims of infringement could result in substantial costs and diversion ofmanagement and technical personnel and resources. The outcome of intellectualproperty proceedings could also impair our ability to develop and commercializeproducts and result in the award of substantial damages against us. In theevent of an unfavorable outcome in litigation, we may need to obtain licensesor redesign our technologies or potential product to avoid infringement.

The Company is subject toproceedings initiated by certain of our competitors in the district court inThe Hague in respect of an alleged infringement of intellectual propertyrights. The claims of these competitors failed during the injunctionsproceedings before the District Court as well as before the Court of Appeal.Plaintiffs continued their claims by starting proceedings at the District Courtin The Hague requesting a judgment on the merits. In 2006 the Court nullified oneof the two patents relied upon by these competitors and rejected their claimrelated to the nullified patent. The judgment of the District Court on theremaining part of the proceedings on the merits is expected in April 2007.With respect to the patents at stake, we have received advice from our patentagent that our product design does not infringe 

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upon anyvalid claim of the patents. We are, however, unable to estimate a possible lossor range of loss related to this claim.

We have no registeredtrademarks and rely on unregistered trademark rights in the countries in whichwe operate, to the extent that they exist, in order to protect our businessname.

**Weare subject to risks associated with international operations which couldnegatively affect our business or results of operations.**

Our operations in someparts of the world are subject to certain political, economic and otheruncertainties including risks of war and other international conflicts,expropriation or nationalization of assets, renegotiation or nullification ofexisting contracts, changing political conditions, changing laws and policiesaffecting trade and investment, changes in tax structures (including tax leasearrangements) and the general hazards associated with the assertion of foreignsovereignty over certain areas in which our operations are conducted, each ofwhich may limit the movement of assets or funds or result in the deprivation ofcontractual rights or the taking of property without fair compensation.Additionally, our ability to compete in many foreign jurisdictions may beadversely affected by foreign governmental regulations that encourage ormandate the hiring of local contractors or by regulations that require foreigncontractors to employ nationals or purchase supplies from a particularjurisdiction. Our future foreign operations could face the additional risks offluctuating currency values, currency shortages and controls of foreigncurrency exchange. There can be no assurance that we will not be subject tomaterial adverse developments with respect to our international operations.

**Ouroperations are dependent on certain management personnel.**

Our future success willdepend to a significant extent on our executive officers and other keymanagement personnel. In addition, the success of any potential acquisitionsmay depend, in part, on our ability to retain management personnel of theacquired companies. Although we have employment agreements with several of ourexecutive officers and key personnel, including Mr. Hugo Heerema, therecan be no assurance that we will be able to attract or retain qualifiedmanagement in the future. See “Item 6: Directors, Senior Management andEmployees—(A) Directors and Senior Management”.

**Ourshare capital is indirectly held by a single beneficial shareholder that isprohibited from dismissing or replacing Mr. Hugo Heerema as the solemember of the management board of Bluewater Holding B.V. without his priorwritten consent.**

We are beneficially ownedby the Jacaranda Trust, an irrevocable discretionary trust of which Mr. HugoHeerema and certain members of his immediate family are beneficiaries.Documentation relating to the Jacaranda Trust provides for the transfer of theJacaranda Trust’s beneficial interest in us to Mr. Heerema in certaincircumstances and prohibits the trustees of the Jacaranda Trust from exercisingtheir powers in a manner that would result in Mr. Heerema being dismissedor replaced as the sole member of the management board of BluewaterHolding B.V. without his prior written consent. The management board ofBluewater Holding B.V. is generally responsible for setting our policiesand managing our general affairs and business. See “Item 6: Directors,Senior Management and Employees” and “Item 7: Major Shareholder andRelated Party Transactions”. Your interests may be different from the interestsof the Jacaranda Trust, its trustees or its beneficiaries or the interests of Mr. Heerema.

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**ITEM 4:**               INFORMATIONON THE COMPANY

**(A)**   Historyand Development of the Company

We are Aurelia Energy N.V., a holding company with noindependent operations, and its subsidiaries, a group of companies thatcomprise a specialized service provider to and operator in the offshore oilindustry. We operate under the name “Bluewater” and are a leader in the design,development, ownership and operation of FPSOs, which we operate for oilcompanies under medium- and long-term service agreements, and the design,development, project management and delivery of SPM systems.

An FPSO is a type of floating production unit used byoil companies to produce, process, store and offload hydrocarbons from offshorefields. FPSOs are either newly built or converted tanker hulls upon whichproduction equipment is mounted. Fluids (oil, gas and water) are processedonboard an FPSO, and treated crude oil is stored before being exported by anoff take system utilizing shuttle tankers. FPSOs are generally involved in theproduction, rather than the exploration or drilling, of oil.

SPM systems are used to secure a floating productionunit (including an FPSO), floating storage and offloading vessel or tanker tothe ocean floor while allowing the unit, vessel or tanker to weathervanefreely. Most SPM systems consist of an anchoring system that is connected tothe ocean floor and a fluid transfer system that permits the transfer of fluidsbetween fixed and rotating parts of the mooring system. Most SPM systems aredeveloped for sale to oil companies and contractors under SPM deliverycontracts.

We were incorporated on December 6, 1993. Ourregistered address is Landhuis Joonchi, Kaya Richard J Beaujun z/n,Curaçao, the Netherlands Antilles, and our telephone number is(599) 9736 6277. Bluewater Offshore Productions (U.S.A.), Inc.acts as our authorized representative in the United States. Its address is 8554Katy Freeway, Suite 327, Houston, Texas 77024, and its telephone number is(1) 713 722 8131.

Descriptions of recentimportant developments in our business and our capital expenditures areincluded under “—(B) Business Overview” and “Item 5: Operating andFinancial Review and Prospects—(B) Liquidity and Capital Resources—CapitalExpenditures”. A description of our operating subsidiaries is included under “Item10: Additional Information—(I) Subsidiary Information”.

**(B)**   BusinessOverview

**Overview ofOperations**

We conduct ouroperations principally through two businesses that we staff and resourceaccording to market conditions and our business needs. These businesses consistof our:

·       **FPSO business.**Our FPSO business earnsrevenues from the design, development and operation of FPSOs pursuant to medium-andlong-term service agreements with oil companies. Under these agreements, wegenerally are paid a defined day rate consisting of a fixed facility fee thatcovers the rental of the FPSO and associated equipment and an indexed operatingfee that covers the cost of operating, maintaining and insuring the vessel. Wemay also receive additional tariff payments based on oil or water production orgas lift volumes (or a combination of those volumes), bonus payments thatrelate to the prevailing price of oil and certain other fees. The medium-to long-term profile of our service agreements provides us with stable andpredictable revenues. During the term of these agreements, the revenues fromour FPSO business are generally significantly insulated from fluctuations inthe price of oil and changes in the levels of exploration and productionactivities of oil companies. Our FPSO fleet currently consists of six highspecification FPSOs (*Uisge Gorm*, *Bleo Holm*, *Glas Dowr*, *Haewene Brim,**Munin*and a 55%ownership interest in FPSO *Jotun A*)that we have contracted to oil companies under service agreements or bareboat agreementsand one FPSO under construction (*Aoka Mizu*) anda trading vessel (*Hanne Knutsen*)**

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purchased for futureconversion into an FPSO. We entered into a service agreement under which we arecurrently converting the *Aoka Mizu*intoan FPSO*.* In 2004, 2005 and 2006, our FPSObusiness generated 84.6%, 83.7% and 69.2% of our revenues, respectively, 96.4%,364.9% and (85.2)% of our net income, respectively, and 100.6%, 122.0% and96.4% of our EBITDA, respectively.

·       **SPM business.**Our SPM business earns revenuesfrom the design, development, project management and delivery of SPM systemsunder our SPM delivery contracts. We have developed a number of different typesof SPM systems for oil companies and contractors around the world, resulting inthe delivery of more than 65 SPM systems since our founding. Because SPMsystems are integral to the operation of FPSOs in harsh environments, andbecause they form an important link in the oil production chain, we believethat it is important to preserve our core SPM capabilities for use inconnection with future FPSO projects. In 2004, 2005 and 2006, our SPM businessgenerated 15.4%, 16.3% and 30.8% of our revenues, respectively, 3.6%, (264.9)%and 185.2% of our net income, respectively, and (0.6%), (22.0%) and 3.6% of ourEBITDA, respectively.

While we manage FPSO and SPM projects from the initialdesign and engineering phase to final installation, we do not engage in thefabrication of FPSOs or SPM systems. Rather, we outsource these requirements toqualified subcontractors.

Weearn revenues on a worldwide basis as described above. The following tablepresents information concerning our revenues by activity and geographicalregion for the periods indicated.

| ** **     | ** ** | **For the year ended December 31,**     | ** ** |
|----------------|------------|------------------------------------------------------------------|------------|
| ** **     | ** ** | **2004**                                                         | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **     | ** ** | **(in U.S.$ thousands, except percentages)** | ** ** |
| FPSO business: |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Europe         |       | 285,775                                                          |       | 65.3 | % | 241,706 |   | 60.6 | % | 204,688 |   | 46.7 | % |
| Asia           |       | 19,395                                                           |       | 4.4 | % | 31,851 |   | 8.0 | % | 22,567 |   | 5.2 | % |
| Africa         |       | 65,071                                                           |       | 14.9 | % | 60,250 |   | 15.1 | % | 67,453 |   | 15.4 | % |
| Other          |       | —                                                           |       | — |   | 21 |   | 0.0 |   | 8,237 |   | 1.9 | % |
| Total          |       | 370,241                                                          |       | 84.6 | % | 333,828 |   | 83.7 | % | 302,945 |   | 69.2 | % |
| SPM business:  |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Europe         |       | 31,826                                                           |       | 7.3 | % | 5,935 |   | 1.5 | % | 43,259 |   | 9.9 | % |
| Asia           |       | 21,295                                                           |       | 4.9 | % | 31,719 |   | 7.9 | % | 88,116 |   | 20.1 | % |
| Africa         |       | 6,229                                                            |       | 1.4 | % | 24,565 |   | 6.2 | % | 2,691 |   | 0.6 | % |
| America        |       | 7,956                                                            |       | 1.8 | % | 2,886 |   | 0.7 | % | 576 |   | 0.1 | % |
| Other          |       | 118                                                              |       | 0.0 |   | 57 |   | — | % | 325 |   | 0.1 | % |
| Total          |       | 67,424                                                           |       | 15.4 | % | 65,162 |   | 16.3 | % | 134,967 |   | 30.8 | % |
| Total          |       | 437,665                                                          |       | 100.0 | % | 398,990 |   | 100.0 | % | 437,912 |   | 100.0 | % |

 

**Strengths**

We believe that wehave the following strengths:

·       **Our FPSOs provide essential infrastructure to the fields on which theyoperate, facilitating extended production lives for the FPSOs.** Wedesign and develop our FPSOs as life-of-field production assets in conjunctionwith oil companies seeking to maximize the production potential of theirfields. Our FPSOs provide the necessary infrastructure for such activitiesthrough the extraction and processing of hydrocarbons from the seabed and thestorage and offloading of treated crude oil. We believe that thisinfrastructural capacity links our FPSOs to the lives of the fields, providingour FPSO business with long-term earnings stability. This earnings stability isfurther strengthened by the economic incentive for field operators to developneighboring fields 

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through the use oftie-backs, which are relatively inexpensive compared to the development of anindependent infrastructure. The *Uisge Gorm* andthe *Bleo Holm* are currently benefiting fromsuch tie-backs.

·       **Our service and bareboat agreements produce stable andpredictable EBITDA streams.**We operate our FPSOs for oil companiespursuant to medium- and long-term service and bareboat agreements, underwhich payments are generally made on the basis of defined day rates thatconsist of a fixed facility fee for the rental of the FPSO and associatedequipment and an indexed operating fee for the operation and maintenance of thevessel during the minimum contract period. Our service and bareboat agreementsgenerally require oil companies to make contract payments irrespective of theprice of oil or whether the field is producing oil. These contract paymentsresult in stable and predictable EBITDA streams. Our service and bareboatagreements also allow oil companies to continue to use our FPSOs at the end ofthe minimum contract period based on predetermined economic terms. Theextendibility of our service and bareboat agreements provides oil companieswith flexibility in developing their reservoir strategies using our FPSOs,while their predetermined economic terms enhance the stability of our EBITDAstreams.

·       **Our service and bareboat agreements are backed by highquality assets.**Our six existing FPSOs are engineered for use inharsh environments and designed to satisfy the most stringent regulatory andenvironmental standards. Since commencing operations, our FPSOs haveexperienced negligible weather downtime and have generally maintained highoperating uptimes while producing on-field. The technical, regulatory andenvironmental standards to which our FPSOs were built would currently permit usto operate them in most offshore oil producing regions, including the offshorefields of the North Sea, South Africa, West Africa, Brazil, Asia, Australia andthe U.S. Gulf of Mexico. Due to their original technical specifications andability to be overhauled, we believe that our FPSOs will be able to operatebeyond the expected production profiles of their fields.

·       **We have a successful track record in the developmentof new FPSOs and SPM systems.**We are an industry leader in thedevelopment and operation of FPSOs and the development of SPM systems, havingbeen one of the early entrants to these markets. Since 1985, we havesuccessfully developed six FPSOs after entering into service agreements withvarious oil companies, and we have developed and delivered over 65 SPM systemsworldwide. Our customers have included Amerada Hess, Enterprise Oil/Shell,Statoil, TotalFinaElf, ExxonMobil, PetroSA, Shell, Talisman, Texaco and ConocoPhilips. We believe that our track record, resource depth and focus make us oneof the leading developers of FPSOs and SPM systems and will provide us withaccess to the new development opportunities currently arising in deepwater oilproduction.

·       **We have an experienced engineering staff that can bedeployed flexibly.**Our highly qualified engineering staff hasexperience in the design and development of both FPSOs and SPM systems and canbe allocated between various projects depending on market conditions andproject demands. In addition to the permanent members of our staff that havetechnical qualifications, we employ highly skilled auxiliary workers on acontractual basis according to our specific needs. We also outsource the moregeneric, labor intensive tasks relating to the development of FPSOs and SPM systemsto subcontractors. We believe that this approach to staffing provides us withsubstantial flexibility that enables us to maintain our core engineeringcapabilities while being able to scale back our operations and manage our costbase in line with market conditions and business needs.

·       **We maintain high operating standards.**Ourpolicy is to conduct operations in a manner that promotes health and safety andto ensure that our activities do not harm the environment. We consider aspectsregarding health, safety and the environment to rank equally with commercialand operational factors, and we review our health, safety and environmentalpractices and procedures 

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regularly to ensure thatour performance is continuously improved. We develop our FPSOs and SPM systemsin line with the International Safety Management Code, ISO 9001 and ISO 14001.We have a strong record in safety and environmental issues. Our customers,governmental authorities and insurance companies perform regular audits of ourFPSO operations and have consistently given us positive scores in this respect.

·       **We have anexperienced management team. Our senior management team has an average of20 years of experience in the offshore oil and contracting industry.**Webelieve that the management and industry expertise of our senior managementteam will enable us to successfully implement our business strategy.

**Strategy**

The primaryelements of our strategy are to:

·       **Maintain our earnings stability by focusing on ourFPSO business.**We will continue to focus on maintaining highoperating standards so as to ensure profit maximization from our existingservice agreements by achieving high production uptimes. We will also continueto work in partnership with our field operators by aligning our production assetswith their reservoir strategies. In this way, we expect to be able to assistoil companies in optimizing their field economics while prolonging theproduction lives of our FPSOs. Where possible, we will negotiate tariff andbonus payments in addition to fixed day rates when extending our existingservice agreements.

·       **Maximize our return on FPSO service agreements.**Webelieve that value maximization is a function not only of the time to firstoil, but also field quality, the duration of our contract periods, day rates,the possibility of tie-backs to neighboring fields and the quality of the fieldoperator. In seeking new service agreements for our FPSOs, we aim to balancethese criteria in order to optimize our asset value. Our strategy is to developFPSOs with long design lives and to operate those vessels pursuant to medium-or long-term service agreements with oil companies and on fields that maximizethe potential for high day rates, extensions of contract periods and tie-backsto neighboring fields. We believe that our existing FPSO fleet has benefitedfrom this strategy.

·       **Continue to develop our SPM business and capturesynergies with our FPSO development activity.**We will continue todevelop SPM systems for delivery to our customers, utilizing our proprietarydesigns where appropriate. We will do this with a view to increase profits,maintain our market share and continue to take advantage of the synergies withour FPSO development activities for which SPM turret design is an integralcomponent.

·       **Selectively develop or acquire new FPSOs under serviceagreements over the medium-term.**In due course we intend to continueto selectively add to our FPSO fleet through the development or acquisition ofadditional vessels. We will do so on the basis of securing medium- tolong-term service agreements with oil companies. In undertaking new FPSOdevelopments, we will leverage our past experience of FPSO development whilecontinuing to outsource all fabrication requirements. Whether we acquire anexisting FPSO or develop a new FPSO, our objective will be to increase thelevel of our medium- to long-term contract revenues.

·       **Continue to outsource fabrication of FPSOs that weoperate and SPM systems that we sell.**We are not involved in thefabrication of the hulls, topsides or any other equipment related to theconstruction or modification of FPSOs. We also do not engage in the fabricationof any components of the SPM systems that we sell. We outsource all fabricationactivities to subcontractors. We carefully manage the selection of oursubcontractors and closely monitor the cost, timeliness and quality of the workdelivered by them. By concentrating our operations on design, engineering,project management and marketing, we believe we are able to preserve the flexibilityof our 

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organization and reduceour vulnerability to the cyclicality of the oil industry. We will maintain ourstrategy of outsourcing all fabrication work related to our business in thefuture.

·       **Preserve our strong engineering culture.**We strive to makeadvances in the development of new FPSOs and the innovation of FPSO and SPMtechnology. We believe that our strong engineering capabilities have enabled usto compete effectively in the FPSO and SPM markets. Given the trend in theoffshore oil industry of expanding production in deepwater environments andother areas that require the use of high specification FPSOs, we aim tocontinue to promote the strong engineering culture within our organization.

**FPSO Business**

***Service and bareboat Agreements***

Our FPSO business focuses on the design, development,ownership and operation of FPSOs pursuant to medium- and long-termservice and bareboat agreements with oil companies. Our service and bareboatagreements establish from the outset the functional specifications that ourFPSOs must meet and are entered into before the FPSO development processbegins. Under service and bareboat agreements our responsibility is to deliveran FPSO that complies with these specifications and to install a fullyoperational unit. Under our service agreements, we are also responsible forperforming the operations of the FPSO, for managing the interface between theunit and subsea facilities and offloading systems and for decommissioning theFPSO upon the cessation of production. Oil companies are responsible for theactual drilling, completion and testing of all wells and for the performance ofany subsequent well interventions. Depending on the shuttle tanker or otherarrangement, we may also be responsible for performing activities relating tooffloading systems and maintaining and repairing subsea systems.

Oil companies estimate the volume of recoverablehydrocarbon reserves in a particular field by analyzing geological andengineering data and use different probability scenarios to model the quantityof hydrocarbons that can be extracted from a particular field. These quantitiesare expressed in one of three main production profiles. The P90 productionprofile is the most conservative profile in the industry and indicates the levelof reserves for which it is estimated that there is a 90.0% probability thatthe actual quantity will be more than the volume estimated and a 10.0%probability that it will be less. Given the uncertainties in predicting theproductivity of a particular field, it is in the interest of oil companies topursue flexible arrangements with FPSO operators in respect of contractperiods. As a result, our service and bareboat agreements generally provide fora minimum contract period based on the P90 production profile of a particularfield and contain rollover provisions or extension options that enable the oilcompany to extend the service agreement beyond the minimum term.

When a service or bareboatagreement continues beyond the minimum contract period, the subsequent contractpayments are typically governed by predetermined terms that were set before theminimum contract period began. Renegotiation of payment terms is not requiredduring these periods. These service or bareboat agreement provisions allow us toreceive payments for a minimum contract period regardless of whether actualproduction is terminated during the period, while they provide oil companieswith certainty that the service or bareboat agreement can be extended beyondthe minimum contract period based on predetermined economic terms if the fieldlife proves to be longer. To provide additional flexibility, our service orbareboat agreements also permit the oil company to terminate the service orbareboat agreement prior to the expiration of the minimum contract period,provided that termination payments are made to compensate us for the amountthat we would have earned during the full minimum contract period. Depending onthe particular service or bareboat agreement, the oil company is required toprovide us with between three and twelve months’ notice if it elects either toterminate the contract during the minimum contract period or to extend theservice or bareboat agreement beyond a current contract period. In practice, wecan generally anticipate the termination or extension of a 

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serviceor bareboat agreement prior to the commencement of such notice period due toreserve statistics and production results. In view of the structure of theseservice or bareboat agreements as described above, both we and the oil companyhave a high level of economic predictability over our future productionoperations.

Generally, under ourservice agreements, a majority of the payments are calculated based on definedday rates. In 2006, these day rates accounted for approximately 83.7% of therevenues from our FPSO business. Typically, our day rates are divided into afacility fee and an operating fee. The facility fee generally relates to theprovision of the FPSO and the associated risers, umbilicals and all otherequipment that are required for production. The operating fee relates primarilyto the cost of manning and maintaining the vessel and normally is indexed tovarious factors, including inflation. Currently, our service agreements requireour FPSOs to maintain minimum operating uptimes that exceed certain thresholds.Depending on the particular service agreement, our facility fee or ouroperating fee may be adjusted upward or downward to the extent that therelevant uptime exceeds or falls below the applicable threshold. When an FPSOis removed from the field as a result of factors unrelated to operatingperformance (such as was the case with the *GlasDowr*), no adjustment is made based upon operating uptime. In such acase, however, our day rate may be replaced by a lay-up rate (which couldapply, among other times, in the event of poor field performance or periods ofscheduled maintenance) or a *force majeure*rate (which could apply, among other times, in the event of a natural disaster,war or industrial action), depending, in each case, on the particular serviceor bareboat agreement. See “—FPSO Fleet, FPSO Hull and Trading Vessel”.

In addition to defined dayrates, we may earn additional tariff payments under the terms of our serviceagreements. These payments are generally based on oil or water production orgas lift volumes or a combination of those volumes. Oil companies have a strongeconomic incentive to extend operations to neighboring fields through the useof tie-backs, which have low marginal field development costs and defray thecost of production over several fields. Tie-backs generally increase oil andwater production and gas lift levels and, as a result, increase the amount oftariff payments that we earn under our service agreements. In 2006, tariffpayments accounted for approximately 11.1% of the total revenues from our FPSObusiness. In certain cases, our FPSO contract revenues may also include bonuspayments relating to the prevailing price of oil, although those payments didnot contribute materially to the revenues from our FPSO business in 2006. Inaddition to our day rates, tariffs and oil bonuses, our FPSO contract revenuesinclude payments for vessel modifications, shuttle tanker and bunker charges. These payments accounted forapproximately 4.9% of the total revenues from our FPSO business.

***FPSO Fleet, FPSOHull and Trading Vessel***

We currently own six highspecification FPSOs (*Bleo Holm*, *Uisge Gorm*, *Glas Dowr*, *Haewene Brim,**Munin*and a 55% ownership interest in FPSO *Jotun A*)that we have contracted to oil companies for operation on fields in the NorthSea, the South China Sea and off the coast of South Africa. We also own a newly-builtFPSO hull (*Aoka Mizu*) that we are converting intoan FPSO and a trading vessel (*Hanne Knutsen*)that we are marketing worldwide. Our current fleet is described below.

*Uisge Gorm.**  *The *UisgeGorm* is the fourth FPSO that we developed and the first that weoperated in the North Sea. It was converted from a conventional product tankerwith double sides and is designed to satisfy stringent safety and environmentalstandards. The most significant modifications included the installation of aturret mooring system that uses a Bluewater designed swivel (which is capableof handling multiple risers and control umbilicals), a flaring system,modularized dual fuel power and generating equipment, a stern offloadingsystem, a helicopter deck, upgraded safety features and a processing plant. The*Uisge Gorm* currently is capableof accommodating 65 persons and has a weight of 92,000 dwt, a storage capacityof 594,000 barrels, a length of 248 meters, a breadth of 40 meters, adepth of 21 meters and a deck area of 7,390 square meters. Fluid capacity is110,000 barrels per day and processing capacity is 57,000 barrels per day.

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We began operating the *Uisge Gorm* in August 1995 on the FifeField at a water depth of 72 meters pursuant to a service agreement withAmerada Hess. The FPSO was tied back to the neighboring Fergus Field in 1996and the neighboring Flora Field in 1998. In 2001, the *Uisge Gorm* was further tied back to theneighboring Angus Field. The FPSO is currently positioned approximately 6 kilometers from the Fergus subsea well, 8.5kilometers from the Flora subsea well and 18 kilometers from the Angus subseawell.

We are currently operating the *Uisge Gorm* at pre-agreed rates pursuant toa three year extension of our service agreement with Amerada Hess. The combinedproduction profile of the Fife, Flora, Fergus and Angus fields is extendeduntil December 2007. Under our service agreement, we are required toprovide a crew to maintain and operate the *UisgeGorm*. We currently receive from Amerada Hess a minimum day rate ofapproximately U.S.$116,000 per day that consists of a minimum facility fee forthe provision of the FPSO and associated equipment and a budget definedoperating fee for the operation and maintenance of the vessel. Under thecontract extension the *Uisge Gorm*earns a production tariff for the facility and for life time extension andmaintenance work, and the operation is on a reimbursable basis. In 2003 the *Uisge Gorm* achieved average oil productionand water injection uptimes of 93.1% and 83.7%, respectively, which levels,however, did not have any effect on the facility fee. During 2004, the *Uisge Gorm* achieved average oil productionand water reinjection uptimes of 93.6% and 88.2%, respectively, which, however,did not have any effect on the facility fee. In 2005 and 2006, the *Uisge Gorm* achieved a volumetricefficiency of 80.8% and 82.0%, respectively. Under the extended contract theproduction tariff is based on oil price, production levels, HSEQ performanceand volumetric efficiency. Tariffs cannot fall below U.S.$25,000 per day.

*Bleo Holm.*   The Bleo Holm is the sixth FPSO that we developed and the thirdthat we have operated in the North Sea. It was converted from a newly builtdouble hull tanker. The primary modifications included the installation of aturret mooring system that uses a Bluewater designed swivel (which is capableof handling multiple risers and control umbilicals), a new piping system, aflaring system, a stern offloading system, a helicopter deck, upgraded safetyfeatures and a processing plant. In April 2001, we shipped the Bleo Holm to the McNulty shipyard in Newcastle, UnitedKingdom, for debottlenecking to allow for increased production in connectionwith a tie-back arrangement and to install new gas equipment. As modified, thevessel has a weight of 105,000 dwt, a storage capacity of 689,000 barrels, alength of 242 meters, a breadth of 42 meters, a depth of 21 meters and a deckarea of 7,985 square meters and can accommodate 96 persons. The vessel has afluid capacity of 126,000 barrels per day and a crude processing capacity of95,000 barrels per day and has sufficient free deck space to enable thetie-back of neighboring fields.

We began operating the *Bleo Holm* on the Ross Field in April 1999at a water depth of 100 meters pursuant to a service agreement with Talisman. Thevessel was tied back to the Blake Field, where it achieved first oil in June 2001,and was tied back to the Blake Flank Field in September 2003.

In connection with the tie-back to theBlake Field, we upgraded the processing capacity of the *Bleo Holm*. Following the completion of theupgrades and the start of production at the Blake Field, the *Bleo Holm*’s average weighted uptimeimproved from its historic level. Notwithstanding this initial increase inaverage weighted uptime, shortly after the Blake Field came on-stream, certainelements in the Blake Field produced fluids which caused a chemical reaction.The combination of oil and produced water caused the formation of calciumnaphanate which blocks the topside oil pipework on the vessel. To prevent thissubstance from forming, acetic acid was injected, which led to an increase incorrosion rates on the topside oil pipework that specifically affected weldsand weld materials. As a consequence, repairs were required, which have causedadditional actual downtime in certain previous periods. Although in 2004 themanagement and the control of the calcium naphanate formation improved, it wasknown that a volume of calcium naphanate remained in the topsides of thevessel. We therefore agreed with Talisman to implement a 26 day shut downbetween late July and late August to remove the calcium naphanate.Due to the additional scope of work, adverse weather and supply difficulties,the shut down over-ran by 6 days. We 

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subsequentlyagreed to split costs with Talisman which increased our costs by a total ofU.S.$2.7 million. Following the shut down and implementation of remedialmeasures, we achieved significantly improved uptimes in October 2004 of99.6%, in November 2004 of 100.0% and in December 2004 of 99.7%.

On July 14, 2005 Talisman andBluewater signed Heads of Terms for replacing the FPSO agreement. As aconsequence, the FPSO agreement has been terminated as per November 30,2005 and replaced by a charter agreement Under the charter agreement, Talisman, in its role as operator of theRoss field, has taken over the role of duty holder and is responsible for allof the operations onshore and offshore, including resourcing. Bluewater nolonger provides onshore support. This heads of agreement also settled for the costof outstanding maintenance work that had not been carried out by Bluewaterunder the FPSO agreement and acceptance by both Talisman and Bluewater of alldisputes regarding pipework corrosion and calcium naphanate management.

Until November 30, 2005 we receivedfrom Talisman a defined day rate of approximately U.S.$174,000 that consistedof a fixed facility fee for the provision of the FPSO and associated equipmentand an indexed operating fee for the operation and maintenance of the vessel.As from November 30, 2005 we no longer receive an operating fee, but onlya defined day rate of approximately U.S.$114,000. In addition we continue toreceive tariff payments that are linked to the actual volume of oil produced.These tariff payments, which totaled U.S.$7.7 million in 2005 andU.S.$3.1 million in 2006, increased with the addition of production fromthe Blake Flank Field in 2005 and decreased in 2006 due to reduced wellproduction. If a *force majeure*event were to occur, we would be entitled to receive a *forcemajeure* rate of U.S.$60,000 per day.

The agreement with Talisman will continueat pre-agreed rates until July 2012 unless terminated earlier by Talisman.We believe that the combined production profile of the Ross, Blake and Blake FlankFields will extend byond 2015 (subject to certain factors, including the priceof oil and overall production rates).

*Glas Dowr.*   The GlasDowr is the fifth FPSO thatwe developed and the second that we operated in the North Sea. Completed in1997, the FPSO was directly converted from a newly built double hull tanker.The main modifications included the installation of a turret mooring systemwith a Bluewater designed swivel (which is capable of handling multiple risersand control umbilicals), a flaring system, an offloading system, a processingplant, a helicopter deck and upgraded safety features and the refitting of thepiping system, engine room and living quarters. During the fourth quarter of2003, we completed upgrades to the vessel’s processing and flaring facilitiesby installing a new Bluewater designed swivel stack, a new gas compressionmodule and two additional processing modules. As modified, the Glas Dowr currently accommodates 96 persons and has a weightof 105,000 dwt, a storage capacity of 657,000 barrels, a length of 242 meters,a breadth of 42 meters, a depth of 21 meters and a deck area of 7,895 squaremeters. The vessel has a fluid capacity of 70,000 barrels per day, a processingcapacity of 60,000 barrels per day and a gas compression capacity of85.0 million standard cubic feet per day.

The *GlasDowr* was initially deployed to the Durward and Dauntless Fieldsunder a service agreement with Amerada Hess. In November 1998, however,Amerada Hess elected to remove the *Glas Dowr*from the fields due to lower than expected reservoir returns that wereunrelated to the vessel’s performance. Amerada Hess continued to make paymentsunder the service agreement during the minimum contract period notwithstandingthe vessels’ removal from the fields. In June 2001, we entered into a newservice agreement with PetroSA, a South African oil company, for the operationof the *Glas Dowr* on the SableField in the Bredasdorp Basin off the coast of South Africa. The Sable Field isprincipally owned by PetroSA and Pioneer Natural Resources South Africa(Proprietary).

To prepare the *Glas Dowr* for operation on the Sable Field, we modified thevessel’s topsides and mooring system and developed the field’s subseainfrastructure in accordance with requirements set forth in our serviceagreement with PetroSA. Due to an unanticipated increase in the scope andcomplexity of 

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the vesselmodifications, labor unrest and difficulties with project management on thepart of the construction yard where the work was performed, the projectexperienced delays and cost overruns. The delay in the achievement of first oiland additional work on the vessel’s gas compression facilities, along withincreased insurance costs, resulted in an upward revision in our costsestimates. The costs of the vessel modifications and subsea work, excludingexchange rate differences and financing costs, were approximatelyU.S.$195.7 million. Of this amount, U.S.$50.4 million wasreimbursable by PetroSA. We had expended approximately U.S.$150.7 millionon the vessel modifications and approximately U.S.$39.2 million ondeveloping the subsea infrastructure, and we had received approximatelyU.S.$39.2 million in milestone payments from PetroSA for the completion ofthe subsea work.

In addition to the cost of vesselmodifications and subsea work, we have capitalized U.S.$9.7 million offinancing costs, U.S.$11.0 million of costs relating to operationalsupport prior to production and U.S.$3.0 million of expenses relating toexchange rate losses resulting from the difference between the project exchangerate and actual exchange rates. The total capitalized cost for the project wasU.S.$175.1 million as of December 31, 2004.

On August 7, 2003, the *Glas Dowr* commenced production. Inconnection with the commencement of production, we entered into a temporaryarrangement pursuant to which we began to earn defined day rates according tothe service agreement with PetroSA.

The *GlasDowr* achieved contractual first oil in the end of December 2003at which time our temporary arrangement with PetroSA was terminated and webegan operating the vessel pursuant to the terms of our service agreement.Under our service agreement, we are responsible for operating and maintainingthe *Glas Dowr* and for providingshuttle tanker services, but not for offloading the hydrocarbon products.During the three year minimum contract period, PetroSA was required to pay aminimum fee of approximately U.S.$124,000 per day plus tariff payments for eachbarrel of oil produced. After the minimum contract period the minimum feeincreases to U.S.$134,000 per day and we will then receive higher tariffpayments for each barrel of oil produced, although tariff payments will nolonger be guaranteed. The minimum fee consists of a facility fee, an operatingfee and a fee for shuttle tanker services. In order to receive the fullfacility fee, we are required to ensure that the *Glas Dowr* maintains minimum oil production and gas and waterinjection uptimes of at least 95%, unless otherwise agreed with PetroSA. If theoperating uptimes fall below this threshold, our facility fee will be reducedaccording to a predetermined schedule. To the extent that our operating uptimesexceed this threshold, we may use the excess operating uptimes to offset anyshortfalls in future periods. There is no limit to the amount of tariffpayments that we can earn, and, regardless of the volume of oil produced,PetroSA has agreed to pay us a minimum of U.S.$44.0 million in tariffpayments at the expiration of the minimum contract period, less any tariffpayments received up until that time. In addition, we will be entitled toreceive further tariff income above the guaranteed levels to the extent thatthe volume of oil produced exceeds certain volumes. PetroSA’s obligations underthe service agreement are fully guaranteed by its parent company, CEF(Proprietary) Limited.

The minimum contract period under theservice agreement with PetroSA expired at the end of 2006. Following theexpiration of the minimum contract period, the service agreement will continuefor a further seven years unless terminated by PetroSA with 8 months’notice. We believe that production from the Sable Field will extend until atleast the end of 2008.

*Haewene Brim.*   In January 2002, we entered intoshare purchase agreements with Aurelia Holding N.V. pursuant to which weacquired all of the share capital of Bluewater (Haewene Brim) N.V., the owner of the Haewene Brim, and Pierce Production Company Ltd., thecompany that operates the Haewene Brim. The Haewene Brim is a harsh environment FPSO that wasconverted by APS, Bergesen and Navion in 1999 from a double hull multipurposeshuttle tanker. The main modifications included the installation of a submergedturret production system, fourteen topside modules, two rotating deck cranes, aflaring system, 

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*astern offloading system, a helicopter deck, upgraded safety features and aprocessing plant. In February 2000, the*Haewene Brim was shipped to the McNulty shipyard inNewcastle, United Kingdom, for debottlenecking. As modified, the vessel has afluid capacity of 70,000 barrels of crude per day and a processing capacity of70,000 barrels per day. With sufficient space to accommodate 75 persons, the Haewene Brim has a weight of 103,000 dwt, a storagecapacity of 630,000 barrels, a length of 253 meters, a depth of 23 meters and adeck area of 3,200 square meters. The current configuration of the topsides ofthe vessel can accommodate the installation of future modules, which wouldpermit future upgrades.

Pierce Production Company Ltd. beganoperating the *Haewene Brim* on thePierce Field in March 1999 at a water depth of 85 meters pursuant to aservice agreement with Enterprise Oil, which is currently owned by Shell. Weassumed operation of the *Haewene Brim*in November 2001 when the vessel and Pierce Production Company Ltd.were acquired by Aurelia Holding N.V.

Under our service agreement, we arerequired to provide a crew to maintain and operate the *Haewene Brim*. We receive a defined dayrate of approximately U.S.$150,000 that consists of a facility fee for theprovision of the FPSO and associated equipment (indexed to the sterling-U.S.dollar exchange rate) and an indexed operating fee for the operation,maintenance and insurance of the vessel. If a *forcemajeure* event were to occur, we would be entitled to receive ourfull facility fee for the first 30 days of the force majeure event and 90%of our facility fee thereafter. In order to receive the full facility fee, wemust ensure that the *Haewene Brim*achieves a minimum gas reinjection uptime of 85%, unless otherwise agreed withEnterprise Oil/Shell. If our gas reinjection uptime is reduced below thisthreshold, our facility fee is reduced on a pro rata basis. If our gasreinjection uptime is above 92%, our facility fee is adjusted upwardaccordingly. The *Haewene Brim*achieved an average gas reinjection uptime of 93.0% in 2005 and 90.25% in 2006.

Enterprise Oil/Shell is obligated tocontinue to make payments to us under our service agreement until the agreementexpires in March 2014. The minimum guaranteed term of the serviceagreement expired in March 2004, permitting Enterprise Oil/Shell toterminate the agreement at any time upon 12 months’ written notice.Enterprise Oil/Shell agreed to invest approximately £86 million(U.S.$169.0 million) to install a water injection unit on board of the *Haewene Brim*. We managed the project ofthe development and installation of the water injection unit on a cost plusbasis and received a management fee. The water injection module was operationalas from October 28, 2004. Enterprise Oil/Shell continued to pay full dayrates and has agreed to deliver title to the water injection unit to us fornominal consideration upon completion of the project. We believe that the waterinjection unit may increase remaining recoverable reserves at the Pierce Fieldby approximately 100 million barrels and, accordingly, that it isreasonably likely that the production profile of the Pierce Field will extendbeyond 2014 (subject to certain factors, including the price of oil and overallproduction rates) and that *Haewene Brim*may continue to operate under the service agreement until that time.

In September 2006, the *Haewene Brim* was moved from the field to ayard in Stavanger in order to carry out repairs to the swivel bearing. At thesame time, maintenance work that would normally be performed off-shore during2006 and 2007 was performed during this period. These repairs and maintenanceworks were completed according to schedule and the vessel returned to the fieldand resumed production in October 2006. We believe that the costs of theswivel repair will be covered under our insurance policy and therefore thetotal costs of the repair, amounting to U.S.$11.5 million, have beencapitalized. The review of this insurance claim is still in its early stagesand final award is not expected until 2007. To finance the acceleratedperformance of the maintenance work that would otherwise have been performed in2007,  Enterprise Oil/Shell provided aninterest free loan in the amount of GBP 1.75 million, which will be repaid onor before August 31, 2007.

*Munin.*   In January 2002, we entered into ashare purchase agreement with Aurelia Holding N.V. pursuant to which weacquired all of the share capital of Bluewater (Munin) N.V., the owner of the Munin, and with Aurelia Holding N.V. and MarencoInvestments Limited, pursuant to which we acquired all of 

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*theshare capital of Lufeng Development Company, the company that operates the*Munin. The Munin is a harshenvironment FPSO that was converted from a double hull multipurpose shuttletanker by APS and Navion in 1999. The main modifications included theinstallation of a submerged turret production system, nine topside modules, tworotating deck cranes, a vent tower, a stern offloading system, a helicopterdeck, upgraded safety features and a processing plant. The Munin currently can accommodate 75 persons, has a weightof 103,000 dwt, a storage capacity of 605,000 barrels, a length of 253 meters,a depth of 23 meters and a deck area of 3,200 square meters. Its fluid capacityis 125,000 barrels per day and its processing capacity is 60,000 barrels perday of the heavy crude oil (with a low gas to oil ratio) found in the LufengField. The vessel has a successful operating record.

Lufeng Development Company began operatingthe *Munin* in January 1998 onthe Lufeng Field at a water depth of 330 meters pursuant to a service agreementwith Statoil. The service agreement was scheduled to expire in February 2004,but has been extended by Statoil until July 7, 2006. During 2003 wereceived a day rate consisting of a facility fee plus tariff payments linked tothe actual volume of oil produced and the price of oil. This day rate averagedapproximately U.S.$51,000 in 2003 and was subject to a minimum paymentguarantee by two of the parent companies of the original sellers of the *Munin*. The payment guarantee, whichexpired in February 2004, has historically insulated our day rate underthe service agreement from fluctuations in the price of oil. In order toreceive the full facility fee, we were required to ensure that the *Munin* maintained a minimum average oilproduction uptime that exceeded 93%, unless otherwise agreed with Statoil. Ifthe oil production uptime fell below this threshold, our facility fee wasreduced according to a predetermined schedule. Since it began operating in January 1998,the *Munin* has maintained oilproduction uptimes that have exceeded the minimum threshold. In 2003, the *Munin* achieved an average oil productionuptime of 96.1%. While we did not receive an operating fee for operating the *Munin*, Statoil has reimbursed us forsubstantially all of our operating expenses, except for limited marine expensesand certain taxes.

In January 2004, Bluewater enteredinto a new service agreement with Conoco Phillips to deliver, install andoperate the *Munin* on the Xijiang Field in the SouthChina Sea using the FPSO’s dynamic positioning system, which will enable us toavoid costs associated with installing a fixed mooring system. As aconsequence, our existing service agreement with Statoil was suspended in July 2004.The *Munin* was relocated to the Xijiang OilField in September 2004 pursuant to the terms of the service agreementwith Conoco Phillips and started operating on the field in October 2004.The new service agreement had a minimum term of 160 days and a maximumterm of 190 days. Under the new agreement, we were required to maintain acrew and operate the *Munin*. Wereceived a defined day rate of approximately U.S.$99,750 per day that consistedof a facility fee and a fixed operating fee. We also received fixed ancillary feesto reimburse us for various costs associated the performance of our dutiesunder the agreement. In order to receive the full facility fee, we had tomaintain a production rate of at least 50,000 barrels of oil produced per dayand achieve an uptime of at least 97% in each month, unless otherwise agreedwith Conoco Phillips. If our production level or uptime was below theapplicable threshold, our facility fee had been reduced on a pro rata basis.Production on Xijiang ended in March 2005 as per contract. Afterdecommissioning at Xijiang, the *Munin*sailed under its own power from HK to the Lufeng field in June 2005 forreconnection to the subsea buoy and mooring system. On the June 9, 2005the *Munin* restarted producing oil from the Lufeng field to re-commenceoperations for Statoil Orient Inc. The amended agreement with Statoil OrientInc. is for a period of 3 years and will expire in April 2008. Under thisrevised agreement, Bluewater will receive a fixed daily hire rate ofU.S.$30,000 per day plus U.S.$3.35 for every barrel of oil produced. Theaverage anticipated revenue over this 3 year period is expected to be in theregion of U.S.$55,000 to U.S.$60,000 per day. In addition, Bluewater receives amonthly lump sum payment to cover a pre-defined scope of work for operationssupport, including the vessel insurance. All other costs incurred by Bluewatersuch as crew costs, flag and classification services etc., are reimbursed byStatoil Orient Inc. at cost.

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*Jotun.*   Bluewater (Dyphavet) B.V., a subsidiary of the Company, and Norwegiancompany Standard Marine Nordsjo AS (“SMNAS”), an affiliate of Exxon MobilCorporation, have formed a partnership (PR Jotun DA) that purchased FPSO JotunA  from Norwegian Jotun field partners ExxonMobil Exploration and Production Norway AS, Lundin Norway AS and Petoro AS. TheCompany holds a 55% ownership interest in PR Jotun DA with SMNAS holding theremaining 45%. The FPSO Jotun A has a storage capacity of 584,400 bbl and has beenproducing on the Jotun field located in the Norwegian sector of the North Seasince 1999. After its acquisition, the FPSO has been leased back under abareboat charter to the Jotun field partners for a minimum term of five years,with extension options up to 15 years. Under the agreement a defined dayrate ofapproximately U.S.$168,000 per day is payable by the Jotun field partners to PRJotun DA. This amount is realized on a straight-lined basis, calculated basedon the term of the agreement.

*Aoka Mizu.*   The Aoka Mizu is a newly-built double hull based on asimilar design to that of the Bleo Holm.Construction of the hull took place in Japan and was completed in the secondhalf of 2000. It was delivered with a moonpool prepared to receive a Bluewaterdesigned turret mooring system. The hull is fully coated both internally andexternally for FPSO operations and has supports for topside facilities. Thehull has a weight of 105,000 dwt, a length of 242 meters, a breadth of 42meters and a deck area of 7,985 square meters. Given its high standards, it iscapable of taking advantage of opportunities in markets with stringentenvironmental requirements and harsh weather conditions.

On March 31, 2006 we entered into aservice agreement with Nexen Petroleum U.K. Ltd. (“Nexen’’) with respect to theprovision and operation of an FPSO for production on the Ettrick field on theUK continental shelf starting 2008. For this project the *Aoka Mizu*is currently being converted into an FPSO. Under the agreement with NexenPetroleum U.K. Ltd. we will receive a fixed daily hire rate of U.S.$112,500 perday plus a production tariff per barrel of oil produced. Nexen has agreed topay us a minimum tariff based on 27 million barrels of oil produced during thefive year contract term. All operating costs will be reimbursed by Nexen,including a profit mark-up.

*Hanne Knutsen.*   On February 9, 2006, the Companyentered into an agreement to purchase the shuttle tanker MT “Hanne Knutsen”for the amount of U.S.$131.5 million. The vessel was built in Spain atAstilleros de Sestau and was delivered to Knutsen OAS in 2000. It has been designedas a typical North Sea tanker and has since been trading in the Baltic iceregions as well as providing services as a shuttle tanker. The “Hanne Knutsen”was specifically chosen for its overall design qualities and its suitabilityfor future FPSO conversion projects. Delivery and payment of the shuttle tankeroccurred on June 29, 2006. Since then the Company has agreed to bareboatcharter the vessel back to the previous owner for a period of eleven months inanticipation of a new FPSO project.

***Development of New FPSOs***

An important activity of our FPSO businessis the development of new FPSOs under service agreements with oil companies.Our development activities consist of the design, engineering, projectmanagement and delivery of FPSOs. Between 1985 and 1994, we developed threeFPSOs based on relatively simple designs and short production lives for use inrelatively benign marine and weather conditions in offshore fields in Asia,Australia, West Africa and the Mediterranean. The last of these FPSOs wasdecommissioned in 1995 in line with our strategic decision to concentrate onthe production of more complex FPSO units that are suitable for use in harshenvironments. Since then, we have designed, engineered and developed three highspecification FPSOs with initial design lives of 15 to 20 years and anFPSO hull  that is currently beingconverted into a FPSO.

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Thefollowing table presents certain information regarding the vessels that we havedesigned and developed, owned and operated since 1985:

| **FPSO**               | ** ** | **Weight  (dwt)** | ** ** | **Mooring System**                  | ** ** | **Location of Operations**       | ** ** | **Depth  (m)** | ** ** | **Oil Company** |
|------------------------|------------|-------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|----------------|------------|----------------------|
| *Acqua Blu (1985)*     |       | 70,000            |       | CALM Wishbone                            |       | Mila Field (Italy)                         |       | 50             |       | Montedison           |
|                   |       |              |       | Spread Mooring                           |       | Gomber Marin Field  (Gabon)                |       | 20             |       | Amoco                |
|                   |       |              |       | Spread Mooring                           |       | Safueiro Field (Angola)                    |       | 40             |       | Agip                 |
|                   |       |              |       | CALM Mooring                             |       | Talisman Field  (Australia)                |       | 80             |       | Marathon Petroleum   |
| *Lan Shui (1987)*      |       | 70,000            |       | CALM Mooring                             |       | Liuhua Calm Field (China)                  |       | 300            |       | Amoco                |
|                   |       |              |       | Spread Mooring                           |       | Intan Field (Indonesia)                    |       | 42             |       | Maxus Energy         |
| *Ayer Biru (1990)*     |       | 45,000            |       | CALM Mooring                             |       | Lufeng Field (China)                       |       | 330            |       | Occidental Eastern   |
| *Uisge Gorm (1995)(1)* |       | 92,000            |       | Internal Turret(2)                       |       | Fife, Fergus, Flora and  Angus Fields (UK) |       | 72             |       | Amerada Hess         |
| *Glas Dowr (1997)(1)*  |       | 105,000           |       | Internal Turret(2)                       |       | Durward and Dauntless  Fields (UK)         |       | 92             |       | Amerada Hess         |
|                   |       |              |       |                                     |       | Sable Field                                |       | 100            |       | PetroSA              |
| *Bleo Holm (1999)(1)*  |       | 105,000           |       | Internal Turret(2)                       |       | Ross, Blake and Blake  Flank Fields (UK)   |       | 100            |       | Talisman             |
| *Haewene Brim (2002)*  |       | 103,000           |       | Internal Turret(2)                       |       | UKCS Pierce Field                          |       | 85             |       | Shell                |
| *Munin (2002)*         |       | 103,433           |       | Internal Turret(2)                       |       | Lufeng Field                               |       | 330            |       | CNOOC                |
| *Jotun A**(2005)(4)*   |       | 92,800            |       | Internal Turret(2)                       |       | Jotun Field                                |       | 126            |       | Exxon                |
| *Aoka Mizu (2000)(3)*  |       | 105,000           |       | Internal Turret(2)  (under construction) |       | Ettrick Field (UK)                         |       | —         |       | Nexen                |

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Notes:

(1)             We currently own and contract the vessel.

(2)             We designed the mooring system.

(3)             Hull completed.

(4)             TheCompany holds a 55% ownership interest in PR Jotun DA with SMNAS holding theremaining 45%.

We do not own any fabrication facilities and do notfabricate FPSOs. We manage our FPSO projects from the design and engineeringphases to completion and enter into construction contracts with qualifiedsubcontractors who specialize in the various aspects of the FPSO developmentprocess. We design our FPSOs as life-of-field assets based on serviceagreements with oil companies that define the design and functionalspecifications of the FPSO and the terms under which it will operate during theproduction phase. We expect any new FPSO developments to be undertaken on asimilar basis.

In connection with a tender for a new serviceagreement, we may ensure the availability of a hull through the use of anoption or a conditional purchase that allows us to avoid purchasing the hullonly if the bid is unsuccessful. We may also secure the availability of a hullby purchasing a tanker that we can continue chartering. When a serviceagreement is awarded, we will convert the hull into an FPSO that is designedfor use on the particular field or group of fields. The conversion process isextensive and generally takes between 18 and 24 months. The actualdevelopment of an FPSO takes place in two principal phases: the production ofthe hull and the topsides at separate locations and their integration at acommon location. Based on historical experience, we believe that the cost ofcarrying out the conversion of a high specification FPSO (including the cost ofprocuring a hull) ranges from U.S.$350.0 million toU.S.$450.0 million, although larger and/or more complex FPSOs may havehigher construction costs.

Because quality assurance is integral to our businessstrategy, we have established high standards for workmanship and safety andimplemented procedures that comply with the International Safety ManagementCode, ISO 9001 and ISO 14001. We seek to use established subcontractors whooperate under our close supervision for naval and marine engineering work andfor the fabrication of topsides. Our quality control plan includes a thoroughassessment of our vendors’ and subcontractors’ ability to meet requirements andan inspection of all work locations. Critical procured items are not accepteduntil they are formally released by one of our trained inspectors andfabrication is not contractually complete until a completion certificate isissued. In addition, system handover and startup cannot begin until all 

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commissioning is completedwith records agreed by our operations representative. For critical safetysystems, we require a certification from a competent independent party.

The principal terms of our agreements withsubcontractors are designed to promote the completion of our projects on timeand within budgetary and project requirements. We normally require the parentcompanies of our subcontractors who are subsidiaries to provide guaranteesunder our contracts. Each guarantee must mirror the terms of the subcontractand the guarantor must be acceptable to us. For contracts with values exceedinga certain amount, we also require a bank or financial institution to provide aletter of credit. The letters of credit allow us to fund the transfer of workto another shipyard in the case of non-performance by the subcontractor,thereby lowering the risk of non-completion.

We intend to furtherenlarge our FPSO fleet over the medium-term by building on past successes indeveloping our existing FPSO fleet. In developing a new FPSO, we will look toenter into a service agreement for the FPSO on a life-of-field basis. We willtypically seek to negotiate a defined day rate that compensates us both for therental of the vessel and associated equipment and for the cost of itsoperation. We will seek new developments either to complement our existingpresence in the U.K. or with a view to expand into new regions such as, but notlimited to, Norway and Gulf of Mexico.

**SPM Business**

Our SPM business specializes in the design,development and delivery of SPM systems for use in a variety of marine andenvironmental conditions. Our SPM operations are primarily focused on theproduction and development of three principal types of mooring systems: turretmooring systems, buoy mooring systems and tower mooring systems. To a lesserdegree, our SPM business is involved in the design, development and sale of floatingstorage and offloading vessels (“FSOs’’), which are used to offload and storehydrocarbons at offshore production platforms and near shore terminals thatlack sufficient storage capacities.

Most of our SPM systems have been designed andmanufactured for oil companies for use in offshore oil production, and asignificant number have been developed for use in connection with FPSOs andFSOs designed and operated by us. An essential component of these systems is aswivel which permits fluids to transfer at high pressures in both directionsbetween fixed and rotating parts of our mooring systems. Our current swiveldesigns provide for multiflow paths at different pressure ratings that aresuitable for use in the extraction of fluids from high pressure fields.

The following is asummary of the SPM systems that we design:

·       **Turret Mooring Systems.**We designed ourfirst turret mooring system in 1993. This first generation turret mooring systemincorporated our advances in swivel technology and used a 3x3 anchoringsystem, which connects the turret to the ocean floor through three sets ofthree anchor lines. Since then, we have designed and delivered 12 turretmooring systems for use at a variety of water depths and marine and weatherconditions. A substantial amount of these systems have been used by FPSOs thatwe designed and operated.

·       **Buoy Mooring Systems.**We design threeprincipal types of buoy mooring systems: a turntable buoy, a wishbone buoy anda turret buoy. Our turntable buoy uses a conventional buoy system and issimilar to those marketed by our competitors. Our wishbone system uses awishbone shaped yoke that is suitable for permanent mooring. Our turret buoy ismore complex and utilizes a turret that is similar to the turret used in aturret mooring system. We are the only designer of turret buoys in theinternational market. We have designed and delivered a total of 56 buoy mooringsystems worldwide.

·       **Tower Mooring Systems.**We also design atower mooring system that is suitable for permanent mooring up to a water depthof 75 meters. This mooring system utilizes a wishbone shaped yoke 

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that is similar to theyoke used in our wishbone buoy system and allows the attached vessel to rotateaccording to wind, wave and weather conditions. We have designed and deliveredfour of these systems to date.

We delivered twenty four buoy mooring systems from2001 to 2006 and are in the process of developing three additional buoy mooringsystems for delivery in 2007 and one tower mooring system for delivery in 2008.We did not deliver any turret mooring systems from 2001 to 2006 due to a lackof market demand for those types of systems during the period. We deliveredonly one tower mooring systems from 2001 to 2006.

Because SPM systems areintegral to the operation of FPSOs, and because they form an important link inthe oil production chain, we believe that it is important to preserve our coreSPM capabilities for use in connection with future FPSO projects. Our policy isto maintain a qualified engineering staff that is experienced in the design anddevelopment of both FPSOs and SPM systems. To ensure flexibility and managecosts, we allocate staff members between our FPSO and SPM businesses in responseto market conditions and specific project demands.

**Seasonality**

We believe that ourbusiness is generally insulated from seasonal weather conditions that affectsome service providers to the offshore oil industry. See “Item 5: Operating andFinancial Review and Prospects—(A) Operating Results—Seasonality”.

**Marketing**

We obtain new business byparticipating in competitive tenders for FPSO service agreements and SPMdelivery contracts. We believe that our successful track record in developingand operating FPSOs and in designing SPM systems, combined with our industrypresence and strong reputation, are important factors affecting our ability toidentify potential business opportunities and to secure invitations to submitbids for these contracts. A description of our FPSO service agreements and ourSPM delivery contracts is included under “—FPSO Business—FPSO Fleet, FPSO Hulland Trading Vessel” and “—FPSO Business—Development of New FPSOs”. Adescription of our revenue recognition policies under these agreements isincluded under “Item 5: Operating and Financial Review and Prospects—(A) OperatingResults—Critical Accounting Policies and Estimates—Revenue Recognition andInventory”.

**IntellectualProperty**

We rely on intellectual property protection throughthe use of confidentiality agreements with our employees and subcontractors,copyright law protection for our design work and internally developed softwareand selective patent filings. We apply for patents in those territorieswhich we consider to be important for aparticular invention. Our patents, copyright works and know-howcollectively represent a material asset to our business. However, no singlepatent, copyright work or item of know-how is of material importance to ourbusiness when taken as a whole. As of December 31, 2006, we held a numberof patents and had made multiple patent applications in respect of differentproducts and processes in selected jurisdictions worldwide. The remainingduration of these patents varies from less than 1 year to 19 years,depending on the date each application was filed and the duration of protectiongranted by each selected jurisdiction.

In those occasions that we do not feel a need to file for patents, we publish the object of such inconference papers, website etc. such as to allow the object to become inthe public domain so as to avoid competitors filing intellectualrights on this technology.

We are currently not a plaintiff in litigationregarding intellectual property rights which we own.

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The Company is subject to proceedings initiated bycertain of our competitors in the district court in The Hague in respect of analleged infringement of intellectual property rights. The claims of thesecompetitors failed during the injunctions proceedings before the District Courtas well as before the Court of Appeal. Plaintiffs continued their claims bystarting proceedings at the District Court in The Hague requesting a judgmenton the merits. In 2006 the Court nullified one of the two patents relied uponby these competitors and rejected their claim related to the nullified patent.The judgment of the District Court on the remaining part of the proceedings onthe merits is expected in April 2007. With respect to the patents atstake, we have received advice from our patent agent that our product designdoes not infringe upon any valid claim of the patents.

We have no registeredtrademarks and rely on unregistered trademark rights in the countries in whichwe operate, to the extent that they exist, in order to protect our businessname.

**Competition**

Competition in the FPSO industry is relevant duringthe redeployment of existing FPSOs and during the tender process for new FPSOprojects, but generally does not play a role during the operation of an FPSOfollowing its deployment. Nevertheless, the design, engineering, projectmanagement and delivery of new FPSOs and the awarding of new FPSO serviceagreements is competitive worldwide and has been impacted by changes in FPSOownership. We estimate that there are currently 10 companies worldwide thatcontract FPSOs under service agreements and believe that the largest of thecompanies, measured by the size of its FPSO fleet, operates nine FPSOs. Therehas been a development among oil companies to contract FPSOs under serviceagreements rather than to purchase them.

FPSO operators compete in three market segments: thehigh specification FPSO segment, the medium specification FPSO segment and thelow specification FPSO segment. The high specification FPSO segment consists ofFPSOs that are suitable for use in areas, such as the North Sea, where harshweather conditions and strict regulatory standards predominate. The mediumspecification FPSO segment consists of (less advanced) FPSOs that are suitablefor use in areas, such as Brazil, Australia and deepwater West Africa, whichare characterized by less demanding environments. The low specification FPSOsegment consists of FPSOs that are suitable for areas, such as West Africa andcertain parts of Asia, where conditions are mild. We believe that there is anincreasing trend in the offshore oil industry to use high specification FPSOsdue to the implementation of more stringent environmental standards and anincrease in production at deepwater fields. We believe that this trend willresult in the convergence of these market segments towards the development ofhigh specification FPSOs in the future.

We have focused our FPSO operations on the highspecification segment of the FPSO market. Our principal competitors in thismarket are SBM, Petroleum Geoservices, Maersk and Modec. Most serviceagreements are obtained through a competitive bidding process. Importantfactors in awarding service agreements include equipment availability, servicequality, technological capacity, performance, reputation (particularly withrespect to safety and performance), customer relations, long-standingrelationships, experience of personnel and price. We believe that ourreputation of being a reliable operator of FPSOs, combined with our strongsafety record in our North Sea operations, our experienced management andengineering teams and our relationships with industry participants have enabledus to be a strong competitor.

The SPM market is highly specializedand competitive, but dominated by a smaller number of companies than the FPSOmarket. We believe that technology is an important factor in competing in thismarket. We have a strong position in this market and are among the four marketleaders in technology. Our principal competitors are SBM, Sofec and APL.

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**Regulation**

Our operations are subject to various governmental andquasi-governmental laws and regulations, including those relating toequipping and operating offshore vessels in continental waters, vessel safetyand stability, environmental protection, the handling, discharge and disposalof waste, currency conversions and repatriation, oil exploration anddevelopment, taxation of foreign earnings and earnings of expatriate personneland the use of local employees and suppliers by foreign contractors. We arerequired to invest financial and managerial resources to comply with these lawsand regulations and anticipate that we will continue to do so in the future. Wehave or can obtain all permits, licenses and certificates necessary to conductour business.

Our FPSOs areclassified by one or more maritime classification societies and flagged by theShipping Inspectorate of the Netherlands Antilles. Under the rules andregulations of these bodies, we must ensure that our FPSOs meet minimuminternational standards for maritime vessels. In addition, our FPSOs aresubject to regulation by a number of national regulatory bodies that havejurisdiction over the territorial waters in which they operate. We are requiredto ensure that our FPSOs satisfy the additional requirements of these nationalbodies as described below.

·       **United Kingdom.**The operations of the *Uisge Gorm*, the *Bleo Holm* andthe *Haewene Brim* are principally subject toregulation by the Health and Safety Executive, the Department of Trade andIndustry, the Civil Aviation Authority, the British Helicopters Advisory Boardand the Marine Safety Agency in the United Kingdom. The Health and SafetyExecutive has jurisdiction over safety aspects of offshore oil installationsand pipelines on the UK continental shelf. The Department of Trade and Industryis responsible for approving the development of fields on the UK continentalshelf and issuing environmental consents. The Civil Aviation Authority and theBritish Helicopters Advisory Board have jurisdiction over the design andconstruction of the helicopter facilities at offshore oil facilities andday-to-day helicopter operations. The Marine Safety Agency is responsible forregulating oil pollution. We are responsible for ensuring that the relevantapprovals and licensing and certification requirements of these bodies aresatisfied and have implemented a regulatory compliance plan to assist us inthis process.

·       **South Africa.**The operations of the *Glas Dowr* are subject to regulation by the Department ofMinerals and Energy, the Maritime Safety Agency and the IndependentCommunications Agency in South Africa. The Department of Minerals and Energy isresponsible for regulating all safety and environmental aspects relating tooffshore oil installations. The Maritime Safety Agency is responsible for theprevention of pollution in territorial waters. The Independent CommunicationsAuthority is responsible for licensing certain communications equipment. We areresponsible for ensuring that the relevant approvals and licensing andcertification requirements of these bodies are satisfied and have implemented aregulatory compliance plan to assist us in this process.

·       **South China Sea.**The operations of the *Munin* are subject to regulation by a number of regulatorybodies in the Peoples Republic of China. Conoco Philips, as the operator of thefield on which the *Munin* operatesand Statoil when the *Munin* returnsto the Lufeng field, will be primarily responsible for ensuring compliance withthe relevant approval, licensing and certification requirements of thesebodies. Accordingly, it has not been necessary for us to implement a regulatorycompliance plan for the *Munin*

·       **Norway.** The operations of the *Jotun A* are subject to regulation by a number of regulatorybodies in Norway. ExxonMobil Exploration and Production Norway AS, on behalf ofthe operators of the field on which the *Jotun A*operates, will be primarily responsible for ensuring compliance with therelevant approval, licensing and certification requirements of these bodies.Accordingly, it has not been necessary for us to implement a regulatorycompliance plan for the *Jotun A.*

We cannot predict all ofthe regulatory requirements or circumstances that will exist in the future, butanticipate that regulatory standards will become increasingly complex, morestringently enforced and more 

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expensiveto comply with. We do not currently anticipate any material adverse effect onour business or financial position as a result of future compliance withexisting laws and regulations; however, future events, such as changes inexisting laws and regulations or their interpretation, more vigorousenforcement policies of regulatory agencies or stricter or different interpretationsof existing laws and regulations, may require us to make additionalexpenditures which may be material. In addition, offshore drilling andproduction operations in certain areas have been opposed by environmentalgroups and, in certain areas, have been restricted. To the extent laws areenacted or other governmental actions are taken that adversely affect offshoredrilling or production, impose requirements that result in increased costs tothe oil industry or otherwise limit the demand for our services, our businessand prospects could be adversely affected. We cannot predict the exact extentto which our future operations and earnings may be affected by new regulatoryinitiatives.

**Health, Safety andEnvironment Policy**

Our policy is to conductoperations in a manner that promotes the health and safety of our employees andthird parties and to ensure that our corporate actions and the actions of ouremployees do not harm the environment. We consider aspects regarding health,safety and the environment to rank equally with commercial and operationalfactors, and we review our health, safety and environmental practices andprocedures regularly to identify new factors which may be relevant and toensure that our performance is continuously improved. All of our employees havethe duty to act responsibly and to take precautions to protect themselves,their colleagues, contractors and third parties from injury or preventableillness, which might arise from their actions. Our health, safety andenvironment policy has the support of senior managers who recognize that,without the cooperation and commitment of employees and contractors at alllevels; the objectives of such a policy would be unattainable.

**Insurance**

We maintain insurance coverage in such amounts as webelieve to be prudent against normal risks in our operations, including, amongother things, the risk of pollution and damage to vessels. Certain risks (suchas business interruptions and environmental liabilities in excess of certainlimits), however, are either not insurable or are insurable only at rates weconsider uneconomical. The cost to obtain and maintain insurance could increaseor decrease in the future for any number of reasons. Our insurance costsincreased significantly following September 11, 2001. There can be noassurance that we will continue to maintain current levels of insurance and wemay determine in the future to carry less insurance or not to insure at all.Moreover, our insurance coverage does not protect against loss of revenues,although we are required under our replacement credit facility to obtain suchinsurance if the number of FPSOs from which we receive revenues falls belowthree.

Depending on competitive conditions and other factors,we seek to obtain indemnity agreements from our customers which require them tohold us harmless in the event of loss of production, reservoir damage orliability for pollution that originates below the surface of the water. Wegenerally rely on these indemnities to protect us from risks which areuninsurable or insurable only at rates which we believe are uneconomical. Whenobtained, these contractual indemnifications may include cross-indemnificationprovisions, and the obligations there under may not be supported in all casesby adequate insurance maintained by the customer or required to be maintainedby us. We have agreed to indemnify each of Amerada Hess in the case of the *Uisge Gorm* and Statoil and Conoco Phillipsin the case of the *Munin*, subjectto amount limitations in the respective service agreements, in respect ofpollution emanating from our FPSOs and certain other equipment which we havesupplied. Each of Amerada Hess and Statoil has agreed to indemnify us withrespect to the foregoing in excess of those amount limitations and in respectof pollution emanating from the field, reservoir or wells (in the case of the *Munin*, subject to certain exceptions).Under our service agreements with PetroSA and Conoco Phillips, we have agreedto 

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indemnify PetroSA andConoco Phillips, respectively, subject to amount limitations, in respect ofpollution emanating from our FPSO, shuttle tankers and certain subsea and otherequipment, and PetroSA and Conoco Phillips have each agreed to indemnify uswith respect to the foregoing in excess of those amount limitations (subject toan exclusion in the event our insurer denies coverage) and in respect ofpollution emanating from wells and certain subsea and other equipment. In thecase of the *Haewene Brim*, we haveagreed to indemnify Enterprise Oil/Shell in respect of certain pollutionemanating from our FPSO (unrelated to oil from the field) and certain otherequipment we have supplied, and Enterprise Oil/Shell has agreed to indemnify usfor pollution relating to oil from the field. In the case of *Jotun A* and the *Bleo Holm* thecharterer has agreed to indemnify us and hold us harmless against any lien ofwhatsoever native arising upon the vessel during the charter period, arisingout of or in relation to the operation of the vessel by the charterer,including but not limited to claims from third parties against the Companycaused by pollution or personal injury. These indemnity arrangements may notprotect us in all circumstances.

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**(C)****        OrganizationalStructure**

We are a limited liabilitycompany incorporated under the laws of the Netherlands Antilles with ourcorporate seat in Curaçao, the Netherlands Antilles and registered with thetrade register of Curaçao with number 65489. We were established in theNetherlands Antilles on December 6, 1993 to act as holding company for agroup of companies that provide services and products to the offshore oilindustry. The following diagram illustrates our current organizationalstructure. Ownership of each company is 100% unless otherwise indicated. Adescription of our subsidiaries is included under “Item 10: AdditionalInformation—(I) Subsidiary Information”.

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**(D)****       Property,Plants and Equipment**

Our materialtangible fixed assets consist of the *UisgeGorm*, the *Glas Dowr*,the *Bleo Holm*, the *Haewene Brim*,**the*Munin*, 55% of *Jotun A* , the *Aoka Mizu*and the *HanneKnutsen*. A description of these vessels is included under “—(B) BusinessOverview—FPSO Business—FPSO Fleet, FPSO Hull and Trading Vessel”. These assetsare subject to encumbrances or limitations on use as described below.

·                     **Security Interests.**We have granted thelenders under our revolving credit facility customary forms of securityinterests over the *Uisge Gorm*, the*Glas Dowr*, the *Bleo Holm*,the *Haewene Brim*, the *Munin,*the*Aoka Mizu* and the companies that own and operate them.These security interests include mortgages, share pledges, assignments ofincome and assignments of insurance proceeds. However, the lenders under thecredit facility have executed quiet enjoyment letters in favor of our clientsthat limit their ability to interfere with the vessels’ operations. We havegranted similar forms of security 

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interests over the *Jotun A* in connection with the financing of this vessel. See“Item 5: Operating and Financial Review and Prospects—(B) Liquidity andCapital Resources”.

·                     **Tax Lease Arrangements.**On November 3,2005 all tax lease structures that had been entered into for FPSO *Uisge Gorm*, FPSO *Glas Dowr* and the topsides of FPSO *Bleo Holm* and FPSO *Haewene Brim*were terminated. As a result of the termination the Companyregained full ownership of the FPSO *UisgeGorm*, the FPSO *Glas Dowr*and the topsides of FPSO *Bleo Holm*and FPSO *Haewene Brim.*These taxlease arrangements are described under “—Item 10: Additional Information—(C) MaterialContracts”. In connection with these arrangements, we granted the tax lessorsecurity interests over the leased assets. These security interests includedsecondary mortgages and cash collateral. However, the tax lease counterpartyexecuted a quiet enjoyment letter that limited its ability to interfere withthe vessels’ operations.

·                     **Environmental Laws.**Our operations andassets are affected by various environmental laws and regulations, includingthose governing discharges into the air and water, the handling and disposal ofwaste and the health and safety of employees. Certain environmental lawsprovide for strict liability, rendering a party liable for environmentaldamage, personal injury and threats to health and safety without regard to itsnegligence or fault. Certain environmental laws may also expose us to joint andseveral liabilities for the conduct of others or for acts that complied withall applicable laws when they were performed. Sanctions for non-compliance mayinclude revocation of permits, corrective action orders, administrative orcivil penalties and criminal prosecution. We are not involved in any legal oradministrative proceedings concerning environmental matters and are not awareof any environmental issues that may materially affect our ability to use ourFPSOs or our FPSO hull.

A description of current and recent capitalexpenditures relating to our vessels is included under“—(B) Business Overview—FPSO Business—FPSO Fleet, FPSO Hull and TradingVessel” and “Item 5: Operating and Financial Review and Prospects—(B) Liquidityand Capital Resources”.

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**ITEM 5:**               OPERATINGAND FINANCIAL REVIEW AND PROSPECTS

*You should read the following discussion of ourfinancial condition and results of operations together with the selectedconsolidated financial data, audited consolidated financial statements and thenotes thereto included elsewhere in this annual report. Our auditedconsolidated financial statements have been prepared in accordance with U.S.GAAP. This discussion contains forward-looking statements based on ourcurrent expectations, assumptions, estimates and projections about us and ourindustry. These forward-looking statements involve risks anduncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of certainfactors, including those described under “Item 3: Key Information—(D) RiskFactors” and elsewhere in this annual report.*

**(A) OperatingResults**

**Overview**

We are Aurelia Energy N.V., a holding company with noindependent operations, and its subsidiaries, a group of companies thatcomprise a specialized service provider to and operator in the offshore oilindustry. We operate under the name “Bluewater” and are a leader in the design,development, ownership and operation of FPSOs, which we operate for oilcompanies under medium- and long-term service agreements, and the design,development, project management and delivery of SPM systems.

Our FPSO business earns revenues from the design,development and operation of FPSOs pursuant to medium- and long-termservice agreements with oil companies. We treat our service agreements as “operatingleases” under U.S. GAAP and present them as such in our consolidated financialstatements. Under these agreements, we generally are paid a defined day rateconsisting of a fixed facility fee that covers the rental of the FPSO andassociated equipment and an indexed operating fee that covers the cost ofoperating, maintaining and insuring the vessel. We may also receive additionaltariff payments based on oil or water production or gas lift volumes (or acombination of those volumes), bonus payments that relate to the prevailingprice of oil and certain other fees. Our FPSO fleet currently consists of sixhigh specification FPSOs (the *Uisge Gorm*,the *Bleo Holm*, the *Glas Dowr*, the *Haewene Brim,*the*Munin*and a 55% ownership interest in *Jotun A*)that we have contracted to oil companies under service agreements,  one FPSO under construction (the *Aoka Mizu*) and one trading vessel (the *Hanne Knutsen)*. We entered into a service agreement underwhich we are currently converting the *Aoka Mizu* intoan FPSO*.* In 2004, 2005 and 2006, our FPSObusiness generated  84.6%, 83.7% and69.2% of our revenues, respectively, 96.4%, 364.9% and (85.2)% of our netincome, respectively, and 100.6%, 122.0% and 96.4% of our EBITDA, respectively.

Our SPM business earns revenues from the design,development, project management and delivery of SPM systems under our SPMdelivery contracts. We have developed a number of different types of SPMsystems for oil companies and contractors around the world, resulting in morethan 70 SPM systems since our founding. Because SPM systems are integral to theoperation of FPSOs in harsh environments, and because they form an importantlink in the oil production chain, we believe that it is important to preserveour core SPM capabilities for use in connection with future FPSO projects. In2004, 2005 and 2006, our SPM business generated 15.4%, 16.3% and 30.8% of ourrevenues, respectively, 3.6%,  (264.9%)and 185.2% of our net income, respectively, and (0.6%), (22.0%) and 3.6% of ourEBITDA, respectively.

While we manage FPSO andSPM projects from the initial design and engineering phase to finalinstallation, we do not engage in the fabrication of FPSOs or SPM systems.Rather, we outsource these requirements to qualified subcontractors. In 2004,2005 and 2006, we had revenues of U.S.$437.7 million,U.S.$399.0 million and U.S.$437.9 million, respectively, operating incomeof U.S.$44.6 million, U.S.$67.8 million and U.S.$71.7 million,respectively, net income of U.S.$6.4 million, U.S.$13.3 million andU.S.$5.4 million, respectively, and EBITDA of U.S.$117.6 million,U.S.$162.8 million and U.S.$178.1 million, respectively.

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**Operating Uptimes**

We derive a substantialproportion of our total revenues from the payments that we receive from oilcompanies under our FPSO service agreements. The majority of these paymentsconsist of defined day rates (consisting of a fixed facility fee and an indexedoperating fee) and tariff payments (based on oil or water production or gaslift volumes or a combination of those volumes) whose economic terms areestablished prior to the commencement of operations under the serviceagreement. These day rates and tariff payments contributedU.S.$253.3 million and U.S.$33.7 million, respectively, to our totalrevenues of U.S.$437.9 million in 2006. We believe that the mostsignificant factor affecting the amount of these payments during a givencontract period is the level of operating uptimes that our FPSOs maintain. Ourservice agreements currently require our FPSOs to maintain minimum operatinguptimes that exceed certain thresholds. Depending on the particular serviceagreement, our facility fee or our operating fee may be adjusted to the extentthat the relevant uptime exceeds or falls below the applicable threshold, andour tariff payments may be affected by consequential changes in oil or waterproduction or gas lift volumes. While our FPSOs generally have maintained highoperating uptimes in the past and, as a result, generally have not sufferedfrom a decrease in revenues associated with operational downtime, we receivedreduced day rates for a period of 24 non-consecutive days during the firstseven months of 2003 under our service agreement for the *Bleo Holm* as a result of downtimeassociated with repair and modification work that we were required to undertakedue to blockages as a result of the formation of calcium naphanate in thevessel’s topsides. On July 14, 2005 Talisman and Bluewater signed Heads ofTerms for replacing the FPSO agreement. As a consequence, the FPSO agreementhas been terminated as of November 30, 2005 and replaced by a charteragreement  Under the charter agreement,Talisman, in its role as operator of the Ross field, has taken over the role ofduty holder and is responsible for all of the operations onshore and offshore,including resourcing. Bluewater no longer provides onshore support. Under theheads of agreement Bluewater has agreed to pay the costs of outstandingmaintenance work with respect to pipework corrosion and calcium naphtanatemanagement that had not previously been carried out under the PFSO agreement.Under the terms of the existing Bare Boat Charter, Talisman is obligated tocontinue to make payments at pre-agreed rates until July 2012 unless theagreement is terminated earlier by Talisman. In 2006 we received reducedfacility fees and operating fees under our service agreement for the *Haewene Brim*due to necessary repair works on the swivelthat needed to be performed in a yard in Stavanger during September and October 2006.The vessel was removed from the field on September 3, 2006 and aftercompletion of the repair works the vessel resumed production on October 15,2006. See “Item 4: Information on the Company—(B) Business Overview—FPSOBusiness—FPSO Fleet, FPSO Hull and Trading Vessel”.

**Seasonality**

Some service providersoperating in harsh weather environments, such as the North Sea, are negativelyaffected in the first and fourth quarters by adverse weather conditions thatprevent or limit the full operation of their crews or vessels. Our FPSOs havebeen developed using high environmental and design standards that generallypermit them to fulfill their contractual uptime requirements even in harshweather conditions. We also do not believe that our SPM business is affected byseasonal factors.

**Oil Prices**

Historically, our serviceagreements have provided for the payment of defined day rates or minimumcontract payments and have included minimum contract periods that havesignificantly reduced the exposure of our FPSO business to fluctuations in oilprices. The most significant exposure of our FPSO business to developments inoil price generally has related to the impact that oil prices have on theproduction economics at the fields on which FPSOs operate. Because fluctuationsin oil prices may affect the decision of oil companies to tie-back marginalfields to existing production facilities or extend 

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productionat fields nearing the end of their production profiles and, if sufficientlysevere, may cause oil companies to alter production levels at producing fields,we have in certain instances been subject to potential risks relating to ourability to enter into new tie-back arrangements, to extend service agreementsand to generate revenue from tariff and bonus payments. However, due topositive developments in oil prices and other relevant factors, these risksgenerally have not had a material impact on our financial condition or resultsof operations or adversely affected our FPSO business. We believe that our SPMbusiness, which accounts for a relatively smaller proportion of our revenues,is generally more affected by fluctuations in oil price than our FPSO businessdue to the fact that SPM systems are generally developed for sale rather thanleased on a term basis. Because oil companies generally adjust their spendingon SPM systems based on trends in oil price, we would expect our SPM businessto grow in response to positive developments in oil price and to decrease in responseto negative developments in oil price. We believe that having a flexible andscalable workforce is an important factor in managing the costs associated withour more cyclical SPM business.

**Insurance Costs**

We maintain insurancecoverage in such amounts as we believe to be prudent against normal risks inour operations, including, among other things, the risk of pollution and damageto vessels. Certain risks (such as business interruptions and environmentalliabilities in excess of certain limits), however, are either not insurable orare insurable only at rates we consider uneconomical. The cost to obtain andmaintain insurance could increase or decrease in the future for any number ofreasons. Our insurance costs increased significantly following September 11,2001. While the increase in the price of insurance following the events of September 11,2001 has been recoverable in part under our service agreements with ourcustomers, we account for the cost of insurance as an expense in ourconsolidated financial statements and the payments that we receive in respectof such expenses as revenues. There is no assurance that we will continue tomaintain the same level of insurance coverage in the future or that we will beable to recover the cost of such coverage from our customers.

**Redeployment of the*Munin***

The contract with ConocoPhilips regarding the *Munin’s*engagement and production on the Xijiang field ended in March 2005. Afterdecommissioning at Xijiang, the *Munin*sailed under its own power from Hong Kong to the Lufeng II Field in June 2005for reconnection to the subsea buoy and mooring system. On June 9, 2005the *Munin* restarted producing oilfrom the Lufeng II Field.

**RefinancedCorporate Facility**

On June 29, 2006, theCompany refinanced its outstanding debt under the U.S.$600.0 million revolvingcredit facility with funds drawn under a U.S.$850.0 million syndicated securedreducing revolving credit facility (the “RCF”). The RCF has been used torefinance outstanding amounts under the existing U.S.$600.0 millionrevolving credit facility, to finance the construction of the FPSO *Aoka Mizu and* to purchase the *HanneKnutsen*, and it will be used to upgrade existing FPSOs and forgeneral corporate purposes. The costs incurred in arranging the corporatecredit facility have been capitalized as debt arrangement fees undernon-current assets and will be amortized over the term of the facility. Themargin, which is currently 0.60%, could increase to a maximum of 0.85%depending on, among other factors, the amount outstanding under the facility.The facility is primarily secured with mortgages over the FPSOs and assignmentsof incoming cash flows generated from contracts with clients concerning theFPSOs.

**Interest Expense**

Our financial income and expense is primarily affectedby our interest expense, which principally includes interest paid or accrued inrespect of our credit facility, our 101¤4% Senior Notesdue 2012, our 

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loan agreements enteredinto to finance the acquisition of the FPSO *Jotun A* and thesubordinated Marenco loan and amortization charges relating to debt arrangementfees and premiums, discounts and deferred gains and losses on the 101¤4% Senior Notes due 2012. Our interest expense does not include interest onfinancial debt relating to the construction or modification of FPSOs, which iscapitalized and added to the historical cost of the FPSO to which it relates.Cash interest paid is defined as interest expense, plus capitalized interest,less accrued interest on the subordinated Marenco loans, less amortization ofdebt arrangement fees and less theineffective portion of hedges recognized in earnings. Our interestexpense has increased since 2002 due to an increase in the amount of ouroutstanding indebtedness. This increase resulted from the incurrence ofapproximately U.S.$285.0 million of additional indebtedness in connectionwith our acquisitions of the *Haewene Brim*,the *Munin* and their relatedoperating companies, the incurrence of approximately U.S.$318.2 million ofadditional indebtedness in connection with the loan agreements entered into tofinance the acquisition of the FPSO *Jotun A* and theincurrence of approximately U.S.$131.5 million of additional indebtedness inconnection with the acquisition of the *Hanne Knutsen.*Inaddition, interest expense has increased due to an increase in the weightedaverage interest rate payable in respect of our indebtedness (which resultedfrom the issuance of our 101¤4%Senior Notes due 2012 at a relatively higher interest rate and from an increasein amortization of debt arrangement fees). This increase does not include ourcapitalized interest expense, which, in 2004, related to modifications to the *Munin* and amounted toU.S.$0.4 million, in 2005 was nil and in 2006, related to theconversion of the *Aoka Mizu* and amounted toU.S.$6.5 million.

To limit its interest exposure after July 3, 2006on the long-term bank loan entered into on July 1, 2005 for financing ofthe acquisition of the 55% ownership interest in PR Jotun DA, the Company purchasedan interest rate cap. This interest rate cap has a strike rate of 4.4%,limiting the maximum interest costs including margin to 5%. The interest ratecap has a starting notional amount of U.S.$143.9 million and the reductionschedule of the notional amount of the cap is aligned with the repaymentschedule of the loan.

On August 10, 2006 and August 11, 2006, theCompany purchased interest rate caps to limit its interest rate exposure onU.S.$300 million of the total outstanding amount under its corporatecredit facility. These interest rate caps have a strike rate of 6.5%, limitingthe maximum interest costs on that principal amount to 6.5% excluding margin.The interest rate caps have fixed notional amounts of U.S.$200.0 million,U.S.$50.0 million and U.S.$50.0 million and are aligned with thematurity of the refinanced corporate facility.

To reduce the interest expense relating to the 101¤4%Senior Notes due 2012, the Company entered into a fixed-to-floating interestrate swap transaction, with effect from April 25, 2003, that enabled theCompany to swap the equivalent of the fixed rate amount of interest that ispayable on U.S.$335.0 million aggregate principal amount of the 101¤4% Senior Notesdue 2012 for the floating rate amount of interest that would be payable on anequal amount of indebtedness. On May 27, 2003, the Company cancelled theswap transaction. Under the swap, prior to the cancellation, the Companyreceived interest payments that were calculated at a fixed rate of 101¤4%and made interest payments that were calculated at a floating rate that wasequal to a margin over LIBOR. The Company received U.S.$6.7 million on May 30,2003, which represented its net gain from the cancellation of the swaptransaction. The Company deferred this gain, which will be credited to incomeover the remaining duration of the 101¤4%Senior Notes due 2012, and used this payment to repay outstanding indebtednessunder its corporate credit facility.

As of July 17, 2003, the Company entered into afixed-to-floating interest rate swap transaction, with terms identical to thoseof the previous swap transaction, that enabled the Company to swap theequivalents of the fixed rate amount of interest that is payable on U.S.$335.0million aggregate principal amount of the 101¤4% Senior Notesdue 2012 for a floating rate amount of interest that would be payable on anequal amount of indebtedness. Under the swap, the Company received paymentsthat were 

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calculated at a fixed rateof 101¤4%and made interest payments that were calculated at a floating rate that wasequal to a margin of 6.32% over LIBOR. As of February 15, 2005 the marginchanged to 6.44%.

On November 4, 2005 the Company partiallycancelled the fixed-to-floating interest rate swap transaction in relation tothe U.S.$335.0 million aggregate principal amount of the 101¤4%Senior Notes due 2012 for the period from August 15, 2005 to August 15,2007. Due to the partial cancellation of the swap transaction, the Company wouldincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. The Company paid U.S.$6.9 million on November 4,2005 which represented its net cost from the partial cancellation of the swaptransaction. The Company has deferred this cost which will be debited to thestatement of income over the remaining duration of the 101¤4% Senior Notesdue 2012.

On April 21, 2006,the Company cancelled the remainder of the fixed-to-floating interest rate swaptransaction in relation to the U.S.$335.0 million aggregate principle amount ofthe 101¤4%Senior Notes due 2012, which was already partially cancelled for the periodfrom August 15, 2005 to August 15, 2007. The Company paidU.S.$23.8 million on May 3, 2006, which represented its net cost fromthe cancellation of the swap transaction. The Company has deferred this costwhich will be debited to the statement of income over the remaining duration ofthe 101¤4%Senior Notes due 2012. The 101¤4%Senior Notes due 2012 will continue at an interest percentage of 10.25%.

**Purchase of FPSO *Jotun A***

Bluewater (Dyphavet) B.V., a subsidiary of theCompany, and Norwegian company Standard Marine Nordsjo AS (“SMNAS”), anaffiliate of Exxon Mobil Corporation, have formed a partnership (PR JotunDA),which purchased FPSO *Jotun A* fromNorwegian  Jotun field  partners Exxon Mobil Exploration andProduction Norway AS, Enterprise Oil Norge AS Lundin Norway AS and Petoro AS.The Company holds 55% ownership in FPSO, with SMNAS holding the remaining 45%.

After its acquisition the FPSO has been leased backunder a bareboat charter to the Jotun field partners for a minimum term of fiveyears, with extension options up to 15 years. On termination of the leasecontract, SMNAS has both a call and a put option to either purchase the Company’sshare in the partnership or to sell its own share in the partnership to theCompany at a predetermined price. The bareboat charter is expected to continuefor the remaining life of the Jotun field. ExxonMobil will continue to operatethe FPSO.

In accordance with theprovisions of FIN 46R, the Company fully consolidates PR Jotun DA and records a45% minority interest. The Company has incurred an additional debt ofU.S.$318.2 million for the acquisition of PR Jotun DA.

**Purchase of the *Hanne Knutsen***

On February 9, 2006,the Company entered into an agreement to purchase the shuttle tanker MT ”HanneKnutsen” for the amount of U.S.$131.5 million. The vessel was built in Spain atAstilleros de Sestau and was delivered to Knutsen OAS in 2000. It has been designedas a typical North Sea tanker and has since been trading in the Baltic iceregions as well as providing services as a shuttle tanker. The “Hanne Knutsen”was specifically chosen for its overall design qualities and its suitabilityfor future FPSO conversion projects. Delivery and payment of the shuttle tankeroccurred on June 29, 2006. Since then the Company has agreed to bareboatcharter the vessel back to the previous owner for a period of eleven months inanticipation of a new FPSO project.

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**Conversion of the *Aoka Mizu***

On March 31, 2006 weentered into a service agreement with Nexen with respect to the provision andoperation of a FPSO for production on the Ettrick field on the UK continentalshelf starting 2008. For this project our existing hull *Aoka Mizu*is currently being converted into a FPSO*.*Under theagreement with Nexen, we will receive a fixed daily hire rate of U.S.$112,500per day plus a production tariff per barrel of oil produced. Nexen has agreedto pay us a minimum tariff based on 27 million barrels of oil producedduring the five year contract term. Nexen will reimburse all operating costs inaddition to a profit mark-up.

**Critical AccountingPolicies and Estimates**

The discussion andanalysis of our financial condition and results of operations is based upon ourconsolidated financial statements which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires ourmanagement to make estimates and assumptions that affect reported amounts ofassets and liabilities and disclosures concerning contingent assets andliabilities as of the date of the financial statements and that impact reportedamounts of revenues and expenses during the reporting period. Our managementevaluates, on an ongoing basis, its estimates and judgments, including thoserelated to bad debts, inventories, tangible fixed assets, pensions, incometaxes, contingencies and litigation. Our management bases these estimates andjudgments on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for judgments made about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Ourmanagement believes that the following accounting policies, among others, arethe most critical to understanding and evaluating our reported financial results.

***Revenue Recognition and Inventory***

Our revenues consist of the contract payments that wereceive under our FPSO service agreements and our SPM delivery contracts andthe payments that we earn from the installation and mobilization of FPSOs andSPM systems. We recognize these revenues in the following manner.

Our service and bareboat agreements are treated as “operatingleases” under U.S. GAAP and presented as such in our consolidated financialstatements. Under these agreements, we derive revenues from defined day rates,tariff payments, payments in respect of capital expenditures, payments for therental of additional equipment and, in certain cases, bonus payments. Our dayrates generally consist of a fixed facility fee (for the rental of the FPSO andassociated equipment) and an indexed operating fee (covering the cost ofoperating, maintaining and insuring the vessel) and may be adjusted dependingon the level of operating uptimes that we achieve. Our tariff payments arebased on oil or water production or gas lift volumes or a combination of thosevolumes. Our bonus payments generally relate to the prevailing price of oil. Werecognize revenues under our service agreements when the FPSO is made availableand the relevant contract payments are based on a signed lease contract. Rentalpayments that vary in amount over time are recognized as revenue on astraight-line basis. We monitor changes in consumer price indices, uptimelevels, production and lift volumes and oil prices on an ongoing basis and onlyinclude payments that depend on those factors in the determination of incomewhen the relevant index is adjusted, the level of uptime is achieved, thenecessary volume has been produced or lifted or the price of oil has changed.All other payments due under our service agreements are recognized on astraight-line basis over the term of the service agreement.

Under our SPM delivery contracts, we receive milestonepayments from our customers for the design, engineering and management servicesthat we provide during the progress of our SPM projects. We recognize revenuesfrom the development of SPM systems and auxiliary equipment based on thepercentage of completion method of accounting as the project is performed.Changes in project conditions 

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are recognized in theperiod in which the revisions are determined. Our management identifies andestimates losses relating to uncompleted contracts and makes necessaryprovisions, if any, in the period in which the losses are determined.Differences between the actual and estimated development of our work inprogress could materially impact the results of operations.

We recognize revenues fromthe installation and mobilization of FPSOs and SPM systems and from theprovision of other services when the installation, mobilization or provision ofservices has been accepted by the customer and the collection of the receivablerelating to the work is probable.

***Income Taxes Payable***

Our income tax charges are based on the tax regimesthat are applicable to our group companies in the countries in which they arelegally seated. We have historically benefited from low income taxes and webelieve that we will continue to benefit from a low level of income taxes infuture years, as a result of the large amount of goodwill and deductibleinterest reported by certain members of our group for Dutch tax purposes. In2002 and 2003 the Dutch tax authorities issued tax assessments with respect tocertain non-Dutch group members pertaining to the 1997, 1998, 1999 and 2000 taxyears, for a total amount of €137.9 million (U.S.$181.million), based on the position that these group companies, prior to and at thetime of the restructuring, were residents of the Netherlands for Dutch taxpurposes or had a taxable presence in the Netherlands. We filed a letter ofobjection to these assessments and engaged in further discussions with theDutch tax authorities, in response to which these assessments have been reducedto zero.

The Dutch tax authoritiesalso issued assessments with respect to one of the Dutch group companies inrespect of the years 1998 and 1999 based on their assertion that certaintransfer pricing adjustments were required. These assessments claimedadditional tax payments were required in an aggregate amount of €23.3million (U.S.$30.7 million). Based upon a letter of objection against theseassessments and subsequent discussions on this issue, the tax authorities haveissued decisions in February and March 2006 to eliminate theseadditional tax assessment amounts, thereby reducing the assessments to theamounts that are equal to amounts originally shown in the tax returns as filed.

***Deferred Income Taxes***

Deferred income taxes are temporary differencesbetween the tax bases of assets or liabilities and their reported amounts inour consolidated financial statements. Future tax benefits attributable tothese differences are recognized to the extent that realization of the benefitsis more likely than not. We recorded deferred income tax assets ofU.S.$0.6 million in 2004, U.S.$20.3 million in 2005 and U.S.$13.6 million in 2006 relating primarily to the amortization of goodwilland the deduction of interest on intercompany loans for income tax purposes.This goodwill and deductible interest is associated with our internalrestructuring. We are having ongoing discussions with the Dutch tax authoritiesand have started legal proceedings which will be heard before the lower taxcourt in Haarlem on April 25, 2007 concerning our ability to takeadvantage of the tax savings associated with it. See “—Income Taxes Payable”.In 2004, the deferred income tax was impacted by a change in the statutory taxrate in the Netherlands from 34.5% to 30.0%, which accordingly reduced theamount of tax credit available to offset against losses. Effective January 1,2007, the statutory tax rate in the Netherlands has decreased further, from30.0% to 25.5%, causing a decrease of the deferred tax assets of U.S.$22.2million. This decrease was offset by an increase of the total realizable losscarry forward of U.S.$140.3 million, resulting in a net deferred tax benefit ofU.S.$13.6 million.

Prior to and after the restructuring that took placein 2000 we have also had extensive discussions with the Dutch tax authoritiesconcerning the amount of goodwill and intercompany indebtedness at the level ofBluewater Holding B.V. pursuant to the restructuring transactions, and theamount of goodwill carried at one of the non-Dutch group companies at the dateit was redomiciled to the Netherlands as part of the 

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same restructuring. In2005 we received tax assessments for these two companies for the tax year 2000based on the tax authorities’ view that no goodwill should be attributed tothese companies and that, accordingly, the amount of intercompany debt andinterest expense at the level of Bluewater Holding B.V. should be reduced. Wehave filed letters of objection against these assessments and had subsequentdiscussions with the Dutch tax authorities. In February 2006, we receiveddecision letters from the Dutch tax authorities accepting some goodwill at thelevel of the redomiciled non-Dutch group company but no goodwill at the levelof Bluewater Holding B.V., and at the same time reducing its intercompany debtand related interest expense by a corresponding amount. On March 22, 2006we started legal proceedings to have the assessments reviewed. Our appeal will beheard before the lower tax court in Haarlem on April 25, 2007.

In February 2007, we received tax assessments forBluewater Holding B.V. with respect to the years 2001 and 2002, based on thesame tax authorities’ view as mentioned above. We have filed letters ofobjection against these assessments and expect that the tax authorities willdelay a decision on these until the litigation in respect of the year 2000 has beenresolved. As is permitted under Dutch law and regulations, we intend towithhold payment of amounts in respect of contested tax assessments pendingfinal resolution of the issue.

During 2006, it has become clear from the defensepapers filed by the tax authorities with the lower tax court of Haarlem thatthe tax authorities have focused in the current litigation on variouscomponents of the valuation method that was used in tax year 2000 to establishthe enterprise value at the time of the restructuring and hence the amount ofgoodwill that arose upon the restructuring. It appears unlikely that otherpreviously disputed matters, such as the amount of goodwill already present atthe Dutch group company level mentioned above at the time of the restructuring,will become subject to judicial review during the upcoming court hearing onApril 25, 2007. The valuation method that was used at the time of therestructuring is in accordance with authoritative literature on this subjectand is fully supported by independent valuation experts. The effectiveelimination of other previously disputed matters, and the support fromindependent experts for our position regarding the principal points ofdiscussion, has in our view significantly reduced the risk of a reduction ofthe total amount of goodwill and intercompany indebtedness at the level ofBluewater Holding B.V.

Based upon current facts and circumstances, applicabletax law, regulation and precedent, discussions with relevant tax authoritiesand professional advisers and other relevant criteria, we estimate that it iscurrently probable that we will realize benefits of at least U.S.$592 million ofamortizable goodwill and at least U.S.$1,041 million of interest bearingintercompany debt in connection with our internal restructuring and that suchamounts will result in tax losses which may be carried forward for Dutch incometax purposes, subject to the potential application of the thin cap rules thatcame into effect on January 1, 2004 and loss carry forward limitations willcome into effect for the Company on December 30, 2013. We have assessedthe valuation of these increased amounts of realizable benefits in accordancewith FAS 109 as disclosed in note 26.

We have analysed the future realization of theselosses carried forward, considering the Company’s history of earnings,projected earnings based on current contracts as well as future contracts, therevised tax rate, the non-deductible interest as a result of thin cap rules andthe maximum carry forward period of the tax losses. Based on this analysis, theCompany believes that it is more likely than not that an estimated amount oftax loss carry forwards resulting in a deferred tax asset of U.S.$122.2 millionwill be fully realized. We have therefore recorded a valuation allowance ofU.S.$4.8 million. Notwithstanding our current estimates, however, it isimpracticable to quantify definitively at this time the effect that the outcomeof such discussions may have on our actual tax position, because suchdefinitive quantification depends on a number of possible future events,including the specific factual findings and legal and regulatory positions thatmay be taken by the Dutch tax authorities in the current legal proceedings, aswell as the outcome of such proceedings.

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We also have tax losses carried forward in the UnitedKingdom due to operating losses incurred. Based on the history of earnings ofthe UK companies, we do not consider it more likely than not that these taxlosses and the deferred tax asset relating thereto will be realized and,accordingly we have accounted for a full valuation allowance amounting toU.S.$24 million.

As of January 1, 2004 Dutch tax law containsso-called thin-capitalization, or ‘thin cap’ rules that may operate torestrict the deductibility of interest on intercompany debt (including externaldebt that is guaranteed by an affiliated company). In order, among otherthings, to defer applicability of the Dutch thin cap rules until December 30,2004 and periods thereafter, the fiscal years of all Bluewater’s Dutch groupcompanies were changed, although no assurance can be given that this measurewill be effective to preclude applicability of the thin cap rules to suchcompanies as of January 1, 2004. As the disallowed portion of the interestdeduction depends significantly on the debt-equity ratio of the relevant entityat the beginning and the end of any financial year, it is clear that theoutcome of the dispute with the Dutch tax authorities concerning the relevantgoodwill amount (and the annual amortization amount resulting therefrom) andthe corresponding intercompany debt amount will have a significant impact onthe effect of the thin cap rules on Bluewater Holding B.V.

In December 2001, U.S.$379.5 million of theintercompany indebtedness of Bluewater Holding B.V. relating to the internalrestructuring was converted to share capital, thereby reducing the amount oftax benefits that we may take advantage of in subsequent periods. At the sametime this increased the equity amount for application of the thin cap rules asof 2004. In December 2006, a further amount of inter-company debt ofBluewater Holding B.V. relating to the internal restructuring was converted toshare capital. According to the terms of the agreement, the amount of this debtconversion will be determined based on the total debt and equity of BluewaterHolding B.V. as at December 31, 2006, but may be revised once the finalamount of goodwill and intercompany debt is established based on the outcome ofthe pending legal proceedings.

The outcome of thesediscussions and judicial proceedings, which may take a considerable period oftime, could limit our ability to take advantage of future tax savingsassociated with our internal restructuring by limiting the amount of goodwillthat we may amortize and the amount of interest that we may deduct for taxpurposes in future periods. In addition, the outcome of our dispute withrespect to thin cap rules may limit the amount of deductible interest forthe tax year 2004 and subsequent periods. While we believe that it is probablethat we will realize tax benefits in amounts that are not less than theforegoing estimates as set forth above and that it is unlikely that the outcomeof these discussions and the pending proceedings relating thereto will have amaterial adverse effect on our financial position, there can be no assurance inthis regard and we could lose some or all of the future anticipated tax savingsassociated with our internal restructuring.

***Tax Lease Benefits Liability***

On November 3, 2005 all tax lease structures thatwere in effect for FPSO *Uisge Gorm*,FPSO *Glas Dowr* and the topsidesof FPSO *Bleo Holm* and FPSO *Haewene Brim*were terminated. As a result of the termination, the Company regainedfull ownership of the FPSO *Uisge Gorm*,the FPSO *Glas Dowr* and thetopsides of FPSO *Bleo Holm* andFPSO *Haewene Brim.*In addition, the related tax leasebenefits liability has been released to other operating income and restricteddeposits were discharged and proceeds were used for repayment of the corporatecredit facility.

Our tax lease benefitsliability related to UK tax leasing transactions that we entered into from 1994to 1999 with respect to the *Uisge Gorm*, the*Glas Dowr* and the topsides of *Bleo Holm* and a tax lease that we signed in April 2003for the topsides of the *Haewene Brim*.These arrangements allowed the lessor to claim tax depreciation in respect ofits expenditure to acquire the vessel or the equipment, which is passed on to,or shared with, us in the form of reduced rentals. Our rental paymentobligations were calculated by 

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referenceto a number of tax and financial assumptions made at the time the leases wereentered into. Payment arrangements at the inception of the lease transactionswere structured, and security has been provided, such that, subject to theadjustments described under “Item 10: Additional Information—(C) MaterialContracts—Tax Lease Arrangements”, we did not have any rental paymentobligations with respect to the *Uisge Gorm*, the*Glas Dowr*, the topsides of the *Bleo Holm* or the topsides of the *Haewene Brim*.Our tax lease benefits liability represented the amount that we would berequired to pay the lessor in the event of a voluntary termination. In theevent of an involuntary termination or an adverse tax change under our taxlease arrangements (whether prospective or retrospective), the tax leasebenefits liability presented in our balance sheets could have been required tobe repaid to the lessor at an amount greater than the carrying value of theliability, which would have had a material adverse effect on our financialcondition and results of operations. The liability declined over time as thetax benefits were realized by the lessor. Periodically, the Company assessedthe likelihood of repayment of the voluntary early termination liability. Aslong as there was more than a remote possibility of early termination, theliability was recorded and was released to other operating income as theliability decreased over the lease term. Payments received from/made  to the lessor as a result of changes inunderlying variables such as market interest rates and corporate income taxwere accounted for in the statement of income as other operatingincome/expense. As per December 31, 2005, the tax lease benefits liabilitywas fully released.

***Tangible Fixed Assets and Depreciation***

Our FPSOs account forapproximately 63.6% of our total assets, are our primary sources of revenuesand, accordingly, represent our most material fixed assets. We account for thevalue of these assets at their construction or acquisition cost and depreciatethem on a straight-line basis over an estimated useful life of 15 years.An increase or decrease in the actual useful lives of our FPSOs over theirestimated useful lives could result in significantly higher or lower annualdepreciation expenses, which could have a material effect on our results ofoperations and shareholder’s equity. In addition, our ability to recover thebook value of our FPSOs depends, to a large extent, on our ability to enterinto profitable service agreements for the vessels. If we are unable to secureprofitable service agreements or if other circumstances arise indicating thatthe carrying amount an FPSO may not be recoverable, we may be required torecord an impairment loss, which could similarly affect our results ofoperations and shareholder’s equity. No circumstances arose in 2004, 2005 or2006 that indicated that our FPSOs could be impaired and, therefore, we did notrecord any impairment losses relating to our fleet. An extension of the usefullives of our FPSOs by one year would have resulted in a decrease indepreciation charges of approximately U.S.$8.0 million for 2006.

***Accounts Receivable***

Accounts receivables arestated at face value less an allowance for possible uncollectible accounts. Wecontinuously monitor collections and payments from our customers and maintain aprovision for estimated credit losses based upon our historical experience andany specific customer collection issues that we have identified. Because ouraccounts receivables are concentrated in a relatively small number ofcustomers, a significant change in the liquidity or financial position of thesecustomers could have a material adverse effect on the collectability of ouraccounts receivables and our results of operations. In 2006 and 2005, werecorded no provision relating to  creditlosses.

***NewAccounting Policies***

**SFAS 153**

In December 2004, theFASB issued Statement No. 153 (“SFAS 153”), “Exchanges of Non-monetaryAssets, an amendment of APB Opinion No. 29”. SFAS 153 eliminates theexception in Opinion No. 29 for non-monetary exchanges of similarproductive assets and replaces it with a general exception for exchanges 

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ofnon-monetary assets that lack commercial substance. The statement becameeffective on January 1, 2006. Adopting SFAS 153 did not have a materialimpact on the Company’s consolidated financial statements.

**SFAS 123R**

In December 2004, theFASB issued SFAS No. 123 (revised 2004) (“SFAS 123R”), concerningShare-Based Payment. SFAS 123R is a revision of Statement No. 123,“Accounting for Stock-Based Compensation”, which the Company adopted fordisclosure purposes in 2003. SFAS 123R supersedes APB Opinion No. 25,that allowed the use of the intrinsic value for measuring stock-basedcompensation expenses for stock issued to employees. SFAS 123R focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions. SFAS 123R containscertain changes compared with the original pronouncement. The provisions ofthis statement are effective for financial statements issued for fiscal yearsbeginning after January 1, 2006. The statement became effective on January 1,2006. Adopting SFAS 123R did not have a material impact on the Company’sconsolidated financial statements.

**SFAS 155**

In February 2006, theFASB issued Statement No. 155 (“SFAS 155”), “Accounting for Certain HybridFinancial Instruments”, an amendment of FASB Statements No. 133 and 140.SFAS 155 provides entities with relief from having to separately determine thefair value of an embedded derivative that would otherwise be required to bebifurcated from its host contract in accordance with Statement 133. Theprovisions of this statement will be effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The Company does not anticipate that theadoption of SFAS 155 will have a material impact on the Company’s consolidatedfinancial statements.

**SFAS 156**

In March 2006, theFASB issued Statement No. 156 (“SFAS 156”), “Accounting for Servicing ofFinancial Assets”, an amendment of FASB Statement No. 140. SFAS 156requires an entity to recognize a servicing asset or servicing liability eachtime it undertakes an obligation to service a financial asset by entering intoa servicing contract. The provision of this statement will be effective for allfinancial statements issued for fiscal years beginning after September 15,2006. The Company does not anticipate that the adoption of SFAS 156 will have amaterial impact on the Company’s consolidated financial statements.

**FIN 46(R)-6**

In April 2006, theFASB issued interpretation No. 46(R)-6. This interpretation addresseshow a company should determine the variability to be considered for variableinterest entities. FIN 46(R)-6 becomes effective on January 1, 2007.The Company does not expect that application of the interpretation will changethe conclusions of assessment of variable interest entities in previous periodsif a reconsideration event would occur that would require a reassessment underFIN 46(R).

**FIN 48**

In June 2006, theFASB issued interpretation No. 48 (“FIN 48”), “Accounting for Uncertaintyin Income Taxes”. This interpretation clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with FASB Statement No. 109. This interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and 

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measurementof a tax position taken or expected to be taken in a tax return. Thisinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. The Company is still in the process of determining the effects ofthis interpretation. The interpretation is effective for fiscal years beginningafter December 15, 2006.

**SFAS 157**

In September 2006,the FASB issued Statement No. 157 (“SFAS 157”), “Fair Value Measurements”.This statement defines fair value, clarifies various concepts used in fairvalue measurements, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007. The Company is still inthe process of reviewing possible impacts of this new standard.

**SFAS 158**

In September 2006,the FASB issued Statement No. 158 (“SFAS 158”), “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans”. This statementrequires an employer to recognize the funded status of a defined-benefitpension plan—measured as the difference between plan assets at fair value andthe defined-benefit pension obligation—in its balance sheet. The offset ofrecognizing the funded status is recorded in accumulated other comprehensiveincome (within stockholders’ equity). Actuarial gains or losses andprior-service costs or credits that arise during the period but are notrecognized as components of net periodic benefit cost pursuant to FASBStatement No. 87 or 106, are recognized as a component of othercomprehensive income, net of taxes. Amounts recognized in accumulated othercomprehensive income, including the gains or losses, prior service costs orcredits, and the transition obligation remaining from the initial applicationof FASB Statement No. 106, are adjusted as they are subsequently recognizedas components of net periodic benefit cost pursuant to the recognition andamortization provisions of those Statements. SFAS 158 will also requiremeasurement of defined-benefit plan assets and obligations as of the date ofthe employer’s fiscal year-end balance sheet. Because the Company does not havepublicly traded equity securities, the recognition and disclosure requirementsare effective for the Company for fiscal years ending after June 15, 2007.As described in note 21, as of December 31, 2006 the Company hasunrecognized actuarial losses of U.S.$810 that will be required to berecognized upon adoption of SFAS 158. The measurement date requirement iseffective for fiscal years ending after December 15, 2008.

**SAB 108**

In September 2006, theUS Securities and Exchange Commission issued SAB 108 “Considering the effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements”. SAB 108 requires a “dual approach” under which both therollover method and the iron curtain method must be used to quantify financialstatement misstatements. SAB 108 is effective for fiscal years ending after November 15,2006. The adoption of SAB 108 did not result in any restatements or additionaldisclosures.

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**Results of Operations**

| ** **                                                                   | ** ** | **For year ended December 31,** | ** ** | **Change** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                                   | ** ** | **2004**                                            | ** ** | **2005**   | ** ** | **2006** | ** ** | **2004-2005** | ** ** | **2005-2006** | ** ** |
| ** **                                                                   | ** ** | **(in U.S.$ thousands)**                  | ** ** | **(%)**    | ** ** |
| **Revenues**                                                                 |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 370,241                                             |       | 333,828    |       | 302,945 |   |   | (9.8 | ) |   |   | (9.3 | ) |   |
| SPM business                                                                 |       | 67,424                                              |       | 65,162     |       | 134,967 |   |   | (3.4 | ) |   |   | 107.1 |   |   |
| Total                                                                        |       | 437,665                                             |       | 398,990    |       | 437,912 |   |   | (8.8 | ) |   |   | 9.8 |   |   |
| **Operating  expenses**                                                      |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Operations  expenses:                                                        |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 247,409                                             |       | 156,285    |       | 120,120 |   |   | (36.8 | ) |   |   | (23.1 | ) |   |
| SPM business                                                                 |       | 66,664                                              |       | 99,312     |       | 126,675 |   |   | 49.0 |   |   |   | 27.6 |   |   |
| Total                                                                        |       | 314,073                                             |       | 255,597    |       | 246,795 |   |   | (18.6 | ) |   |   | (3.4 | ) |   |
| Selling, general  and administrative expenses                                |       | 9,754                                               |       | 11,310     |       | 13,047 |   |   | 16.0 |   |   |   | 15.4 |   |   |
| Other operating  income                                                      |       | (3,738                                              | )          | (30,702    | )          | — |   |   | 721.3 |   |   |   | — |   |   |
| Depreciation of  tangible fixed assets and amortization of intangible assets |       | 72,995                                              |       | 94,953     |       | 106,344 |   |   | 30.1 |   |   |   | 12.0 |   |   |
| Total operating  expenses                                                    |       | 393,084                                             |       | 331,158    |       | 366,186 |   |   | (15.8 | ) |   |   | 10.6 |   |   |
| **Operating  income**                                                        |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 45,339                                              |       | 103,730    |       | 65,312 |   |   | 128.8 |   |   |   | (37.0 | ) |   |
| SPM business                                                                 |       | (758                                                | )          | (35,898    | )          | 6,414 |   |   | 4,635.9 |   |   |   | 117.9 |   |   |
| Total                                                                        |       | 44,581                                              |       | 67,832     |       | 71,726 |   |   | 52.2 |   |   |   | 5.7 |   |   |
| **Financial  income and expense**                                            |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                              |       | 3,355                                               |       | 3,550      |       | 1,831 |   |   | 5.8 |   |   |   | (48.4 | ) |   |
| Interest expense                                                             |       | (44,940                                             | )          | (54,464    | )          | (79,065 | ) |   | 21.2 |   |   |   | 45.2 |   |   |
| Currency exchange  results                                                   |       | 2,924                                               |       | (14,873    | )          | 9,931 |   |   | (608.7 | ) |   |   | 166.8 |   |   |
| Total                                                                        |       | (38,661                                             | )          | (65,787    | )          | (67,303 | ) |   | 70.2 |   |   |   | 2.3 |   |   |
| Income before  taxes                                                         |       | 5,920                                               |       | 2,045      |       | 4,423 |   |   | (65.5 | ) |   |   | 116.3 |   |   |
| Income taxes                                                                 |       | (469                                                | )          | (16,421    | )          | (11,548 | ) |   | 3,401.3 |   |   |   | (29.7 | ) |   |
| Income after  income taxes                                                   |       | 6,389                                               |       | 18,466     |       | 15,971 |   |   | 189.0 |   |   |   | (13.5 | ) |   |
| Minority interest                                                            |       | —                                              |       | 5,163      |       | 10,550 |   |   | — |   |   |   | 104.3 |   |   |
| Net income                                                                   |       | 6,389                                               |       | 13,303     |       | 5,421 |   |   | 108.2 |   |   |   | (59.2 | ) |   |
| EBITDA(1):                                                                   |       |                                                |       |       |       |   |   |   |   |   |   |   |   |   |   |
| FPSO business                                                                |       | 118,279                                             |       | 198,632    |       | 171,594 |   |   | 67.9 |   |   |   | (13.6 | ) |   |
| SPM business                                                                 |       | (703                                                | )          | (35,847    | )          | 6,476 |   |   | (4,999.1 | ) |   |   | 118.1 |   |   |
| Total                                                                        |       | 117,576                                             |       | 162,785    |       | 178,070 |   |   | 38.5 |   |   |   | 9.4 |   |   |

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Note:

(1)          A reconciliation ofEBITDA to net income and net cash provided by operating activities is includedunder “Item 3: Key Information—(A) Selected Consolidated Financial Data—Notes”.

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**Year Ended December 31,2006 Compared with Year Ended December 31, 2005**

***Revenues***

Revenues were U.S.$437.9 million in 2006, up 9.8%from U.S.$399.0 million in 2005. Revenues from our FPSO business wereU.S.$302.9 million in 2006, down 9.3% from U.S.$338.0 million in2005. Revenues from our SPM business were U.S.$135.0 million in 2006, up107.1% from U.S.$65.2 million in 2005.

Revenues from our FPSO business decreased by U.S.$30.8million in 2006 compared to 2005 due to a number of factors. Revenues inrelation to the *Haewene Brim* decreased byU.S.$41.1 million. U.S.$33.7 million of this decrease was due to the close outof the water injection project in 2006, which therefore did not generate anyrevenues in 2006 and U.S.$8.5 million was due to lower facility income andlower operational income as a result of an unplanned shutdown to performnecessary repairs to the swivel, an essential part of the turret. Revenues inrelation to the *Bleo Holm* also decreased byU.S.$24.9 million because Talisman took over the role of operator in November 2005and is responsible for all of the operations onshore and offshore, includingresourcing. As a result, the Company no longer receives any operational income.Revenues in relation to the *Munin*decreasedby U.S.$9.9 million due to decreasing well production since the vesselrestarted producing oil from the Lufeng field on June 9, 2005 and revenuesrelated to the *Uisge Gorm*decreased by U.S.$0.9million. The resulting total decrease in revenues of U.S.$76.8 million waspartially offset by increased revenues of U.S.$45.9 million. Of this increaseU.S.$30.4 million was attributable to revenues in relation to FPSO *Jotun A,*which was acquired on July 1, 2005, U.S.$8.2million was attributable to bareboat charter income in relation to *Hanne Knutsen,*which was acquired on June 29, 2006, andU.S.$7.3 million was attributable to higher revenues in relation to the *Glas Dowr*and due to higher shuttle tanker revenues andhiger bunker charges.

Revenues from our SPMbusiness increased by U.S.$69.8 million in 2006. U.S.$21.5 million of thisincrease was attributable to the reimbursement by Nexen of additional costs onthe *Aoka Mizu* project caused by delaysduring contract negotiations and reimbursable change orders. These costs andthe reimbursement of such costs were excluded from other tangible fixed assetsand recorded in the income statement. The remaining U.S.$48.3 million of thisincrease is due to a higher level of SPM activities in 2006, compared with2005. This was mainly due to SPM delivery contracts for the development of buoymooring systems and turret mooring systems which were awarded late 2005 andearly 2006 and which are now generating revenues.

***Operations Expenses***

Operations expenses were U.S.$246.8 million in2006, down 3.4% from U.S.$255.6 million in 2005. In our FPSO business, ouroperations expenses were U.S.$120.1 million in 2006, down 23.1% fromU.S.$156.3 million in 2005. In our SPM business, operations expensesamounted to U.S.$126.7 million in 2006, up 27.6% fromU.S.$99.3 million in 2005.

Operations expenses of our FPSO business decreased byU.S.$36.2 million in 2006 compared to 2005. Of this decrease U.S.$24.5 isattributable to the close out of the water injection project on the *Haewene Brim*. Operations expenses in relation to the *Bleo Holm* decreased by U.S.$17.7 million because Talismantook over the role of operator in November 2005 and is responsible for allof the operations onshore and offshore, including resourcing. As a result, theCompany no longer incurs operational expenses. The operations expenses for the *Munin*  decreased byU.S.$1.7 million in 2006. In addition, FPSO tender costs and other FPSOrelated expenses decreased by U.S.$13.7 million. This total decrease ofU.S.$57.6 million in operations expenses was partially offset by an increase inoperations expenses of U.S.$21.4 million. Operations expenses in relation tothe *Glas Dowr* increased by U.S.$15.4million, mainly due to a provision for higher invoiced amounts that are stillunder negotiation with our client, higher shuttle tanker costs, higher bunkercharges and increased maintenance costs. Operations expenses in relation to the*Uisge Gorm* increased by U.S.$6.0 millionmainly due to higher maintenance and on-shore support costs.

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Operations expenses of ourSPM business increased by U.S.$27.4 million during 2006. This increase wasprimarily attributable to a higher level of SPM activities in 2006 comparedwith 2005. The higher level of SPM activities was mainly due to SPM deliverycontracts for the development of buoy mooring systems and turret mooringsystems which were awarded late 2005 and early 2006.

***Selling, General and Administrative Expenses***

Selling, general andadministrative expenses amounted to U.S.$13.0 million in 2006, up 15.4% fromU.S.$11.3 million in 2005. The increase of U.S.$1.7 million in selling,general and administrative expenses was attributable to an increase of U.S.$0.7 millionin the cost of administrative supporting personnel and an increase of U.S.$1.0million, related to general office and office related costs.

***Depreciation of Tangible Fixed Assets***

Charges for depreciationof tangible fixed assets amounted to U.S.$106.3 million in 2006, up 12.0%from U.S.$95.0 million in 2005. The increase of U.S.$11.3 million inthe amount of these charges resulted mainly from an increase in depreciationcharges that we recorded in respect of FPSO *Jotun A,*whichwas acquired on July 1, 2005 and depreciation of the shuttle tanker *Hanne Knutsen* which was delivered on June 29, 2006.

***Operating Expenses***

Due to the foregoingfactors, total operating expenses were U.S.$366.2 million in 2006, up10.6% from U.S.$331.2 million in 2005. Operating expenses in 2005 werelower due to the release of the tax lease benefits obligation of U.S.$30.7million.

***Operating Income***

Due to the foregoingfactors, operating income amounted to U.S.$71.7 million in 2006, up 5.7%from U.S.$67.8 million in 2005. Our operating margin decreased to 16.4% of ourrevenues in 2006, compared to 17.0% of our revenues in 2005.

***Financial Income and Expense***

Net financial expense amounted toU.S.$67.3 million in 2006, up 2.3% from U.S.$65.8 million in 2005.

Our interest expense increased fromU.S.$54.5 million in 2005 to U.S.$79.1 million in 2006. Of thisU.S.$24.6 million increase, U.S.$6.4 million  was attributable to the financing of thepurchase of FPSO *Jotun A*,**U.S.$6.7million was attributable to the write off of the fair value of the partiallycancelled bond swap and U.S.$11.5 million was attributable to the increasein interest expenses in relation to the purchase of the *HanneKnutsen*and loan drawdowns for general corporate use*.*

Interest income was U.S.$1.8 million in 2006,down 48.4% from U.S.$3.6 million in 2005. This decrease was due to the releaseof previously restricted deposits as a result of the cancellation of the taxleases in November 2005.

Currency exchange resultedin a gain of U.S.$9.9 million in 2006, compared with a loss ofU.S.$14.9 million in 2005. Of this U.S.$24.8 million increase, U.S.$16.8million was attributable to our sterling and euro foreign currency exchangecontracts on which we recognized a U.S.$7.7 million gain compared to aU.S.$9.1 million loss in 2005. The remaining U.S.$8.0 million of thisincrease was attributable to revaluation of the individual movements of thesterling and euro exchange rates. The movement of the U.S. dollar and the euroexchange rates from €/U.S.$1.3655 in 2004 to €/U.S.$1.1845in 2005 and from £/U.S.$1.9388 in 2004 to £/U.S.$1.7204 in 2005 resulted in aloss in 2005. This compared to 

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amovement of €/U.S.$ from €/U.S.$1.1845 in 2005 to €/U.S.$1.3186in 2006 and from £/U.S.$1.7204 in 2005 to £/U.S.$1.9660 in 2006, which resultedin a gain in 2006.

***Income before Taxes***

Due to the foregoingfactors, income before taxes was U.S.$4.4 million in 2006, up 116.3% fromU.S.$2.0 million in 2005. As a percentage of revenues, our income beforetaxes increased from 0.5% in 2005 to 1.01% in 2006.

***Income Taxes and Net Income***

We recordedU.S.$11.5 million of income tax credits in 2006, down 29.7% fromU.S.$16.4 million in 2005. These income tax credits consisted of currenttax charges of U.S.$2.0 million in 2006, down 41.2% fromU.S.$3.4 million in 2005, and deferred tax credits ofU.S.$13.6 million in 2006, down 31.3% from U.S.$19.8 million in 2005.The decrease in the deferred tax credit in 2006 was due to a decrease of thecorporate income tax rate from 30% to 25.5% which was offset by an increase ofthe available tax credits carried forward. The deferred tax credits primarilyresulted from the increase of tax loss carry-forwards which resulted fromour internal restructuring. After taking into account income tax credits andminority interest, net loss amounted to U.S.$5.4 million in 2006, down59.2% from net income of U.S.$13.3 million in 2005.

**Year Ended December 31,2005 Compared with Year Ended December 31, 2004**

***Revenues***

Revenues were U.S.$399.0 million in 2005, down8.8% from U.S.$437.7 million in 2004. Revenues from our FPSO business wereU.S.$333.8 million in 2005, down 9.8% from U.S.$370.2 million in2004. Revenues from our SPM business were U.S.$65.2 million in 2005, down3.4% from U.S.$67.4 million in 2004.

Revenues from our FPSO business decreased byU.S.$36.4 million in 2005. The payments received in relation to thereimbursement of expenses incurred in connection with the installation of a newwater injection facility on the *Haewene Brim*decreased by U.S.$77.8 million during 2005 compared with 2004 because thewater injection facility has been installed in October 2004 and we arecurrently in the close out phase of the project. The payments received underour service agreement with PetroSA for the reimbursable expenses incurred inconnection with the installation of subsea equipment on the Sable Field during2005 decreased by U.S.$2.9 million compared with 2004 because the work has beenfinalized during 2004 and the tariff income of the *Glas Dowr*decreasedby U.S.$1.9 million in 2005. This total decrease of U.S.$82.6 million waspartially offset by an increase in revenues of U.S.$46.2 million.U.S.$30.9 million was attributable to revenues in relation to FPSO *Jotun A*, U.S.$12.5 million was attributable toincreased revenues as a result of redeployment of the *Munin* to the Xijiang Field, U.S.$0.9million was attributable to increased operational fees of the *Haewene Brim* and U.S.$1.9 million was attributable toan extension of the contract for three years with Amerada Hess for the *Uisge Gorm* where the Company receives anoperational fee in GBP and a U.S.$. tariff per barrel produced as of January 1,2005.

Revenuesfrom our SPM business decreased by U.S.$2.2 million in 2005,primarily attributable to a lower level of revenues associated with the *Haewene Brim*regarding the installation of a new waterinjection facility on the *Haewene Brim*which resulted in a decrease of revenues ofU.S.$15.7 million in 2005. Thisdecrease was partially offset by  U.S.$13.5 million due to a higherlevel of SPM activities in 2005. The higher level of SPM activities was mainlydue to SPM delivery contracts for the development of buoy mooring systemsduring 2004 which were awarded late in the year and which will largely generaterevenues during 2005. We do not expect payments under the contracts to have amaterial effect on our results of operations in the future.

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***Operations Expenses***

Operations expenses were U.S.$255.6 million in2005, down 18.6% from U.S.$314.0 million in 2004. In our FPSO business,our operations expenses were U.S.$156.3 million in 2005, down 36.8% fromU.S.$247.4 million in 2004. In our SPM business, operations expensesamounted to U.S.$99.3 million in 2005, up 49.0% fromU.S.$66.7 million in 2004.

The U.S.$91.1 milliondecrease in the operations expenses of our FPSO business during 2005 wasprimarily attributable to a decrease of expenses incurred in connectionwith the installation of a new water injection facility on the *Haewene Brim* of U.S.$77.8 million. Inaddition costs in relation to our service agreement with PetroSA for thereimbursable expenses incurred in connection with the installation of subseaequipment on the Sable Field during 2005 decreased by U.S.$2.9 million comparedby 2004 because the work has been finalized during 2004, the commissioning andstart-up costs decreased with U.S.$4.0 million associated with our serviceagreement with PetroSA relating to the *GlasDowr* compared with 2004 and the operational expenses decreased byU.S.$2.5 million due to operational savings. In addition, effectively November 30,2005 Talisman took over the role as operator of the Ross Field for the*Bleo Holm*resulting in a decrease of U.S.$3.9 million operations expenses.

Operationsexpenses of our SPM business increased by U.S.$32.6 million during 2005.Of this increase, U.S.$13.5 million was attributable to a higher level of SPMactivities which was more than offset by the lower level of expenses incurredin connection with the installation of a new water injection facility on the *Haewene Brim*of U.S.$15.7 million in 2005 compared with 2004. Operationsexpenses increased by U.S.$17.0 million due to an accrual in relation to thetotal estimated costs the Company expects to incur based on the outcome of anarbitration case regarding the alleged failure of the Company to pay foradditional work and U.S.$5.1 million due to the costs of arbitrationproceedings. In addition, the operations expenses increased by U.S.$4.6 millionbecause higher general project costs, U.S.$4.0 million because of a provisionfor loss taken on one of our SPM projects during 2005 and U.S.$4.1 million inrelation to higher costs for tender activities in 2005.

***Selling, General and Administrative Expenses***

Selling,general and administrative expenses amounted to U.S.$11.3 million in 2005, up16.0% from U.S.$9.8 million in 2004. The increase ofU.S.$1.5 million in selling, general and administrative expenses during2005 was due to an increase of the costs of administrative supporting personnelof U.S.$0.9 million due to an increase in the number of personnel, an increase in advertising costs of U.S.$0.1million, an increase in rent of U.S.$0.1 million and an increase costs forprofessional services of U.S.$0.4 million.

***Depreciation of Tangible Fixed Assets***

Charges for depreciationof tangible fixed assets amounted to U.S.$95.0 million in 2005, up 30.1%from U.S.$73.0 million in 2004. The increase of U.S.$22.0 million inthe amount of these charges resulted primarily from a U.S.$12.1 millionincrease in depreciation charges that we recorded in respect of FPSO *Jotun A.*In addition, the depreciation charges relating toFPSO *Munin* increased by U.S.$3.2million as a result of capitalization of repair and lifetime extension workfollowing the redeployment of the *Munin*to the Xijiang Field and Lufeng reconnection in 2004. Other contributingfactors were higher depreciation charges of U.S.$3.2 million relating toFPSO *Haewene Brim* in connection with theinstallation of a new water injection facility (depreciation was temporarilysuspended during the period the vessel was of location in 2004), of U.S.$3.3million as a result of the accelerated depreciation of three solar turbines onthe *Bleo Holm*because Talisman took over therole as operator of the Ross Field meaning that the turbines will be operatedby our client and of U.S.$0.2 million as a result of the purchase of newequipment on board of the *Uisge Gorm*.

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***Operating Expenses***

Due to the foregoingfactors, total operating expenses were U.S.$331.2 million in 2005, down15.8% from U.S.$393.1 million in 2004.

***Operating Income***

Due to the foregoingfactors, operating income amounted to U.S.$67.8 million in 2005, up 52.2%from U.S.$44.6 million in 2004. Our operating margin increased to 17.0% ofour revenues in 2005, compared to 10.2% of our revenues in 2004.

***Financial Income and Expense***

Net financial expense amounted toU.S.$65.8 million in 2005, up 70.2% from U.S.$38.7 million in 2004.

Ourinterest expense increased from U.S.$44.9 million in 2004 toU.S.$54.5 million in 2005. U.S.$7.3 million was attributableto the increase of our debt from U.S.$545.3 million in 2004 toU.S.$715.2 million in 2005 as a result of the financing of the purchase ofFPSO *Jotun A* and U.S.$2.3 million due to the increase in interest costs as aresult of a relatively higher interest rate. Interestincome was U.S.$3.6 million in 2005, up 5.9% from U.S.$3.4 million in2004, due to lower interest rates in 2004. Currency exchange results were a loss of U.S.$14.9 million in 2005,compared with a gain of U.S.$2.9 million in 2004. U.S.$6.3 millionof this decrease was attributable to our sterling and euro foreign currencyexchange contracts. In 2005, we recognized U.S.$4.8 million of loss onthese foreign currency exchange contracts compared to U.S.$1.5 milliongain in 2004. In addition, we recorded no revaluation result on the restricteddeposits do to their release in 2005, compared to U.S.$5.4 millionrevaluation gain in 2004. The movement of the U.S. dollar and the euro exchangerates from €/U.S.$1.3655in 2004 to 1.1845 in 2005 and €/U.S.$ from 1.9388 in 2004to 1.72041 in 2005 resulted in a loss in 2005, compared to a gain in 2004.

***Income before Taxes***

Due to the foregoingfactors, income before taxes was U.S.$2.0 million in 2005, down 65.5% fromU.S.$5.9 million in 2004. As a percentage of revenues, our income beforetaxes decreased from 1.4% in 2004 to 0.5% in 2005.

***Income Taxes and Net Income***

We recordedU.S.$16.4 million of income tax credits in 2005, up 3,180% from U.S.$0.5 million in 2004. These income tax credits consisted of current taxcharges of U.S.$3.4 million in 2005, up 2,400% from U.S.$1.0 millionin 2004, and deferred tax credits of U.S.$19.8 million in 2005, up 1,220%from U.S.$1.5 million in 2004. The decrease in the deferred tax credit in2004 was primarily attributable to a change in the statutory tax rate in theNetherlands from 34.5% to 30.0%, which accordingly reduced the amount of taxcredit available to offset against losses. The deferred tax credits primarilyresulted from the increase of tax loss carry-forwards which resulted fromour internal restructuring. After taking into account income tax credits andminority interest, net income amounted to U.S.$13.3 million in 2005, up108.2% from U.S.$6.4 million in 2004.

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**(B)**   Liquidityand Capital Resources

**Overview**

Our primary sources of liquidity are cash flowsgenerated from our operations and external debt. Our primary uses of cash areto fund working capital, to service indebtedness and to fund investments in newFPSOs. We believe that our working capital is sufficient to satisfy currentrequirements.

Thefollowing table sets forth selected information concerning our consolidatedcash flows during the periods indicated.

| ** **                                            | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | ** **                                 | ** ** | **(as restated)(2)** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(in U.S.$ thousands)**         | ** ** |
| Provided by  operations                               |       | 71,661                                     |       |   | 95,316 |   |   | 61,856 |   |
| (Used in)  investing activities                       |       | (18,744                                    | )          |   | (306,780 | ) |   | (233,590 | ) |
| Provided by (used  in) financing activities           |       | (40,282                                    | )          |   | 215,712 |   |   | 162,211 |   |
| Bank debt                                             |       | (40,282                                    | )          |   | 182,890 |   |   | 194,483 |   |
| Debt arrangement fees                                 |       | —                                     |       |   | (1,137 | ) |   | (6,538 | ) |
| Minority interest                                     |       | —                                     |       |   | 29,019 |   |   | — |   |
| Premium paid for interest rate cap.                   |       | —                                     |       |   | (1,462 | ) |   | (1,984 | ) |
| Payments for  fixed-to-floating interest rate swap(1) |       | —                                     |       |   | (6,898 | ) |   | (23,750 | ) |

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Notes:

(1)          Relatesto the following: a net loss of U.S.$6.9 million was realized in 2005 inconnection with the partially unwinding of a fixed-to-floating interest rateswap entered into on July 17, 2003 that is associated with our 101¤4%Senior Notes due 2012. The remainder of the swap was cancelled in 2006 whichresulted in a loss of U.S.$23.8 million. See “—(A) Factors AffectingResults of Operations—Interest Expense”.

(2)          Cash flows from operating and financingactivities for 2005 have been restated to reflect a reclassification of cashflows of U.S.$13,300 from cash flows from operating activities to cash flowsfrom financing activities, relating to the correction of an unintentional errorwith regards to recording the effect of the change in the fair value ofinterest rate swap and caps and the corresponding change in the fair value ofthe hedged debt. This reclassification in the statement of cash flows did nothave an impact on cash and cash equivalents, total cash flows, statementof operations or balance sheet as of and for the year ended December31, 2005. See note 34 to the Consolidated Financial Statements.

**Net Cash FlowProvided by Operations**

Net cash flow provided by operations consists ofoperating income earned from our service agreements and our SPM deliverycontracts, adjusted for investments in working capital and non-cash items suchas depreciation and amortization. Working capital is defined as our currentassets less our current liabilities. Net cash flow provided by operations wasU.S.$71.7 million in 2004, U.S.$95,316 million in 2005 (as restated)and U.S.$61.9 million in 2006. The decrease in net cash flow provided byoperations from 2005 to 2006 was U.S.$33.4 million. The changes in workingcapital resulted from movements in work in process, trade receivables, otherreceivables and other liabilities and accrued expenses. Work in process increased fromU.S.$15.2 million to U.S.$29.7 million because the level of our SPMbusiness activities was higher in 2006 compared to 2005. Trade receivablesincreased from U.S.$31.5 million to U.S.$43.5 million also due to the higherlevel of SPM activities. Other receivables increased fromU.S.$25.7 million to U.S.$45.0 million primarily because of a higheramount in VAT receivable and increased insurance claims to 

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bereceived. Other liabilities and accrued expenses decreased byU.S.$14.1 million due to an increase of unpaid investments.

The increase in net cashflow provided by operations from 2004 to 2005 was U.S.$23.7 million. Thechanges in working capital include movements in work in process, billings inexcess of cost and unrealized income, other receivables, other liabilities andaccrued expenses, accounts payable and prepaid expenses. The increase in netcash flow provided by operations from 2004 to 2005 was primarily attributableto an increase of the operating results which was partially offset by areduction of working capital. Work inprocess increased from U.S.$13.8 million to U.S.$15.2 million becausethe level of our SPM business activities was higher in 2005 compared to 2004.Billings in excess of cost increased from U.S.$8.5 million toU.S.$11.6 million because during 2005 there were more SPM projects for whichadvance billings were sent. Other receivables increased fromU.S.$24.9 million to U.S.$25.7 million primarily because of a higheramount in chargables to the client. Other liabilities and accrued expensesincreased by U.S.$23.0 million, primarily because of a provision inthe costs in relation to the alleged failure of the Company to pay foradditional work and the market to marketvalue of the foreign currency exchange contracts. Accounts payable decreased by U.S.$8.5 million mainly because ofdecreased project expenses relating to the water injection unit project of the *Haewene Brim*in 2005. In 2005, prepaid expenses decreased byU.S.$0.8 million, primarily due to a lower level of advance payments, ascompared to 2004, in connection with general office expenditures.

**Net Cash Flow (Usedin) Investing Activities**

Net cash flow (used in) investing activities dependsprimarily on the amount of capital expenditures that we make in connection withthe construction, modification or acquisition of FPSOs. Net cash flows (used in)investment activities totaled U.S.$(18.7) million in 2004, U.S.$(306.8) millionin 2005 and U.S.$(233.6) million in 2006.

The net cash outflow in2006 consisted primarily of U.S.$131.5 million in relation to the acquisitionof the *Hanne Knutsen*, a trading vessel whichwas delivered to Bluewater on June 29, 2006, and U.S.$86.5 of otherinvestments, mainly related to work performed in connection with the conversionof our existing hull *Aoka Mizu* into aFPSO. In addition, we invested U.S.$13.5 million to acquire an 11.1%ownership interest in Amni Oil and Gas Ltd. and provided a short term loan ofU.S.$2.0 million to a related party with a working interest in Nigerianoil producing license OPL229. The net cash outflow in 2005 consisted ofU.S.$381.8 million for the purchase of FPSO *Jotun A*,U.S.$2.2 million for work performed in connection with building two stockbuoys and U.S.$2.3 million for work performed in connection with the FPSOconversion of the *Aoka Mitzu*. Furthermore,U.S.$1.0 million related to equipment on the *Uisge Gorm*, U.S.$0.9 million to equipment on the *Munin,*U.S.$2.6 million to thepurchase of new solar turbines on the *Bleo Holm* andU.S.$0.7 million to expenditures on certain office equipment and U.S.$0.8million in OPL 229. In addition, we invested U.S.$2.0 million in theshares of Emerald Energy Resources Ltd. Furthermore, all tax lease structuresthat have been entered into for FPSO *UisgeGorm*, FPSO *Glas Dowr*and the topsides of FPSO *Bleo Holm*and FPSO *Haewene Brim* were terminated,**resulting in the discharge of the restricted deposits and receipt of a cash payment from thelessor.

**Net Cash FlowProvided by (Used in) Financing Activities**

The net cash flow provided by (used in) financingactivities is primarily driven by our borrowing activities. The net cash flowamounted to U.S.$(40.3) million in 2004, U.S.$215,712 million in 2005 (asrestated) and U.S.$162.2 million in 2006. Our net indebtedness typicallyincreases while we are modifying, developing or acquiring an FPSO, while ournet indebtedness tends to decrease if we are not engaged in those activities.

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In 2006, the net cash flow provided by financingactivities resulted primarily from borrowings under our new credit facility,which was offset by repayments of the former credit facility. A significantportion of the proceeds from our credit facility was used for the purchase ofthe *Hanne Knutsen* and for investment inrelation to work performed in connection with the conversion of our existinghull *Aoka Mizu* into an FPSO*.*In addition, we paid U.S.$23.8 million for thecancellation of the bond swap and U.S.$6.5 million for refinancing of thecorporate facility.

In 2005, the net cash usedin financing activities was primarily from borrowings for our fully consolidatedpartnership PR Jotun DA. In addition, the Company used financing activities forpaying debt arrangement fees and for partially canceling the fixed-to-floatinginterest rate swap transaction in relation to the U.S.$335.0 million aggregateprincipal amount of the 101¤4% Senior Notesdue 2012 for the period from August 15, 2005 to August 15, 2007.

**FinancingArrangements**

As of December 31,2006, we did not have any short-term bank debt under working capital facilitiesor our credit facility. We had total long-term bank debt of U.S.$363.4 millionincurred under our credit facility, bank debt of U.S.$239.4 million (includingthe short term portion) in relation of the purchase of the FPSO *Jotun A* and cash and cash equivalents ofU.S.$42.5 million. We also had U.S.$335.0 million aggregate principalamount of 101¤4%Senior Notes due 2012 outstanding and U.S.$153.8 million of indebtednessoutstanding under the subordinated Marenco loan.

***Credit Facility***

On June 29, 2006, the Company refinanced itsoutstanding debt under its U.S.$600.0 million revolving credit facility withfunds drawn under a U.S.$850.0 million syndicated secured reducing RCF. The RCFhas been used to refinance outstanding amounts under the existing U.S.$600.0million revolving credit facility, to finance the construction of the FPSO *Aoka Mizu*, to purchase the *HanneKnutsen*, and it will be used to upgrade existing FPSOs and forgeneral corporate purposes. The costs incurred in arranging the corporatecredit facility have been capitalized as debt arrangement fees undernon-current assets and will be amortized over the term of the facility. Themargin, which is currently 0.60%, could increase to a maximum of 0.85%depending on, among other factors, the amount outstanding under the facility.As of December 31, 2006 the interest rate on the corporate creditfacility including margin was approximately 5.95%. A description of theprincipal terms of the credit facility, including restrictions on theincurrence of indebtedness and other financial covenants, is included under “Item10: Additional Information—(C) Material Contracts—Credit Facility”.

Thefollowing table presents certain information regarding the expectedavailability of funding under our credit facility in its current form duringthe periods indicated.

| ** **     | ** ** | **Year ending December 31,** | ** ** |
|----------------|------------|---------------------------------------------|------------|
| ** **     | ** ** | **2007**                                    | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| ** **     | ** ** | **(in U.S.$ millions)**           | ** ** |
| Facility limit |       |                                        | 850        |   |   |   | 764 |   |   |   | 593 |   |   |   | 421 |   |   |   | 421 |   |   |
|                |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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Note:

As of December 31, 2006 the maximum availableamount based on our current FPSO fleet excluding FPSO *Jotun was*U.S.$822.0million, being 66.7% of the aggregate fair market at December 31, 2006. U.S.$363.4has been drawn down on the facility and therefore the remaining borrowingcapacity under the RCF is U.S.$458.6 million as of December 31, 2006.

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***Other Financing Arrangements***

In addition to thecredit facility described above, we also have entered into the followingfinancing arrangements.

·       **Long-term loan.** On July 1, 2005, the Company enteredinto a U.S.$175.0 million loan agreement to finance the acquisition of a 55%ownership interest in PR Jotun DA. The loan will amortize to zero over a periodof six years and a quarter, by September 2011. Interest equals 0.60% overLIBOR. The non-recourse loan is secured with a mortgage over the FPSO and anassignment of the bareboat charter contract with the Jotun field partners tothe lenders.

On July 1, 2005, PRJotun DA entered into a U.S.$143.2 million loan agreement with Standard MarineNordsjo AS (“SMNAS”) to finance the acquisition of the FPSO *Jotun A*. The loan will amortize to zero over a period of sixyears and a quarter, by September 2011. Interest equals 5%.

·       **10****1****¤****4%Senior Notes due 2012.**In February 2002, we issuedU.S.$260.0 million aggregate principal amount of 101¤4% SeniorNotes due 2012 through our finance subsidiary, Bluewater Finance Limited, at aprice of 98.47% of the principal amount thereof. We used the gross proceedsfrom the issuance to repay approximately U.S.$248.5 million ofindebtedness outstanding under our credit facility and to pay approximatelyU.S.$7.5 million of costs relating to the issuance. In April 2003, weissued an additional U.S.$75.0 million aggregate principal amount of 101¤4% SeniorNotes due 2012 through our finance subsidiary, Bluewater Finance Limited, at aprice of 100.5% of the aggregate principal amount thereof plus accrued interestfrom and including February 15, 2003 to but excluding the issue date. Weused approximately U.S.$75.4 million of the gross proceeds from theissuance, excluding the accrued interest from and including February 15,2003 to but excluding the issue date, to repay approximatelyU.S.$73.4 million of indebtedness outstanding under our credit facilityand to pay an estimated U.S.$2.0 million of costs relating to theissuance. The 101¤4% Senior Notes due 2012 have been fully andunconditionally guaranteed, on a joint and several basis, by our other groupcompanies. A description of the principal terms of the 101¤4% SeniorNotes due 2012, including financial covenants and change of control provisions,is included under “Item 10: Additional Information—(C) Material Contracts—101¤4% SeniorNotes due 2012, Indenture and Associated Swap”.

·       **Subordinated Marenco Loan.**We haveborrowings outstanding under a loan from Marenco Investments Limited, our affiliate,that is fully subordinated to both our credit facility and the guarantees ofour 101¤4% SeniorNotes due 2012. As of December 31, 2006, the total amount of this loan(including accrued interest) was U.S.$153.8 million. Interest is payableat a rate of 7.0% per annum; however, cash interest payments on the loan can bemade only in accordance with the provisions of our credit facility and therestricted payment provisions of the indenture for our 101¤4% SeniorNotes due 2012. In 2006, we accrued approximately U.S.$10.3 million, andwe repaid U.S.$3.5 million of interest on the loan. A description of theprincipal terms of the Subordinated Marenco Loan, including limitations oninterest payments, is included under “Item 10: Additional Information—(C) MaterialContracts—Subordinated Marenco Loan”.

·       **Guarantee Facilities.**We are party to a U.S.$10.0 millionguarantee facility with Lloyds TSB, a U.S.$20.0 million performanceguarantee facility with ABN-AMRO Bank, a €20.0 million(U.S.$26.4 million) performance guarantee facility with Nationale Borg anda U.S.$20 million guarantee facility with ING. The facilities enable us to givebank guarantees to our suppliers. As of December 31, 2006, we hadU.S.$46.2 million of obligations guaranteed under these facilities.

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**Capital Expenditures**

Fromtime to time, we are required to make capital expenditures in respect of ourFPSOs and our SPM development projects. In 2004 our capital expendituresrelated primarily to modifications that we made to the *Munin* in connection with its redeploymentto the Xijiang Field in the South China Sea. The investment during 2005consisted primarily of work performed in connection with building two stockbuoy’s, work performed in connection with the *Aoka Mizu*  FPSO conversion project and capital equipmenton the *Uisge Gorm, Munin and Bleo Holm*.During 2006, our capital expenditures consisted primarily of payments inrelation to the purchase of the *Hanne Knutsen*,a trading vessel which has been delivered to Bluewater on June 29, 2006,work performed in connection with the conversion of our existing hull *Aoka Mizu* into an FPSO and work performed in connection withthree stock buoys.

Our future capitalexpenditures will depend primarily on the projects that we undertake.

**(C)**        Researchand Development, Patents andLicences

We have focused ourresearch and development activities on technology that is integral to our FPSOand SPM businesses. We have an in-house design and engineering team consistingof engineers trained in a number of disciplines. We also access new sources ofinformation or technology by entering into strategic alliances with equipmentmanufacturers, oil and gas companies, universities or by participating in jointindustry programs. While the market for our products and services is subject tocontinual technological changes, development cycles from initial conceptionthrough introduction can extend over several years. Our efforts have resultedin the development of a number of inventions, new processes and techniques,many of which have been incorporated as improvements to our product lines. Ourresearch and development activity has led to a number of patents or patentapplications, principally in the area of SPM systems. See “Item 4: Informationon the Company—(B) Business Overview—Intellectual Property”. During 2004,2005, and 2006, our research and development expenditures wereU.S.$0.5 million, U.S.$0.6 million, and U.S.$0.7 million,respectively. We expect to expend a similar amount on research and developmentin future periods.

**(D)**       TrendInformation

**During2006, sustained high oil price levels provided for an increased level of newprojects coming to the market. The increased level of project activity hasresulted in upward pressure on prices of labour, material and equipment. TheCompany expects that the above trends will persist during 2007. At the end of2006, the order book consisted of one new FPSO lease and operating contract and25 SPM projects. The total value of the order book wasU.S.$335 million in FPSO lease and operating contracts andU.S.$146 million of SPM contracts.**

**(E) Off-balance Sheet Arrangements**

We are not a party to anymaterial off-balance sheet financial arrangements.

**(F)**         TabularDisclosure of Contractual Obligations

Thefollowing table presents the scheduled maturities of our contractualobligations, including estimated interest expenses, assuming that any availablerollover provisions were inapplicable, as of December 31, 2006.

|                                | ** ** | **Total**                                                                 | ** ** | **<1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **>5 years** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|--------------------|------------|----------------------|------------|
| ** **                     | ** ** | **Payments due by Period  (in U.S.$ thousands)** | ** ** |
| Long-term  debt obligations    |       | 1,277,728                                                                 |       | 117,757             |       | 228,432            |       | 312,497            |       | 619,042              |       |
| Long-term  loan, related party |       | 264,297                                                                   |       | —              |       | —             |       | —             |       | 264,297              |       |
| Operating lease  obligations   |       | 23,196                                                                    |       | 3,061               |       | 6,011              |       | 5,323              |       | 8,801                |       |
| Total                          |       | 1,565,221                                                                 |       | 120,818             |       | 234,443            |       | 317,820            |       | 892,140              |       |

 

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**ITEM 6:**               DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES

**(A)**          Directorsand Senior Management

Our business and generalaffairs are managed by the management boards of Aurelia Energy N.V. andBluewater Holding B.V. and the executive officers of Bluewater Energy ServicesB.V.

**Aurelia Energy N.V.**

Aurelia Energy N.V. is aholding company that invests in companies that are specialized service providersto and operators in the offshore oil industry. These investment activities aremanaged by Aurelia Energy N.V.’s management board, which is authorized torepresent the company. Aurelia Energy N.V.’s management board currentlyconsists of two managing directors, Fortis Intertrust (Curaçao) N.V. (formerlyIntertrust (Curacao) N.V.), which was elected to the management board on December 6,1993 by a vote of the sole shareholder of Aurelia Energy N.V. for an indefiniteterm, and Mr. John Collison, who was elected to the management board on December 29,2000 by a vote of the sole shareholder of Aurelia Energy N.V. for an indefiniteterm.

***United InternationalTrust N.V.***

United International TrustN.V. is a limited liability company established under the laws of theNetherlands Antilles that provides director nominee services on a fee basis forNetherlands Antilles companies. United International Trust N.V. and itspredecessors have served as a managing director of Aurelia Energy N.V. sincethe company was established in the Netherlands Antilles in 1993. UnitedInternational Trust N.V. currently also serves as a managing director of anumber of Aurelia Energy N.V.’s subsidiaries and affiliates, and it providessimilar services on a fee basis for a number of other companies. Mr. G. E.Elias, Managing Director, and Ms. V.M.G. Haseth-Portillo asAttorney-in-Fact A are authorized to represent United International Trust N.V.in its capacity as the sole managing director of Aurelia Energy N.V.. UnitedInternational Trust N.V. was elected to the management board of Aurelia Energy N.V.on January 1, 2007 at the direction of Mr. Hugo Heerema who, at thetime of the election, was the beneficial owner of 100.0% of Aurelia Energy N.V.’soutstanding share capital. See “Item 7: Major Shareholder and Related PartyTransactions—(A) Major Shareholder”.

***John Collison***

Mr. Collison, 67, hasserved as a managing director of Aurelia Energy N.V. since December 29,2000. Mr. Collison is a qualified accountant and also serves as a directoron the board of directors of a number of Aurelia Energy N.V.’s subsidiaries. Mr. Collisonhas served as a financial director of a number of multi-nationalorganizations operating in the Middle East, including the A.W. Aujan Group, theAbdulla Fouad Group and the Algosaibi Group. Mr. Collison has over35 years of experience in the oil, gas and petrochemicals industry,serving in positions of financial management, control and direction.

**Bluewater HoldingB.V.**

Aurelia Energy N.V.’soperating activities are conducted exclusively through its operatingsubsidiaries in accordance with policies that are established by the managementboard of Bluewater Holding B.V. The general meeting of the shareholders ofBluewater Holding B.V. determines the size of the management board, appointsand dismisses the members of the management board and determines their compensationand benefits. Bluewater Holding B.V.’s management board currently consists ofone managing director, Mr. Hugo Heerema, who is authorized to representthe company. Mr. Heerema was elected to the management board on March 10,2000 by a vote of the sole shareholder of Bluewater Holding B.V. for anindefinite term.

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***Hugo Heerema***

Mr.                 Heerema, 54, is the sole managing director ofBluewater Holding B.V. and the founder of Aurelia Energy N.V. Mr. Heeremafounded Aurelia Energy N.V. in September 1993 in connection with hisacquisition of the “Bluewater” group of companies. Prior to this acquisition, Mr. Heeremawas employed by the Heerema Group, where he served as a commercial director. Mr. Heeremaholds an MBA from the University of Delft and has over 25 years ofexperience in the offshore industry. Mr. Heerema has acted as the managingdirector of Aurelia Energy N.V.’s various Dutch subsidiaries since 1993. He hasalso held several advisory positions and non-executive directorships inaffiliated companies. At the time of his appointment to the management board ofBluewater Holding B.V., Mr. Heerema was the beneficial owner of 100.0% ofAurelia Energy N.V.’s outstanding share capital. While he has since transferredthis shareholding to the Jacaranda Trust, the trustees of the Jacaranda Trustare prohibited from exercising their power in a manner that would result in Mr. Heeremabeing dismissed or replaced as Bluewater Holding B.V.’s sole managing directorwithout his prior written consent. See “Item 7: Major Shareholder andRelated Party Transactions—(A) Major Shareholder”.

**Bluewater EnergyServices B.V.**

The executive officers of Bluewater Energy ServicesB.V. are responsible for implementing the policies established by themanagement board of Bluewater Holding B.V. Under general powers of attorney,each executive officer having the title “Vice President” may individually bindBluewater Energy Services B.V. for legal acts up to an amount of €100,000.Two executive officers acting together may bind Bluewater Energy Services B.V.for legal acts up to an amount of €500,000. The executiveofficers serve in their positions pursuant to employment agreements enteredinto with Bluewater Energy Services B.V. and may be appointed and dismissed inaccordance with applicable employment law.

Thefollowing table presents certain information concerning the current executivesof Bluewater Energy Services B.V.

| Name                 | ** ** | ** **                                  | ** ** | **Current Office** | ** ** | **Date of Appointment** | ** ** |
|----------------------|------------|---------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| Michel Bonte         |       | Vice  President, Business Development       |       | May 14,  1996      |       |
| Jaap de Baan         |       | Vice  President, Technology and Development |       | September 1,  1993 |       |
| Jesse van de  Korput |       | Vice  President, Floating Productions       |       | November 1,  1998  |       |
| Kees Voormolen       |       | Vice  President, Finance and Administration |       | July 1,  2000      |       |
| Maarten van Aller    |       | Vice  President, Projects                   |       | November 10,  2003 |       |
| Rene Raaijmakers     |       | Vice President,  Proposals                  |       | October 1, 2005    |       |

 

***Michel Bonte***

Mr. Bonte, 57, servesas Vice President of Business Development. Mr. Bonte held managementpositions with the Heerema Group, Seaway Heavy Lifting and the Glenmore Groupprior to joining our company in 1996. He holds a civil engineering degree fromWeg en Waterbouw in Rotterdam and an MBA from the Instituut voorBedrijfsopleidingen in Zeist. He has over 30 years of experience in theoffshore sector.

***Jaap de Baan***

Mr. de Baan, 59,serves as Vice President of Technology and Development. Mr. de Baan joinedour company in 1978 and has over 30 years of experience in managing andsupervising of design and engineering of FPSOs and SPM systems. He holds amechanical engineering degree from Rotterdam Technical College.

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***Jesse van de Korput***

Mr. van de Korput,49, serves as Vice President of Floating Productions. He held managementpositions with Elf Petroland and Fluor Daniel prior to joining our company. Mr. vande Korput holds an engineering degree and a master’s degree in management fromthe Vrije Universiteit of Brussels and Boston. He has 15 years ofexperience in the offshore industry.

***Kees Voormolen***

Mr. Voormolen, 44,serves as Vice President of Finance and Administration. He held positions withRoyal Boskalis Westminster, Western Atlas Inc. and KLM Royal DutchAirlines prior to joining our company in 1999. Mr. Voormolen holds amasters degree in business economics from the Erasmus University of Rotterdamand has ten years of experience in the offshore industry. Mr. Voormolenalso has approximately 20 years of experience with structured financing,project financing and mergers and acquisitions.

***Maarten van Aller***

Mr. van Aller, 38, servesas Vice President of Projects. He held project management positions within theIHC Caland Group and sales positions within a shipping service company prior tojoining our company in 2001 as a Business Development Manager. Mr. vanAller holds a masters degree in civil engineering from the Delft University ofTechnology. Mr. van Aller has 13 years of experience in the offshoresector.

***René Raaijmakers***

Mr. Raaijmakers,38, serves as Vice President of Proposals. He joined Bluewater early1996 and held various positions within the Technology &Development and Business Development divisions and the last 2years as the Business Development Manager for BluewaterOffshore Production Systems (USA), Inc. in Houston. Mr. Raaijmakersholds a masters degree in civil engineering from the Delft University ofTechnology and has more than 11 years of experience in the offshoresector.

**(B)**         Compensation

Theaggregate compensation of our various managing directors and executive officersas a group was U.S.$1.8 million in 2006. In 2006, we set aside or accruedU.S.$0.3 million to provide pension, retirement or similar benefits.

**(C)**        BoardPractices

None of our managingdirectors or directors is a party to a contract providing for benefits upontermination of employment. We have not established an audit or remunerationcommittee.

**(D)**        Employees

We maintain a core staff of employees that may beallocated between our FPSO and SPM businesses depending on market conditionsand business needs. In addition to the permanent members of our staff that havetechnical qualifications, we employ highly skilled auxiliary workers on acontractual basis according to our specific needs and outsource the moregeneric, labor intensive tasks relating to the development of FPSOs and SPMsystems to subcontractors. We believe that this approach to staffing providesus with substantial flexibility that enables us to maintain our coreengineering capabilities while allowing us to scale our operations and manageour cost base in response to changes in market conditions and business needs.

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Thefollowing table presents the average number of workers that we employed on apermanent and on an auxiliary basis during the periods indicated.

|                      | ** ** | **Year ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Permanent  employees |       |                                       | 476        |   |   |   | 670 |   |   |   | 657 |   |   |
| Auxiliary  employees |       |                                       | 114        |   |   |   | 75 |   |   |   | 101 |   |   |
| Total employees      |       |                                       | 590        |   |   |   | 745 |   |   |   | 758 |   |   |

 

We have never experienceda material work stoppage by members of our staff and consider ourrelations with our employees to be good, although in certain instances we havebeen negatively affected by labor disputes at the facilities of certainsubcontractors to whom we have contracted work. A small number of our employeesare members of unions; however, we are not subject to any collective bargainingagreements. We do not currently have a works council in the Netherlands orelsewhere. However, we would form such a council if requested.

**(E)**         ShareOwnership

Mr. Heerema (withcertain members of his immediate family) is a beneficiary of the JacarandaTrust, which beneficially owns 100.0% of our outstanding common B shares and100.0% of our outstanding preference A shares. See “Item 7: Major Shareholderand Related Party Transactions—(A) Major Shareholder”. We currently do nothave any outstanding options entitling the holders thereof to acquire ourcommon B shares or our preference A shares, nor have we entered into anyarrangements for providing for the issuance of those shares to our employees,executive officers or managing directors through the granting of options orotherwise.

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**ITEM 7:**               MAJORSHAREHOLDER AND RELATED PARTY TRANSACTIONS

**(A)**         MajorShareholder

Aurelia Holding N.V. isthe registered shareholder of 136,000 of our common B shares and 34,000 of ourpreference A shares, representing 100.0% of our outstanding voting shares. On January 28,2003, Mr. Hugo Heerema, as the holder of 100.0% of the issued andoutstanding share capital of Aurelia Holding N.V., voted in an extraordinarygeneral meeting of shareholders of Aurelia Holding N.V. to dissolve andliquidate the company. The resolution is irrevocable and binding on allsubsequent shareholders. Due to the foregoing, upon the expiration of awinding-up period, the dissolution and liquidation of Aurelia Holding N.V. wascompleted and the shareholder or shareholders of Aurelia Holding N.V.immediately prior to the completion of the dissolution and liquidation becamethe direct owner or owners of 100.0% of our outstanding common B shares and 100.0%of our preference A shares.

On January 29, 2003, Mr. Heerematransferred by gift, and for no consideration, his shareholdings in AureliaHolding N.V. to Bailhache Labesse Trustees Limited and Mr. Graham Boxall,as trustees of the Jacaranda Trust. The Jacaranda Trust is an irrevocablediscretionary trust constituted under the laws of Jersey. Mr. Heerema andcertain members of his immediate family are the current beneficiaries of theJacaranda Trust. In connection with this transfer, the Jacaranda Trust becamethe beneficial owner of 136,000 of our common B shares and 34,000 of ourpreference A shares, representing 100.0% of our outstanding voting shares. Uponcompletion of the dissolution and liquidation of Aurelia Holding N.V., BailhacheLabesse Trustees Limited and Mr. Graham Boxall, as trustees of theJacaranda Trust, became the direct owner of these shares. While the transfer ofMr. Heerema’s shareholdings in Aurelia Holding N.V. resulted in a changeof control for the purposes of the U.S. securities laws, it did not result in a“Change of Control” under the indenture for our 101¤4% SeniorNotes due 2012.

The documentation relating to the transfer of Mr. Heerema’sshareholdings in Aurelia Holding N.V. and the settlement of the Jacaranda Trustincludes certain provisions affecting the potential for a future change ofcontrol for the purposes of the U.S. securities laws and the election ofmanaging directors that are generally responsible for setting policies andmanaging the general affairs and business of our operating subsidiaries. Inparticular, the documentation providing for the transfer to the Jacaranda Trustof Mr. Heerema’s shareholdings in Aurelia Holding N.V. will be revoked andannulled, and ownership of Aurelia Holding N.V., or, after the liquidation ofAurelia Holding N.V., ownership of us, will revert back to Mr. Heerema ifhis death occurs within certain periods of time and is subject to certainBelgian or Dutch tax consequences. In addition, while the documentationrelating to the settlement of the Jacaranda Trust generally provides itstrustees with discretion in determining the manner in which our outstandingshares may be voted, it prohibits them from exercising their powers in a mannerthat would result in Mr. Heerema being dismissed or replaced as the solemember of the management board of Bluewater Holding B.V. without his priorwritten consent. The management board of Bluewater Holding B.V. is generallyresponsible for setting the policies of our operating companies.

**(B)**        RelatedParty Transactions

**Marenco Loans**

We currently have indebtedness outstanding under asubordinated loan from Marenco Investments Limited, an unconsolidated affiliatethat is owned by our sole beneficial shareholder. Interest on the loan is fixedat a rate of 7.0% per annum; however, cash payments may only be paid in certaincircumstances. The largest amount of indebtedness outstanding under this loanduring the last three years was U.S.$153.8 million. This is the amount ofindebtedness that was outstanding as of December 31, 2006. MarencoInvestments Limited loaned these funds to us in a series of transactions toenable us to finance the construction and modification of FPSOs. In 2006, weaccrued approximately U.S.$10.3 million and repaid U.S.$3.5 millionof interest on the loan.

**(C)**        Interestsof Experts and Counsel

Not applicable.

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**ITEM 8:**   FINANCIALINFORMATION

**(A)**   ConsolidatedStatements and Other Financial information

**FinancialStatements**

Please refer to Item 18.

**Legal andArbitration Proceedings**

From time to time, the Company is subject to variousclaims arising out of the ordinary course of business.

On February 10, 2006 the London Court ofInternational Arbitration issued its decision regarding a claim against theCompany relating to the alleged failure of the Company to pay for additionalwork performed by a subcontractor, by which the Company was ordered to payU.S.$15.9 million to the subcontractor. On December 6, 2006 a final awardwas issued by the London Court of International Arbitration regarding somefurther issues that remained outstanding in connection with this dispute,including interest costs, legal costs and the treatment of exchange rates. Inthis final award, the Company was ordered to pay part of the legal costs, whichamounted to an estimated U.S.$3 million. All other issues have been dismissedin the Company’s favor.

At December 31, 2006, a significant claim existedagainst the Company involving aggregate damages of U.S.$16.0 million. Thisclaim relates to the alleged breach of a contract for the design of equipment.Since the outcome of this claim is uncertain the Company cannot estimate apossible loss or range of loss.

In addition, the Company is subject to proceedingsinitiated by certain of our competitors in the district court in The Hague inrespect of an alleged infringement of intellectual property rights. The claimsof these competitors failed during the injunctions proceedings before theDistrict Court as well as before the Court of Appeal. Plaintiffs continuedtheir claims by starting proceedings at the District Court in The Haguerequesting a judgment on the merits. In 2006 the Court nullified one of the twopatents relied upon by these competitors and rejected their claim related tothe nullified patent. The judgment of the District Court on the remaining partof the proceedings on the merits is expected in April 2007. With respectto the patents at stake, we have received advice from our patent agent that ourproduct design does not infringe upon any valid claim of the patents. We are,however, unable to estimate a possible loss or range of loss related to thisclaim.

While the ultimate result of all such matters is notpresently determinable, based upon current knowledge and facts, management doesnot expect that their resolution will have a material adverse effect on theCompany’s consolidated financial position or results of operation.

We are currently notengaged in any legal or arbitration proceeding in which any of our managingdirectors, directors, executive officers or affiliates is an adverse party orhas an interest that is materially adverse to us.

**Dividends andDividend Policy**

Under our articles ofincorporation, we may pay dividends from our net profit at the discretion of ageneral meeting of shareholders. Any declared dividends are paid first topreference A shareholders to the extent of their preference. The remainingdividends are paid to common B shareholders in proportion to the amount ofcommon B shares held by them. Unless the entire preferred dividend is declaredon our preference A shares over the fiscal year, a resolution to reserveprofits may be adopted only during a general meeting of shareholders, duringwhich all preference A shares must vote in favor of such a resolution. Ourmanagement board is authorized at any time to pay out interim dividends inprepayment of expected dividends. No dividend may be paid if any loss has beensustained during the year that cannot be 

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coveredby reserves or compensated in any other way. Notwithstanding the foregoing, ourability to pay dividends in respect of our preference A shares and our common Bshares is limited by the terms and conditions of certain of our financingarrangements, including the indenture relating to our outstanding 101¤4%Senior Notes due 2012 and our credit facility. Our dividend policy hashistorically been to add our net income to retained earnings rather than to payit out in the form of dividends. In the future, we may elect to pay dividendsto the extent that we are not involved in any significant projects and thepayment of such dividends is permitted by our financing arrangements.

**(B)**   SignificantChanges

There have not been anysignificant changes to our business or financial condition since December 31,2006.

**ITEM 9:**   THEOFFER AND LISTING

**(A)**   Offerand Listing Details

We are a privately heldcompany that is owned by a single beneficial shareholder and, accordingly,there is no established or liquid trading market for our preference A shares orour common B shares.

**(B)**   Planof Distribution

Not applicable.

**(C)**   Markets

Neither our outstandingpreference A shares nor our outstanding common B shares are listed on asecurities exchange or otherwise quoted. Our outstanding 101¤4%Senior Notes due 2012 are listed on the Luxembourg Stock Exchange and tradeunder the symbol “BLUWAT”.

**(D)**   SellingShareholders

Not applicable.

**(E)**   Dilution

Not applicable.

**(F)**   Expensesof the Issuer

Not applicable.

**ITEM 10:**   ADDITIONALINFORMATION

**(A)**   ShareCapital

Notapplicable.

**(B)**   Articlesof Incorporation

**Organization,Registration and Objectives**

We are a limitedliability company established under the laws of the Netherlands Antilles withour corporate seat in Curaçao, the Netherlands Antilles and registered with thetrade register of Curaçao with number 65489. Our articles of incorporationgovern our operations. We have no by-laws. Our objectives 

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statethat we are a holding company and participate in other corporations andenterprises. These objectives include:

·       investingin and alienating shares, bonds, funds and other securities;

·       borrowingmoney, issuing indebtedness, lending money and granting suretyships for ourobligations and obligations of third parties;

·       investingin, administering and developing real property;

·       trading,importing and exporting raw materials, minerals, organic materials, semi-finishedproducts and finished products; and

·       acquiring income from thedisposal or licensing of copyrights, patents, designs, secret processes orformulae, trademarks and similar interests and from royalties relating to theuse of industrial, commercial or scientific equipment, the exploitation ofmines, the rental of motion pictures and the rendering of technical assistance.

**Summary ofProvisions Relating to our Management Board and Managing Directors**

We are managed by a management board comprised of oneor more managing directors, who are appointed by an absolute majority ofshareholders during a general meeting of shareholders and who can at any timebe suspended or removed by the shareholders at an annual or special meeting.There are no age limits on acting as a managing director. The activities of themanagement board are governed by our articles of incorporation.

We are represented by one managing director in allmatters, including court matters, against third parties. In the case of aconflict of interest between ourselves and one or more managing directors, weshall be represented by another managing director, or in the absence of anothermanaging director, a person designated by the general meeting of shareholders.The general meeting of shareholders has the right at all times to designate aperson to represent us in the event of a conflict of interest. In the event ofan impediment or default by one or more of the managing directors, theremaining managing directors have all management powers vested in them. In thecase of an impediment or default by all managing directors, we shall be managedtemporarily by a person designated by a general meeting of the shareholders.Such a designated person is authorized only to act in matters that cannot bedelayed and has an obligation to immediately convene a general meeting toprovide for a definite management board.

Our management board isauthorized, without instructions from a general meeting of shareholders, torepresent and bind us when negotiating and entering into agreements, including,without limitation, entering into and executing and delivering such agreements,documents and instruments as shall be necessary or appropriate and consistentwith our corporate objectives. Our articles of incorporation do not contain anyrestrictions applicable to the managing directors in this respect.

**Description ofShare Capital: Rights, Restrictions and Preferences**

Our authorized share capital is U.S.$170,000, dividedinto 34,000 preference A shares and 136,000 common B shares, each with a parvalue U.S.$1,000 per share. Each share is entitled to one vote on all mattersduly presented to a general meeting of shareholders for adoption. Cumulativevoting is not permitted. Shares are issued by the management board and new sharesmay be issued from time to time by the management board, provided that theprice of any newly issued shares may not be below par. New shares shall beissued to existing shareholders, in proportion to the shares held by them atthe time. We may acquire fully-paid up shares for our own capital, providedthat at least 20% of our authorized share capital remains issued andoutstanding with other shareholders after any acquisitions. We may not vote ormake a claim on any shares held by us and any shares held by us may notparticipate in any profit or 

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liquidation balance.Neither our articles of incorporation nor Netherlands Antilles law provides forany right of the shareholders to have their shares redeemed.

Our net profit according to our duly adopted income statementmay be reserved or paid out as a dividend, at the discretion of a generalmeeting of shareholders. Insofar as the profit permits, any declared dividendswill be paid to preference A shareholders first to the extent for which thosepreference A shares have preference, over the amount paid up on the preferenceA shares. The remaining profit declared for dividends will be paid to common Bshareholders in proportion to the amount of common B shares held by them.Unless the entire preferred dividend has been declared on the preference Ashares over the fiscal year, a resolution to reserve profits can only beadopted by a general meeting of shareholders if for all issued preference Ashares votes have been cast in favor of such resolutions. The management boardis authorized at any time to pay out interim dividends in prepayment on thedividends expected. No dividends may be paid according to our profit and lossaccount if any loss has been sustained during the year that cannot be coveredby the reserves or compensated for in any other way.

Under our articles ofincorporation, resolutions for our dissolution may only be passed at a generalmeeting of shareholders at which at least two-thirds of the issued capital isrepresented and three-fourths of those present vote for dissolution. UnderNetherlands Antilles law, our shareholders are entitled to all of our assetsupon liquidation and dissolution after all creditors have been paid. Anyremaining profits will be paid to preference A shareholders first, equal to thepercentage to which the preference A shareholders have preference over theamount paid up on the preference A shares. If there are no common B sharesoutstanding after a dissolution is declared, all profits will be paid to thepreference A shareholders. If there are common B shareholders, the balance ofthe profits will be paid to common B shareholders in proportion to theirpercentage of common B shares held. No profits will be paid out upondissolution if a loss has been sustained during the year that cannot be coveredby the reserves or compensated for in some other way. If a dissolution iseffected, the liquidation will be effected under such provisions as theshareholders decide at the general meeting.

**Modifications ofShareholders’ Rights**

The rights of ourshareholders against us are determined by Netherlands Antilles law and ourarticles of incorporation. The manner in which these rights may be exercisedmay be further stipulated in an agreement between ourselves and ourshareholders. Resolutions to amend our articles of incorporation may only bepassed by means of a vote of three-fourths of the votes cast in a generalmeeting of shareholders at which at least two-thirds of the issued capital isrepresented.

**Shareholders’Meetings**

The annual general meeting of shareholders shall beheld in Curaçao, the Netherlands Antilles within nine months after the end ofour financial year. During this annual meeting, a report regarding our courseof business and conduct of affairs during the past financial year is given bythe management board and a balance-sheet and profit and loss account mustbe adopted.

Each managing director and any shareholder jointlyrepresenting at least 10.0% of our issued share capital may call a meeting. Allmeetings must be convened by an advertisement in a widely read newspaper inCuraçao, the Netherlands Antilles at least five days prior to the meeting. Theadvertisement must contain the agenda for the meeting or state the agenda hasbeen deposited at our office for the shareholders’ inspection. If the meetingis being convened to deal with proposed amendments to our articles ofincorporation, the advertisement must include a statement to that effect. Evenif the above provisions are not abided by, resolutions will nevertheless bevalid if they are adopted by unanimous vote at a meeting in which our entireshare capital is represented.

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Holders of shares inbearer form must identify themselves to our satisfaction in order toparticipate in a meeting. Share certificates, held for the duration of themeeting, will be sufficient identification. Shareholders may be represented byproxies at the annual meeting. All resolutions at an annual or special generalmeeting will be adopted by absolute majority, except those pertaining to amendmentsto our articles of incorporation.

**Limitations onRights to Hold Shares, Changes of Control and Changes in Capital**

There are no limitationson holding our shares under Netherlands Antilles law, and our articles ofincorporation do not contain any provisions that would delay, defer or preventa change in control. Our articles of incorporation also do not contain anyprovisions regarding changes in capital that are more stringent than requiredby law, except that a resolution to increase the authorized share capitalpursuant to an amendment of the articles of incorporation may be passed only bya vote of three-fourths of the votes cast at the general meeting ofshareholders at which at least two-thirds of the issued share capital isrepresented.

**Disclosure of ShareOwnership**

Our articles ofincorporation do not require disclosure of any shareholding, irrespective ofthe level of shareholding.

**(C)**   MaterialContracts

**Service andBareboat Agreements**

We currently operate ourFPSOs on offshore oil fields pursuant to six service and bareboat agreementsthat we have entered into with oil companies. These service agreements consistof the documents included as Exhibits 4.1 to 4.14, Exhibit 4.59 and Exhibit 4.62of this annual report. On March 31, 2006 we entered into a serviceagreement with Nexen Petroleum U.K. Ltd. with respect to the provision andoperation of an FPSO for production on the Ettrick field on the UK continentalshelf. For this project our existing hull *Aoka Mizu*iscurrently being converted into an FPSO*.*The principalterms and conditions of these agreements are described under “Item 4:Information on the Company—(B) Business Overview—FPSO Business—FPSO Fleet,FPSO Hull and Trading Vessel”.

**Credit Facility**

We are a party to arevolving credit facility agreement, dated June 29, 2006, among BluewaterHolding B.V., Bluewater Energy Services B.V. and Bluewater (Aoka Mizu) N.V., asborrowers, ING Bank N.V. as arranger, ING Bank N.V., as facility agent, INGBank N.V., as facility security trustee, and certain financial institutions, aslenders. Obligations under the credit facility are guaranteed by Aurelia EnergyN.V. and certain subsidiaries other than the borrowers pursuant to a facilityguarantee, dated June 29, 2006.

***Structure***

The credit facility is aU.S.$850.0 million reducing revolving credit facility. See “—Maturity andAmortization”. Subject to certain conditions the facility can be used tofinance the construction of new, and modification of existing, FPSOs and forgeneral corporate purposes. The structure of the facility includes a maximumavailable amount, being 66.7% of the aggregate fair market value of the FPSOs.The facility can be drawn at any time up to the lower of the facility limit andthe maximum available amount at that time. The valuation of the fleet anddetermination of the maximum available amount is annually. The maximumavailable amount is updated quarterly during periods of construction toincorporate the value of the progress of the construction as determined in thequarterly report of the technical consultant. The 

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maximumavailable amount may be re-determined following certain events, including thetermination of our service agreements or proceeds becoming payable under theinsurances.

***Interest Rates and Fees***

Advances under the credit facility bear interest at arate per annum equal to LIBOR plus a margin of 0.600%. There is a marginadjustment mechanism under which the applicable margin is increased by up to0.275% during the period if the amount of credit that is drawn exceeds certainpercentages of the facility amount. Commitment commissions are 40.0% of theapplicable margin.

On August 10, 2006and August 11, 2006, the Company purchased interest rate caps to limit itsinterest rate exposure on U.S.$300 million of the total outstanding amountunder its corporate credit facility. These interest rate caps have a strikerate of 6.5%, limiting the maximum interest costs on that principal amount to6.5% excluding margin. The interest rate caps have a fixed notional amount ofU.S.$200.0 million, U.S.$50.0 million and U.S.$50.0 million andare aligned with the maturity of the refinanced corporate facility.

***Guarantees and Security***

The borrowers’ obligationsunder the credit facility are guaranteed by Aurelia Energy N.V., BluewaterEnergy N.V., Bluewater Offshore Production Systems Limited, Bluewater FloatingProduction B.V., Bluewater (Bleo Holm) N.V., Bluewater (Glas Dowr) N.V.,Bluewater (Haewene Brim) N.V., Bluewater (Munin) N.V., Bluewater OffshoreProduction Systems N.V., Bluewater International B.V., Lufeng DevelopmentCompany ANS, Bluewater Services (UK) Limited, Bluewater Ettrick Production (UK)Limited, Bluewater (Floating Production) Limited, Bluewater Operations (UK)Limited, Bluewater (UK) Limited, and Pierce Production Company Limited.Together, the borrowers and the guarantors have granted security interests overthe majority of their assets, including mortgages over all FPSOs, fixed chargesover certain of their properties, debts, bank accounts, insurance proceeds andspecified agreements. In addition, the shares of each FPSO-owning company havebeen pledged in favor of the facility security trustee for the lenders underthe credit facility, and the operating income relating to our FPSO serviceagreements has been pledged to the lenders to secure the credit facility.

***Covenants***

The credit facility contains certain customarynegative covenants that restrict the borrowers (subject to certain agreedexceptions) from, among other things, engaging in certain mergers orconsolidations, incurring additional debt other than permitted indebtedness,creating security interests on their assets and disposing of assets other thanin the ordinary course. The facility further requires us to observe certaincustomary covenants, including, but not limited to, covenants relating to theprovision of information, maintenance of government approvals and licenses,compliance with law, maintenance of corporate existence and core business.

Additionalcovenants provide that we must do the following:

·       ensurethat our tangible net worth (including the subordinated Marenco loan) at alltimes is greater than both U.S.$500.0 million and 25% of total assets;

·       ensurethat our ratio of earnings before interest, tax, depreciation and amortizationover net interest (including interest in respect of the notes but excludinginterest accrued under the subordinated Marenco loan and interest capitalizedduring construction) is greater than 2.5x;

·       ensurethat, in relation to each leverage calculation period, our ratio of netfinancial indebtedness (excluding any project debt, subordinated debt orconstruction debt) over earnings before interest, 

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tax, depreciation andamortization (excluding earnings before interest, tax, depreciation andamortization from project financed property) is less than 3.0x;

·       maintaina minimum liquidity of not less than U.S.$15.0 million in freely availablecash, other marketable securities or availability under the credit facility;and

procure at all times thatthe amount of credit as drawn under the facility does not exceed 66.7% of theaggregate fair market value of the FPSOs.

***Maturity and Amortization***

The credit facility had aremaining term of five years as of December 31, 2006. The facility limit,which reduces by U.S.$42.9 million per quarter as of September 2008,was U.S.$850.0 million on December 31, 2006 and is scheduled to reachzero by December 2011.

***Prepayments***

Subject to an indemnityfor broken funding costs, the borrowers under the credit facility mayvoluntarily prepay amounts outstanding without penalty or premium, at any timein whole or in part, in minimum amounts of U.S.$5.0 million. In the caseof a total loss, the FPSO will be excluded from the aggregate fair market valueand we will be required to prepay within 180 days after the total lossoccurred and on the date the proceeds in relation to the total loss are paidthe amount by which our outstanding indebtedness at that time exceeds theadjusted maximum available amount.

***Events of Default***

The credit facility currently contains certain eventsof default customary for senior bank financings, the occurrence of which wouldallow the lenders to accelerate all outstanding loans and terminate theircommitments.

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**10**1¤4%Senior Notes due 2012, Indenture and Associated Swap

We are a party to anindenture, dated as of February 22, 2002, among Bluewater Finance Limited,each of the guarantors party thereto and The Bank of New York, as trustee,pursuant to which we issued U.S.$260.0 million aggregate principal amountof 101¤4%Senior Notes due 2012 on February 22, 2002 and an additionalU.S.$75.0 million aggregate principal amount of 101¤4% Senior Notesdue 2012 on April 23, 2003. The 101¤4% Senior Notesdue 2012 were issued by our finance subsidiary, Bluewater Finance Limited, andwere initially guaranteed by each of: Aurelia Energy N.V., *Bleo Holm* Standby Purchaser N.V.,Bluewater (*Bleo Holm*) N.V.,Bluewater Brasil Ltda., Bluewater Energy N.V., Bluewater Energy ServicesB.V., Bluewater Equipment Leasing Ltd., Bluewater Floating ProductionB.V., Bluewater (Floating Production) Ltd., Bluewater (*Glas Dowr*) N.V., Bluewater (*Haewene Brim*) N.V., Bluewater HoldingB.V., Bluewater International B.V., Bluewater (Malta) Ltd., Bluewater (*Munin*) N.V., Bluewater (Aoka Mizu), N.V.,Bluewater (Norway) ANS, Bluewater Offshore Production Systems Ltd.,Bluewater Offshore Production Systems Nigeria Ltd., Bluewater OffshoreProduction Systems N.V., Bluewater Offshore Production Systems (U.S.A.), Inc.,Bluewater Operations (UK) Ltd., Bluewater Services (UK) Ltd.,Bluewater (UK) Ltd., Bluewater Terminal Systems N.V., Lufeng DevelopmentCompany ANS and Pierce Production Company Ltd. Pursuant to a supplementalindenture, dated as of March 31, 2004, Bluewater Oil & GasInvestments Ltd. has acceded to the indenture as an additional guarantorof the 101¤4% Senior Notes due 2012.

***Ranking***

The 101¤4%Senior Notes due 2012 are general unsecured obligations of Bluewater FinanceLimited and rank equal in right of payment with all future unsecured andunsubordinated obligations of Bluewater Finance Limited. The guarantees of the101¤4%Senior Notes due 2012 are unsecured senior subordinated obligations of theguarantors, are subordinated in right of payment to certain senior indebtednessof the guarantors and are effectively subordinated to existing and futuresecured obligations the guarantors. The guarantees rank equal in right ofpayment with all existing and future trade payables and senior subordinated obligationsof the guarantors.

***Interest***

Interest is payablesemi-annually in arrears on February 15 and August 15 of each yearand is payable at a rate of 101¤4% per annum.On July 17, 2003, we entered into a fixed-to-floating interest rate swaptransaction, with terms that are identical to the fixed-to-floating interestrate swap transaction that enables us to swap the equivalent of the fixed rateamount of interest that is payable on U.S.$335.0 million aggregateprincipal amount of our 101¤4%Senior Notes due 2012 for a floating rate amount of interest that would bepayable on an equal amount of indebtedness. Under the swap, we receivedpayments that were calculated at a fixed rate of 101¤4% and madeinterest payments that were calculated at a floating rate that was equal to amargin of 6.32% over LIBOR. Substantially all of the guarantors of our 101¤4%Senior Notes due 2012 had guaranteed obligations under the swap. As of February 15,2005 the margin changed to 6.44%.

On November 4, 2005the Company partially cancelled the fixed-to-floating interest rate swaptransaction in relation to the U.S.$335.0 million aggregate principal amount ofthe 101¤4%Senior Notes due 2012 for the period from August 15, 2005 to August 15,2007. Due to the partial cancellation of the swap transaction, the Company wouldincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. The Company paid U.S.$6.9 million on November 4,2005 which represented its net cost from the partial cancellation of the swaptransaction. The Company has deferred this cost which will be debited to thestatement of income over the remaining duration of the 101¤4% Senior Notesdue 2012.

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On April 21, 2006, the Company cancelled theremainder of the fixed-to-floating interest rate swap transaction in relationto the U.S.$335.0 million aggregate principal amount of the 101¤4%Senior Notes due 2012, which was already partially cancelled for the periodfrom August 15, 2005 to August 15, 2007.

***Maturity and Redemption***

The 101¤4% Senior Notesdue 2012 mature on February 15, 2012. Other than out of the proceeds ofcertain public equity offerings prior to February 15, 2005, or for certaintax reasons, the 101¤4%Senior Notes due 2012 may not be redeemed prior to February 15, 2007. Onor after February 15, 2007, the 101¤4% Senior Notesdue 2012 may be redeemed in whole or in part at certain predetermined prices.In addition, each holder of 101¤4%Senior Notes due 2012 will have the right to have its 101¤4% Senior Notesdue 2012 repurchased at 101% of their principal amount plus accrued and unpaidinterest, if any, and any other amounts due upon a “Change of Control” asdefined in the indenture.

***Covenants***

The indenture contains certain covenants that, among otherthings, limit our ability to incur additional indebtedness, make certainpayments with respect to our share capital, make certain investments, prepaysubordinated debt, create certain liens, enter into certain sale and leasebacktransactions, enter into certain transactions with affiliates, issue or sellshare capital, engage in certain asset sales, consolidate, merge or transferall or substantially all our assets and enter into other lines of business.These covenants are subject to a number of important limitations and exceptionsthat are set forth in the indenture.

***Events of Default***

The indenture contains certain events of default thatare customary for high yield debt securities, the occurrence of which wouldallow the holders to accelerate the payment of their outstanding 101¤4%Senior Notes due 2012.

**Financing PR JotunDA**

We are party to a U.S.$175.0 million loan agreement tofinance the acquisition of our 55% ownership interest in PR Jotun DA. The loanwill amortize to zero over a period of six years and a quarter, by September 2011.Interest equals 0.60% over LIBOR. The non-recourse loan is secured with amortgage over the FPSO and an assignment to the lenders of the bareboat chartercontract with the Jotun field partner.

PR Jotun DA is party to a U.S.$143.2 million loanagreement with Standard Marine Nordsjo AS (“SMNAS”) to finance the acquisitionof the FPSO *Jotun A.*The loan will amortize to zeroover a period of six years and a quarter, by September 2011. Interestequals 5%. In accordance with the provisions of FIN 46R the company fullyconsolidated PR Jotun DA and records a 45% minority interest.

**SubordinatedMarenco Loan**

We are a party to an amended and restated subordinatedloan agreement, dated November 21, 2001, between Aurelia Energy N.V., asborrower, and our affiliate, Marenco Investments Limited, as lender. Under theamended and restated loan agreement, the subordinated Marenco loan bearsinterest on an annual basis at a rate of 7.0% per annum with effect from January 1,2000. The subordinated Marenco loan will not mature and may not be repaid,mandatorily redeemed or repurchased prior to the date on which the 101¤4%Senior Notes due 2012 mature or are fully repaid in cash. Cash interestpayments may only be paid in certain circumstances. In addition, the agreementprohibits Marenco Investments Limited from taking any enforcement action underthe subordinated Marenco loan prior to the satisfaction by 

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paymentin cash of all obligations in respect of the 101¤4% Senior Notesdue 2012 or from transferring the subordinated Marenco loan to any person otherthan Aurelia Energy N.V.

**Intercompany Loan**

In connection with our issuance of 101¤4%Senior Notes due 2012 in February 2002, Bluewater Holding B.V., asborrower, entered into an intercompany loan agreement dated February 22,2002 with Bluewater Finance Limited, as lender, pursuant to which BluewaterFinance loaned Bluewater Holding the U.S.$256.4 million gross proceedsfrom the sale of the 101¤4%Senior Notes due 2012. In connection with our issuance of additional 101¤4%Senior Notes due 2012 in April 2003, Bluewater Holding B.V. and BluewaterFinance Limited amended and restated the intercompany loan agreement to enableBluewater Finance Limited to lend Bluewater Holding B.V. the U.S.$75.4 millionof the gross proceeds from the issuance (excluding accrued interest from andincluding February 15, 2003, to but excluding the issue date) on the samebasis as the original loan. The intercompany loan bears interest at a rate of101¤4%per annum. Interest is payable in same day funds two business days prior toeach date on which interest is payable on the 101¤4% Senior Notesdue 2012 and is payable to such account or accounts with such person or personsas Bluewater Finance Limited may designate to Bluewater Holding B.V. Thematurity date of each is February 15, 2012. Bluewater Holding B.V.’sobligation under the intercompany loan are subordinated on the same basis andto the same extent as the guarantees.

All payments under the intercompany loan are madewithout deductions for or on account of tax. In the event that BluewaterHolding B.V. is required to make any such deduction, it will be required togross-up each payment to Bluewater Finance Limited to ensure that BluewaterFinance Limited receives and retains a net sum equal to the sum which it wouldhave received had no such deduction or withholding been made or required to bemade. Further, all payments under the intercompany loan agreement must be madeon a timely basis in order to ensure that Bluewater Finance Limited may satisfyits payment obligations under the indenture and the 101¤4%Senior Notes due 2012 when due, in each case, taking into account theadministrative and timing concerns and limitations on making payments due onthe 101¤4%Senior Notes due 2012.

**Tax LeaseArrangements**

We entered into certaintax lease arrangements for the *Uisge Gorm*,the *Glas Dowr* and the topsides ofthe *Bleo Holm* from 1994 to 1999and, in April 2003, signed a new tax lease for the topsides of the *Haewene Brim*, in each case with HillSamuel Leasing No. 4 Ltd, a UK lessor, that was able under UK tax lawto obtain tax depreciation on the capital expenditure incurred by it onacquiring the leased assets. These arrangements are principally comprised ofthe documents included as Exhibits 4.48 to 4.55 of this annual report.Pursuant to these arrangements:

·       weagreed to sell the *Uisge Gorm* tothe UK lessor under a conditional sale agreement;

·       weagreed to sell the *Glas Dowr* tothe UK lessor under a conditional sale agreement;

·       theUK lessor became buyer of the *Bleo Holm*topsides from the manufacturer, the original sales contract having beenterminated and replaced;

·       theUK lessor became the buyer of the *Haewene Brim*topsides from Ranberger Holding B.V., a limited liability company owned by athird party foundation, our original lease of the assets from Ranberger HoldingB.V. having been terminated.

We owned legal title to both the hull and topsides ofeach of the *Uisge Gorm* and the *Glas Dowr* and to the hull of the *Bleo Holm* and the *Haewene Brim*. The UK lessor held legaltitle to the topsides of the *Bleo Holm*and the *Haewene Brim*. In eachcase, the UK lessor had leased its interest in those asset to us 

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pursuantto lease arrangements that provided us with the right to use, operate, possesand enjoy the leased assets without interference and entitled us to the fulleconomic benefit of the operation of the leased assets.

These arrangements allowed the lessor to claim taxdepreciation in respect of its expenditure to acquire the vessel or theequipment, which was passed on to, or shared with, us in the form of reducedrentals. Our rental payment obligations were calculated by reference to anumber of tax and financial assumptions made at the time the leases wereentered into. Payment arrangements at the inception of the lease transactionswere structured, and security had been provided, such that, subject to theadjustments described below, we did not had any current rental payment ortermination payment obligations with respect to the *Uisge Gorm*, the *Glas Dowr*,the topsides of the *Bleo Holm* orthe topsides of the *Haewene Brim*.If certain of these assumptions proved to be incorrect, the rental paymentsunder the tax lease arrangements would be adjusted by the lessor to preserve thelessor’s agreed after-tax rate of return on its acquisition of the leasedassets and, in the case of an increase in such rentals or anticipatedtermination sums, we would be liable for the excess above the realizable valueof the security held by the lessor and the lessor would be entitled to requirethe provision of additional security.

See “Item 5: Operating and Financial Review andProspects—(A) Operating Results—Critical Accounting Policies and Estimates—TaxLease Benefits Liability”.

On November 3, 2005 all tax lease structures thatwere in effect for FPSO *Uisge Gorm*,FPSO *Glas Dowr* and the topsidesof FPSO *Bleo Holm* and FPSO *Haewene Brim*were terminated. As a result of the termination, the Companyregained full ownership of the FPSO *UisgeGorm*, the FPSO *Glas Dowr*and the topsides of FPSO *Bleo Holm*and FPSO *Haewene Brim.*The tax lease benefits liability hasbeen released as other operating income and restricted deposits were dischargedand proceeds were used  for repayment ofthe corporate credit facility.

**Economic SaleAgreement**

Effective January 1, 2000, we entered into aninternal restructuring process. In connection therewith, the economic interestsin most of the assets and liabilities of certain non-Dutch group companies weresold to Bluewater Holding B.V. pursuant to an economic sale agreement, whilelegal title to those assets and liabilities remained with the sellingcompanies. The companies making such dispositions to Bluewater Holding B.V.were: Bluewater (*Bleo Holm*) N.V.,Bluewater Energy N.V., Bluewater Equipment Leasing Ltd., Bluewater (*Glas Dowr*) N.V., Bluewater(Malta) Ltd., Bluewater (New Hull) N.V., Bluewater Offshore ProductionSystems Ltd., Bluewater Offshore Production Systems N.V., Bluewater(Malta) Ltd. and Brightfield Corporation. The valuation of the assets andliabilities transferred was based on a valuation report prepared by anindependent investment bank. This sale resulted for income tax purposes only inintercompany profits (estimated at €589.0 million(U.S.$776.7 million)) at the level of the selling companies, and thecreation of goodwill and intercompany indebtedness at the level of BluewaterHolding B.V. Depreciation of the goodwill and the accrual of interest expenseat the level of Bluewater Holding B.V. over time is expected to generate taxlosses which may be available to reduce our amount of taxable income in thefuture. Although extensive discussions were held with the tax authoritiesconcerning our tax structure and the internal restructuring, our tax structureand the tax consequences of the internal restructuring have been the subject toa tax audit and remain subject to further review by the tax authorities. See “Item3: Key Information—(D) Risk Factors—Our internal restructuring and ourDutch tax treatment of our group companies remain subject to review” and “Item5: Operating and Financial Review and Prospects—(A) Operating Results—CriticalAccounting Policies and Estimates”. Because only the economic interests of theselling companies in the covered assets and liabilities have been sold toBluewater Holding B.V., the internal restructuring has not affected any of ourexisting contractual arrangements with third parties. The selling companies maycontinue to exercise their rights against, and must continue to perform theirobligations and discharge their liabilities in favor of, such third parties.

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**(D)**   ExchangeControls

There are no legislative or other legal provisionscurrently in force in the Netherlands Antilles or arising under our articles ofincorporation that currently restrict our ability to transfer capital to orfrom the Netherlands Antilles (because we have obtained the relevant licensesunder applicable foreign exchange control ordinances) or that affect theavailability of cash or cash equivalents for use by our member companies. Thereare also no legislative or other legal provisions currently in force in theNetherlands Antilles or arising under our articles of incorporation that affectour ability to remit dividends, interest or other payments to non-residentholders of our securities, except as described under “Item 10: AdditionalInformation—(B) Articles of Incorporation—Description of Share Capital:Rights, Restrictions and Preferences”.

**(E)**   Taxation

**NetherlandsAntilles Taxation**

The following is a general discussion of certainNetherlands Antilles tax considerations relating to our 101¤4%Senior Notes due 2012. The discussion is based upon the tax laws of theNetherlands Antilles in force and in effect as of the date of this annualreport. The discussion does not consider any investor’s particularcircumstances and is not intended as tax advice.

***Withholding Tax***

All payments under the 101¤4%Senior Notes due 2012 may be made free of withholding or deduction of, for oron account of any taxes of whatsoever nature imposed, levied, withheld orassessed by the Netherlands Antilles, or any political subdivision or taxingauthority thereof or therein.

***Taxes on Income and Capital Gains***

An individual holder of 101¤4%Senior Notes due 2012 will not be subject to Netherlands Antilles taxes onincome or capital gains in respect of any payment under the 101¤4% Senior Notesdue 2012 or in respect of any gain realized on the sale, redemption, exchangeor conversion of the 101¤4%Senior Notes due 2012, provided that:

·       suchholder is neither resident nor deemed resident in the Netherlands Antilles; and

·       suchholder does not have an enterprise or a profession or an interest in anenterprise or profession that is, in whole or in part, carried on in theNetherlands Antilles by or for the account of such holder, and to whichenterprise or profession or part of an enterprise or profession, as the casemay be, the 101¤4%Senior Notes due 2012 are attributable.

A holder which has notbeen organized under the laws of the Netherlands Antilles, will not be subjectto any Netherlands Antilles taxes on income or capital gains in respect of anypayment under the 101¤4%Senior Notes due 2012 or in respect of any gain realized on the sale,redemption, exchange or conversion of the 101¤4% Senior Notesdue 2012, provided that:

·       suchholder is neither resident nor deemed to be resident in the NetherlandsAntilles; and

·       suchholder is not engaged in a trade or business in the Netherlands Antillesthrough a permanent establishment or representative.

***Gift, Estate or Inheritance Taxes***

No gift, estate or inheritance taxes will arise in theNetherlands Antilles with respect to an acquisition of 101¤4%Senior Notes due 2012 by way of gift by, or on the death of, a holder who isneither resident nor 

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deemedto be resident in the Netherlands Antilles. A holder will not be deemed to beresident in the Netherlands Antilles by reason only of the holding of 101¤4%Senior Notes due 2012.

***Sales Tax***

No sales tax (*omzetbelasting*),expenditure tax (*algemenebestedingsbelasting*), turnover tax (*belastingop bedrijfsomzetten*) or similar tax will arise on the invoicing orpayment of principal, premium and interest on the 101¤4% Senior Notesdue 2012.

***Other Taxes and Duties***

No Netherlands Antilles registration tax, custom duty,transfer tax, stamp duty or any similar documentary tax or duty, other thancourt fees, will be payable in the Netherlands Antilles in respect of or inconnection with the execution, delivery and/or enforcement by legal proceedingsof the 101¤4%Senior Notes due 2012 or the Guarantees or the performance by the Issuer of itsobligations thereunder, provided these actions take place outside theNetherlands Antilles, with the exception of stamp duty which is payable in caseof registration in the Netherlands Antilles of the 101¤4% Senior Notesdue 2012 and/or Guarantees or if such documents are brought into the courts ofthe Netherlands Antilles.

A holder will not incur or become liable for anyregistration tax, custom duty, transfer tax, stamp duty or any other similardocumentary tax or duty by reason only of the acquisition, ownership ordisposal of the 101¤4%Senior Notes due 2012.

**U.S. Federal IncomeTaxation**

The following is a summary of the material U.S.federal income tax consequences of the acquisition, ownership and dispositionof our 101¤4%Senior Notes due 2012 by a U.S. Holder (as defined below). This summary dealsonly with initial purchasers of our 101¤4%Senior Notes due 2012 at the issue price that are U.S. Holders and that willhold our 101¤4%Senior Notes due 2012 as capital assets. This discussion does not cover allaspects of U.S. federal income taxation that may be relevant to, or the actualtax effect that any of the matters described herein will have on, theacquisition, ownership or disposition of our 101¤4% Senior Notesdue 2012 by particular investors, and does not address state, local, foreign orother tax laws. In particular, this summary does not discuss all of the taxconsiderations that may be relevant to certain types of investors subject tospecial treatment under the U.S. federal income tax laws (such as financialinstitutions, insurance companies, investors liable for the alternative minimumtax, individual retirement accounts and other tax-deferred accounts, tax-exemptorganizations, dealers in securities or currencies, investors that will holdour 101¤4%Senior Notes due 2012 as part of straddles, hedging transactions or conversiontransactions for U.S. federal income tax purposes or investors whose functionalcurrency is not the U.S. dollar).

As used herein, the term “U.S. Holder” means abeneficial owner of our 101¤4% Senior Notesdue 2012 that is, for U.S. federal income tax purposes, (i) a citizen orresident of the United States, (ii) a corporation, created or organizedunder the laws of the United States or any State thereof, (iii) an estatethe income of which is subject to U.S. federal income tax without regard to itssource or (iv) a trust if a court within the United States is able toexercise primary supervision over the administration of the trust and one ormore U.S. persons have the authority to control all substantial decisions ofthe trust, or the trust has elected to be treated as a domestic trust for U.S.federal income tax purposes.

The U.S. federal income tax treatment of a partner ina partnership that holds our 101¤4% Senior Notesdue 2012 will depend on the status of the partner and the activities of thepartnership. Investors that are partnerships should consult their tax advisersconcerning the U.S. federal income tax consequences to 

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theirpartners of the acquisition, ownership and disposition of our 101¤4%Senior Notes due 2012 by the partnership.

The summary is based on the tax laws of the UnitedStates, including the Internal Revenue Code of 1986, as amended, itslegislative history, existing and proposed regulations there under publishedrulings and court decisions, all as currently in effect and all subject tochange at any time, possibly with retroactive effect.

**THE SUMMARY OF U.S.FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY.ALL PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THEPARTICULAR TAX CONSEQUENCES TO THEM OF OWNING THE 10**1¤4%SENIOR NOTES DUE 2012, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL,FOREIGN AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAW.

***Payments of Interest***

Interest on a 101¤4% Senior Notedue 2012 will be taxable to a U.S. Holder as ordinary income at the time it isreceived or accrued, depending on the holder’s method of accounting for taxpurposes. Interest paid by Bluewater Finance Limited on the 101¤4% Senior Notesdue 2012 constitutes income from sources outside the United States. Prospectivepurchasers should consult their tax advisors concerning the applicability ofthe foreign tax credit and source of income rules to income attributableto our 101¤4%Senior Notes due 2012.

*Pre-IssuanceAccrued Interest.**  *U.S.Holders that purchased 101¤4%Senior Notes due 2012 in our initial offering may elect to exclude pre-issuanceaccrued interest from the issue price of the Notes. In that event, a portion ofthe first interest payment will be treated as a nontaxable return of thepre-issuance accrued interest. Otherwise, the full amount of this firstinterest payment will be taxable, and the pre-issuance accrued interest will beincluded in the issue price and taken into account in determining the U.S.Holder’s purchase premium. See “—101¤4%Senior Notes due 2012 Purchased at a Premium”.

*10*1¤4*% Senior Notesdue 2012 Purchased at a Premium.**  *AU.S. Holder that purchases our 101¤4%Senior Notes due 2012 for an amount in excess of their stated redemption priceat maturity may elect to treat the excess as “amortizable bond premium”, inwhich case the amount required to be included in the U.S. Holder’s income eachyear with respect to interest on our 101¤4% Senior Notesdue 2012 will be reduced by the amount of amortizable bond premium allocable(based on our 101¤4%Senior Notes due 2012’s yield to maturity) to that year. Any election toamortize bond premium applies to all bonds (other than bonds the interest onwhich is excludible from gross income for U.S. federal income tax purposes)held by the U.S. Holder at the beginning of the first taxable year to which theelection applies or thereafter acquired by the U.S. Holder, and is irrevocablewithout the consent of the IRS.

*MarketDiscount.**  *Our101¤4%Senior Notes due 2012 generally will be treated as purchased at a marketdiscount (“Market Discount Notes”) if the principal amount on our 101¤4%Senior Notes due 2012 exceeds the amount for which the U.S. Holder purchasedour 101¤4%Senior Notes due 2012 by at least 0.25 per cent. of the principal amount on our101¤4%Senior Notes due 2012 multiplied by the number of complete years from the dateacquired by the U.S. Holder to the maturity on our 101¤4% Senior Notesdue 2012. If this excess is not sufficient to cause our 101¤4% Senior Notesdue 2012 to be Market Discount Notes, then the excess constitutes “*de minimis* market discount”.

Under current law, any gain recognized on the maturityor disposition of a Market Discount Note will be treated as ordinary income tothe extent that the gain does not exceed the accrued market discount on theNote. Alternatively, a U.S. Holder of a Market Discount Note may elect toinclude market discount in income currently over the life of the Note. Thiselection applies to all debt instruments with market discount acquired by theelecting U.S. Holder on or after the first day of the first taxable year forwhich the 

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election is made. Thiselection may not be revoked without the consent of the IRS. The U.S. Holder mayinclude market discount in income on the basis of rateable accrual, or make anirrevocable election to use a “constant-yield method”. The amount ofmarket discount includible in income under the constant-yield method isthe sum of the daily portions of market discount with respect to the 101¤4%Senior Note due 2012 for each day during the taxable year or portion of thetaxable year on which the U.S. Holder holds the Note (“accrued market discount”).The daily portion is determined by allocating to each day in any “accrualperiod” a pro rata portion of the market discount allocable to that accrualperiod. Accrual periods with respect to a 101¤4% Senior Notedue 2012 may be of any length selected by the U.S. Holder and may vary inlength over the term of the 101¤4%Senior Note due 2012 as long as (i) no accrual period is longer than oneyear; and (ii) each scheduled payment of interest or principal on the 101¤4%Senior Note due 2012 occurs on either the final or first day of an accrualperiod. The amount of market discount allocable to an accrual period equals theexcess of (a) the product of the 101¤4% Senior Notedue 2012’s adjusted issue price at the beginning of the accrual period and the101¤4%Senior Note due 2012’s yield to maturity (determined on the basis ofcompounding at the close of each accrual period and properly adjusted for thelength of the accrual period) over (b) the sum of the payments of intereston the 101¤4%Senior Note due 2012 allocable to the accrual period. The “adjusted issue price”of a 101¤4%Senior Note due 2012 at the beginning of any accrual period is the issue priceof the 101¤4%Senior Note due 2012 increased by the amount of accrued market discount foreach prior accrual period. A U.S. Holder of a Market Discount Note that doesnot elect to include market discount in income currently generally will berequired to defer deductions for interest on borrowings incurred to purchase orcarry a Market Discount Note that is in excess of the interest on the Noteincludible in the U.S. Holder’s income, to the extent that this excess interestexpense does not exceed the portion of the market discount allocable to thedays on which the Market Discount Note was held by the U.S. Holder.

Under current law, market discount on a MarketDiscount Note will accrue on a straight-line basis unless the U.S. Holderelects to accrue the market discount on a constant-yield method. Thiselection applies only to the Market Discount Note with respect to which it ismade and is irrevocable.

*Election to Treat AllInterest as Original Issue Discount.*   A U.S.Holder may elect to include in gross income all interest that accrues on a Noteusing the constant-yield method described above under “Market Discount”,with certain modifications. For purposes of this election, interest includesinterest, original issue discount, market discount and *de minimis* market discount, as adjusted byany amortisable bond premium or acquisition premium. This election generallyapplies only to the 101¤4%Senior Note due 2012 with respect to which it is made and may not be revokedwithout the consent of the IRS. If the election to apply the constant yieldmethod to all interest on a 101¤4%Senior Note due 2012 is made with respect to a Market Discount Note, theelecting U.S. Holder will be treated as having made the election describedabove under “Market Discount” to include market discount in income currentlyover the life of all debt instruments held or thereafter acquired by the U.S.Holder. U.S. Holders should consult their tax advisers concerning the proprietyand consequences of this election.

***Purchase,Sale and Retirement of our 10****1**¤**4%Senior Notes due 2012*

A U.S. Holder’s tax basis in our 101¤4%Senior Notes due 2012 will generally be its U.S. dollar cost, increased by theamount of any market discount included in the U.S. Holder’s income with respectto our 101¤4%Senior Notes due 2012 and reduced by the amount of any amortisable bond premiumapplied to reduce interest on such Notes.

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A U.S. Holder will generally recognize gain or loss onthe sale or retirement of a 101¤4% Senior Notedue 2012 equal to the difference between the amount realised on the sale orretirement and the tax basis of the 101¤4%Senior Note due 2012. The amount realised does not include the amountattributable to accrued but unpaid interest, which will be taxable as interestincome to the extent not previously included in income. Except to the extentdescribed under “Market Discount” above, gain or loss recognized by a U.S.Holder on the sale or retirement of our 101¤4% Senior Notesdue 2012 will be capital gain or loss and will be long-term capital gain orloss if our 101¤4%Senior Notes due 2012 were held by the U.S. Holder for more than one year.

Gain or loss realised by aU.S. Holder on the sale or retirement of our 101¤4% Senior Notesdue 2012 generally will be U.S. source. Prospective purchasers should consulttheir tax advisers as to the foreign tax credit implications of the sale orretirement of such Notes.

***Early Redemption***

In the event of a changeof control, the holders of our 101¤4% Senior Notesdue 2012 will have the right to require Bluewater Finance to purchase our 101¤4%Senior Notes due 2012 at 101% of their principal amount plus accrued and unpaidinterest. Treasury regulations provide that the right of holders of our 101¤4%Senior Notes due 2012 to require redemption of our 101¤4% Senior Notesdue 2012 upon the occurrence of a change of control will not affect the yieldor maturity date of the 101¤4%Senior Notes due 2012 if, based on all the facts and circumstances as of theissue date, it is significantly more likely than not that a change of controlgiving rise to the redemption right will not occur. Bluewater Finance does notintend to treat this redemption provision of the 101¤4% Senior Notesdue 2012 as affecting the computation of the yield or maturity date of the 101¤4%Senior Notes due 2012.

***Backup Withholding and Information Reporting***

Paymentsof principal, and interest on, and the proceeds of sale or other dispositionof, 101¤4%Senior Notes due 2012, by a U.S. paying agent or other U.S. intermediary, willbe reported to the U.S. Internal Revenue Service and to the U.S. Holder as maybe required under applicable regulations. Backup withholding may apply to thesepayments if the U.S. Holder fails to provide an accurate taxpayeridentification number or certification of exempt status or fails to report allinterest and dividends required to be shown on its U.S. federal income taxreturns. Certain U.S. Holders (including, among others, corporations) are notsubject to backup withholding. U.S. Holders should consult their tax advisorsas to their qualification for exemption from backup withholding and theprocedure for obtaining an exemption.

**(F)**         Dividendsand Paying Agents

Notapplicable.

**(G)**       Statementby Experts

Not applicable.

**(H)**          Documentson Display

We file reports, includingannual reports on Form 20-F and current reports on Form 6-K,with the Commission. As a foreign private issuer, we are not subject to theproxy rules under Section 14 or the short-swing insider profitdisclosure rules under Section 16 of the U.S. Securities Exchange Actof 1934. You may obtain copies of the reports that we file with the Securitiesand Exchange Commission and other information by sending a written request toBluewater Finance Limited, c/o Bluewater Holding B.V., Marsstraat 33, 2132 HRHoofddorp, the Netherlands, Attn: Vice President, Finance &Administration, Telephone: (31) 23 568 2800. You may also inspect and copythese reports at the Public Reference 

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Room ofthe Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,D.C. 20549 and may obtain copies of these materials at prescribed rates bycalling the Securities and Exchange Commission at (1) 800 SEC 0330. Someof our filings may also be viewed on the Commission’s website at www.sec.gov.All information referred to above will, for so long as our 101¤4%Senior Notes due 2012 are listed on the Luxembourg Stock Exchange and the rules ofthe Luxembourg Stock Exchange so require, also be available, without charge, atthe specified office of our paying agent in Luxembourg during usual businesshours on any weekday that is not a public holiday. The Bank of New York(Luxembourg) S.A. currently acts as our paying agent in Luxembourg andmaintains offices at Aerogolf Centre, 1A, Hoehenhof, L-1736,Senningerberg, Luxembourg.

**(I)**            SubsidiaryInformation

The following is adescription of the subsidiaries of Aurelia Energy N.V.:

·                    BleoHolm Standby Purchaser N.V. is a limited liability company incorporated underthe laws of the Netherlands Antilles with its corporate seat in Curaçao, theNetherlands Antilles and registered with the trade register of Curaçao withnumber 79593. Established on August 12, 1998, it is a dormant company andis not engaged in any activities. The Company is in liquidation.

·                    Bluewater(Bleo Holm) N.V. is a limited liability company incorporated under the laws ofthe Netherlands Antilles with its corporate seat in Curaçao, the NetherlandsAntilles and registered with the trade register of Curaçao with number 63982.Established on July 6, 1993, it owns title to the *Bleo Holm*.

·                    BluewaterBrasil Ltda. is a company with limited liability incorporated under thelaws of Brazil with its corporate seat in Rio de Janeiro, Brazil and withcompany number 04280695/0001-63. Established on February 9, 2001, itis used as a company for contracts to be entered into in Brazil.

·                    BluewaterChina Offshore Equipment Production Co Ltd. is a limited liability companyincorporated under the laws of China and registered with the organization ID ofP R China, with number 78330373-6. Established on December 21,2005, it is a company that is engaged in offshore construction activities.

·                    BluewaterEnergy N.V. is a limited liability company incorporated under the laws of theNetherlands Antilles with its corporate seat in Curaçao, the NetherlandsAntilles and registered with the trade register of Curaçao with number 63983.Established on July 6, 1993, it is a holding company of a group ofcompanies engaged in the supply of services and products to the offshore oilindustry.

·                    BluewaterEnergy Services B.V. is a private company with limited liability incorporatedunder the laws of the Netherlands with its corporate seat in Haarlemmermeer,the Netherlands and registered with the chamber of commerce and industry forAmsterdam with number 34088044. Established on October 24, 1985, it, alongwith Bluewater Holding B.V., is primarily engaged in setting our policies andconducting our day to day business affairs to the extent such activities arenot performed by other group companies.

·                    Bluewater EnergyServices (Malaysia) Sdn Bhd. is a limited liability company incorporated underthe laws of Malaysia with its corporate seat in Kuala Lumpur, Malaysia andregistered with number 707913-X. The company was established on August 29,2005, as Valroy Trax Company Sgn Bhd. On May 26, 2006 the company’s namewas changed into Bluewater Energy Services (Malaysia) Sdn Bhd. The company isprimarily engaged in engineering activities.

·                    BluewaterEquipment Leasing Ltd. is a limited liability company incorporated underthe laws of Malta with its corporate seat in Valletta, Malta and with companynumber OS/1894/T. 

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Established on November 14,1994, it is a dormant company and is not engaged in any activities. Inliquidation

·                    BluewaterEttrick Production (UK) Ltd. is a company with limited liabilityincorporated under the laws of England and Wales with its corporate seat inLondon, England and with company number 2982172. Established on October 18,2006, it is primarily engaged in operating activities related to the *Aoka Mizu*.

·                    BluewaterFinance Limited is an exempted company incorporated with limited liabilityunder the laws of the Cayman Islands with its corporate seat in George Town,Grand Cayman, Cayman Islands with company number 110746. Established on June 8,2001, it is the issuer of our 101¤4%Senior Notes due 2012.

·                    BluewaterFloating Production B.V. is a private company with limited liabilityincorporated under the laws of the Netherlands with its corporate seat inHoofddorp, the Netherlands and registered with the chamber of commerce and industryfor Amsterdam with number 34130591. Established on March 10, 2000, it is aholding company that is engaged in the investment in companies engaged in thefield of the supply of services and products to the offshore oil industry.

·                    Bluewater(Floating Production) Ltd. is a company with limited liabilityincorporated under the laws of England and Wales with its corporate seat inLondon, England and with company number 3291793. Established on December 13,1996, it is primarily engaged in operating activities related to the *Bleo Holm*.

·                    Bluewater(Glas Dowr) N.V. is a limited liability company incorporated under the laws ofthe Netherlands Antilles with its corporate seat in Curaçao, the NetherlandsAntilles and registered with the trade register of Curaçao with number 73347.Established on May 15, 1996, it owns title to the *Glas Dowr*.

·                    Bluewater(Haewene Brim) N.V. is a limited liability company incorporated under the lawsof the Netherlands Antilles with its corporate seat in Curaçao, the NetherlandsAntilles and registered with the trade register of Curaçao with number 88020and the Chamber of Commerce and Industry for Amsterdam with number 34183661.Established on August 28, 2001, it owns title to the hull of the *Haewene Brim*.

·                    BluewaterHolding B.V. is a private company with limited liability incorporated under thelaws of the Netherlands with its corporate seat in Hoofddorp, the Netherlandsand registered with the chamber of commerce and industry for Amsterdam withnumber 34130587. Established on March 10, 2000, it is the holding companyof a group of companies engaged in the design, engineering, project management,supply, installation and operation of FPSOs and SPM systems. It, along withBluewater Energy Services B.V., is engaged in setting our policies andconducting our day to day business affairs to the extent such activities arenot performed by other group companies.

·                    BluewaterInternational B.V. is a private company with limited liability incorporatedunder the laws of the Netherlands with its corporate seat in Hoofddorp, theNetherlands and registered with the chamber of commerce and industry forAmsterdam with number 34130590. Established on March 10, 2000, it isprimarily engaged in holding activities concerning overseas companies that areprimarily engaged in business development and the operation of FPSOs.

·                    Bluewater(Malta) Ltd. is a limited liability company incorporated under the laws ofMalta with its corporate seat in Valletta, Malta and with company numberC21528. Established on June 12, 1997, it is primarily engaged inintermediate activities concerning our tax lease structures. In liquidation

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·                    Bluewater(Munin) N.V. is a limited liability company incorporated under the laws of theNetherlands Antilles with its corporate seat in Curaçao, the NetherlandsAntilles and registered with the trade register of Curaçao with number 87273and the Chamber of Commerce and Industry for Amsterdam with number 34183674.Established on April 25, 2001, it owns title to the *Munin*.

·                    BluewaterAfter Sales N.V. (former Bluewater (New Hull) N.V.) is a limited liabilitycompany incorporated under the laws of the Netherlands Antilles with itscorporate seat in Curaçao, the Netherlands Antilles and registered with thetrade register of Curaçao with number 78013. Established on January 13,1998, it owns title to the *Aoka Mizu*.

·                    Bluewater(Norway) ANS is a limited partnership organized under the laws of Norway withits statutory seat in Oslo, Norway and registered with the trade register withnumber 984 109 598. Established on December 21, 2001, it is primarilyengaged in activities supporting the operation of the *Munin*.

·                    BluewaterOffshore Production Systems Ltd. is a limited liability companyincorporated under the laws of Malta with its corporate seat in Valletta, Maltaand with company number OS/1408/T. Established on November 30, 1993, it isa holding company that is engaged in the investment in companies engaged in thefield of the supply of services and products to the offshore oil industry.

·                    BluewaterOffshore Production Systems Nigeria Ltd. is a company with limitedliability incorporated under the laws of Nigeria with its corporate seat inLagos, Nigeria and with company number RC 366224. Established on October 6,1999, it is a special purpose company for contracts to be entered into inNigeria.

·                    BluewaterOffshore Production Systems N.V. is a limited liability company incorporatedunder the laws of the Netherlands Antilles with its corporate seat in Curaçao,the Netherlands Antilles and registered with the trade register of Curaçao withnumber 63981. Established on July 6, 1993, it owns title to the *Uisge Gorm*.

·                    BluewaterOffshore Production Systems (U.S.A.), Inc., is a company with limitedliability incorporated under the laws of Delaware with its corporate seat inDelaware, United States. Established on February 20, 2001, it is primarilyengaged in business development and providing feasibility studies and projectresearch to third parties.

·                    Bluewater Oil &Gas Investments Ltd. is a company with limited liability incorporatedunder the laws of Nigeria with its corporate seat in Lagos, Nigeria.Established on September 2, 2003, it is primarily engaged in investmentsand developments in the oil and gas sector.

·                    BluewaterOperations (UK) Ltd. is a company with limited liability incorporatedunder the laws of England and Wales with its corporate seat in London, Englandand with company number 2982172. Established on October 18, 1994, it isprimarily engaged in operating activities related to the *Uisge Gorm*.

·                    BluewaterServices (UK) Ltd. is a company with limited liability incorporated underthe laws of England and Wales with its corporate seat in London, England andwith company number 3253206. Established on September 17, 1996, it is aholding company that is engaged in the investment in companies engaged in thefield of the supply of services and products to the offshore oil industry.

·                    BluewaterTerminal Systems N.V. is a limited liability company incorporated under thelaws of the Netherlands Antilles with its corporate seat in Curaçao, theNetherlands Antilles and registered with both the trade register of Curaçaowith number 13578 and the chamber of commerce and industry for Amsterdam withnumber 34146572. It was established on 

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November 25,1977. The activities of the company are performed by Bluewater Energy ServicesB.V.

·                    Bluewater(UK) Ltd. is a company with limited liability incorporated under the lawsof England and Wales with its corporate seat in London, England and withcompany number 3138155. Established on December 11, 1995, it is primarilyengaged in operating activities related to the *Glas Dowr*.

·                    LufengDevelopment Company ANS is a partnership established under the laws of Norwaywith its corporate seat in Oslo, Norway and with company number 976744705.Established on September 19, 1996, it is primarily engaged in operatingactivities related to the *Munin*.

·                    PierceProduction Company Ltd. is a company incorporated under the laws ofEngland and Wales with its corporate seat in London, England and with companynumber 3492253. Established on January 8, 1998, it is primarily engaged inoperating activities related to the *Haewene Brim*.

·                    BluewaterManning Services Ltd. is a company incorporated under the laws of Englandwith its corporate seat in London, England and with company number 5144206.Established on June 3, 2004, it is primarily engaged in crew training andrecruitment of crew.

·                    BluewaterServices International Private Ltd. is a company incorporated under thelaws of Singapore with its corporate seat in Singapore with company number200407205K. Established on June 10, 2004, it is primarily engaged asemployer of offshore and onshore personnel.

·                    BluewaterOffshore France S.A.S. is a company incorporated under the laws of France withits corporate seat in Paris with company number 480099019. Established on December 30,2004, it is primarily engaged in projects in the offshore industry. Inliquidation

·                    Bluewater(Tullebuk) B.V. is a private company with limited liability incorporated underthe laws of the Netherlands with its corporate seat in Hoofddorp, theNetherlands and registered with the chamber of commerce and industry forAmsterdam with number 34228592. Established on June 24, 2005, it isprimarily engaged in activities in the field of the supply of services andproducts to the offshore oil industry.

·                    Bluewater(Dyphavet) B.V. is a private company with limited liability incorporated underthe laws of the Netherlands with its corporate seat in Hoofddorp, theNetherlands and registered with the chamber of commerce and industry forAmsterdam with number 34227746. Established on June 21, 2005, it isprimarily engaged in activities in the field of the supply of services andproducts to the offshore oil industry.

·                    Bluewater(Aoka Mizu) N.V. is a limited liability company incorporated under the laws ofthe Netherlands Antilles with its corporate seat in Curaçao, the NetherlandsAntilles and registered with the trade register of Curaçao with number 63981.Established on July 6, 1993, it owns title to the *Aoka Mizu*.

·                    Bluewater NewHull B.V. (former Refugio B.V.) is a private company with limited liabilityincorporated under the laws of the Netherlands with its corporate seat inHoofddorp, the Netherlands and registered with the chamber of commerce andindustry for Amsterdam with number 33240453. Established on December 22,1972, it owns title to the *Hanne Knutsen.*

·                    SupernovaEnergy B.V. (former Luludia Asset Finance B.V.) is a private company withlimited liability incorporated under the laws of the Netherlands with itscorporate seat in Hoofddorp, the Netherlands and registered with the chamber ofcommerce and industry for Amsterdam with number 33281388. Established on June 11,1996, it is primarily engaged in oil and gas upstream activities.

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**ITEM 11: QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

In the ordinary course ofour business, we are exposed to a variety of market risks arising fromfluctuations in interest rates and foreign currency exchange rates butgenerally are not exposed under our service agreements to any material risksrelating to the price of oil. To manage the market risks to which we areexposed, we enter into market sensitive instruments based on internal policiesand guidelines that are designed to mitigate our exposure to any adverseeffects of changes in market conditions. We do not enter into market sensitiveinstruments for trading or speculative purposes. While we do not anticipatethat the use of market sensitive instruments will have a material adverse effecton our consolidated financial position, results of operation or prospects, wecannot guarantee that our mitigation strategy will be effective.

**Interest RateSensitivity**

The majority of our indebtedness consists of advancesunder our credit facility and our outstanding 101¤4% Senior Notesdue 2012. We expect that in the future we will continue to have significantindebtedness under our credit facility and that our 101¤4% Senior Notesdue 2012 will continue to be outstanding. Advances under the credit facilitybear interest at rates typically expressed as a margin over the appropriateinterbank rate. Under the documentation of the credit facility, we are requiredat any time to have the net present value of the proportion of the facility feeincome that we expect to receive during the minimum contract period of ourservice agreements swapped to fixed rates. As of December 31, 2006, thisrepresented approximately 60% of the outstanding indebtedness under thefacility.

To reduce the interest expense relating to our 101¤4%Senior Notes due 2012, we entered into a fixed-to-floating interest rateswap transaction that enabled us to swap the equivalent of the fixed rateamount of interest that is payable on U.S.$335.0 million aggregateprincipal amount of our 101¤4%Senior Notes due 2012 for a floating rate amount of interest that would bepayable on an equal amount of indebtedness. Under the swap, we receivedpayments that were calculated at a fixed rate of 101¤4% and madeinterest payments that were calculated at a floating rate that was equal to amargin of 6.32% over LIBOR. As of February 15, 2005 the margin changed to6.44%.

On November 4, 2005 the Company partiallycancelled the fixed-to-floating interest rate swap transaction in relation tothe U.S.$335.0 million aggregate principal amount of the 101¤4%Senior Notes due 2012 for the period from August 15, 2005 to August 15,2007. Due to the partial cancellation of the swap transaction, the Companywould incur fair value fluctuations through the statement of income from thedate of cancellation until August 15, 2007. The Company paid U.S.$6.9million on November 4, 2005 which represented its net cost from thepartial cancellation of the swap transaction. The Company has deferred thiscost which will be debited to the statement of income over the remainingduration of the 101¤4%Senior Notes due 2012.

On April 21, 2006, the Company cancelled theremainder of the fixed-to-floating interest rate swap transaction in relationto the U.S.$335.0 million aggregate principal amount of the 101¤4%Senior Notes due 2012, which was already partially cancelled for the periodfrom August 15, 2005 to August 15, 2007.

To limit the interest exposure after July 3, 2006on the long-term bank loan entered into on July 1, 2005 for financing ofthe acquisition of the 55% ownership interest in PR Jotun DA, the Companypurchased an interest rate cap. This interest rate cap has a strike rate of4.4%, limiting the maximum interest costs including margin to 5%. The interestrate cap has a starting notional amount of U.S.$143.9 million and thereduction schedule of the notional amount of the cap is aligned with therepayment schedule of the loan.

On August 10, 2006 and August 11, 2006, theCompany purchased interest rate caps to limit its interest rate exposure onU.S.$300 million of the total outstanding amount under its corporatecredit 

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facility. These interestrate caps have a strike rate of 6.5%, limiting the maximum interest costs onthat principal amount to 6.5% excluding margin. The interest rate caps have afixed notional amount of U.S.$200.0 million, U.S.$50.0 million andU.S.$50.0 million and are aligned with the maturity of the refinancedcorporate facility.

Thetable below provides information about our derivative financial instruments andother financial instruments that are sensitive to changes in interest rates,including interest rate swaps and debt obligations that were outstanding as of December 31,2006. For debt obligations, the table presents our principal cash flows and relatedweighted average interest rates by expected maturity dates under our existingdebt arrangements. For interest rate swaps, the table presents notional amountsand weighted average interest rates by expected (contractual) maturity dates.Notional amounts are used to calculate the contractual payments to be exchangedunder the swap. Weighted average variable rates are based on implied forwardrates in the yield curve at the reporting date. The information is presented inU.S. dollars, which is our reporting currency. The instrument’s actual cashflows are also denominated in U.S. dollars.

| ** **                        | ** ** | **Expected Maturity Date as of December 31,** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------------|------------|------------|
| **Liabilities**                   | ** ** | ** **                                                                  | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** | ** ** |
| ** **                        | ** ** | **(in thousands of U.S.$ equivalents)**                 | ** ** | ** ** |
| **Long-Term  Debt**               |       |                                                                        |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate debt                   |       | —                                                                      |       | —     |   | — |   | — |   | — |   | 153,823 |   | 153,823 |   | 173,864 |   |   |
| Average interest rate             |       | 7.0                                                                         | %          | 7.0        | % | 7.0 | % | 7.0 | % | 7.0 | % | 7.0 | % | — |   | — |   |   |
| Fixed rate debt(1)                |       | —                                                                      |       | —     |   | — |   | — |   | — |   | 335,000 | (1) | 335,000 | (1) | 351,750 |   |   |
| Average interest rate             |       | 10.25                                                                       | %          | 10.25      | % | 10.25 | % | 10.25 | % | 10.25 | % | 10.25 | % | — |   | — |   |   |
| Variable rate debt(2)             |       | —                                                                      |       | —     |   | — |   | — |   | 113,354 |   | 250,000 |   | 363,354 |   | — |   |   |
| Average interest rate             |       | LIBOR+M                                                                     |       | LIBOR+M    |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   |   |   |   |   |   |
| Variable rate debt(3)             |       | 28,105                                                                      |       | 27,578     |   | 28,931 |   | 28,387 |   | 18,676 |   | — |   | 131,677 |   | — |   |   |
| Average interest rate             |       | LIBOR+M                                                                     |       | LIBOR+M    |   | LIBOR+M |   | LIBOR+M |   | LIBOR+M |   | — |   | — |   | — |   |   |
| Fixed rate debt(4)                |       | 22,995                                                                      |       | 22,563     |   | 23,671 |   | 23,226 |   | 15,280 |   | — |   | 107,735 |   | — |   |   |
| Average interest rate             |       | 5                                                                           | %          | 5          | % | 5 | % | 5 | % | 5 | % | — |   | — |   | — |   |   |
| **Interest  Rate Swaps and Caps** |       |                                                                        |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable cap (3)                  |       | 28,105                                                                      |       | 27,578     |   | 28,931 |   | 28,387 |   | 18,676 |   | — |   | 131,677 |   | 2,209 |   |   |
| Average pay rate                  |       | 4.4                                                                         | %          | 4.4        | % | 4.4 | % | 4.4 | % | 4.4 | % | — |   | — |   | — |   |   |
| Average receive rate              |       | LIBOR                                                                       |       | LIBOR      |   | LIBOR |   | LIBOR |   | LIBOR |   | — |   | — |   | — |   |   |
| Variable cap (2)                  |       | —                                                                      |       | —     |   | — |   | — |   | 113,354 |   | 186,646 |   | 300,000 |   | 1,084 |   |   |
| Average pay rate                  |       | 6.5                                                                         | %          | 6.5        | % | 6.5 | % | 6.5 | % | 6.5 | % | 6.5 | % | — |   | — |   |   |
| Average receive  rate             |       | LIBOR                                                                       |       | LIBOR      |   | LIBOR |   | LIBOR |   | LIBOR |   | LIBOR |   | — |   | — |   |   |
|                                   |            |                                                                             |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Notes:

(1)                While indebtedness in respect of our 101¤4% Senior Notes due 2012 amounted toU.S.$310.4 million as of December 31, 2006, theU.S.$335.0 million aggregate principal amount of the 101¤4% Senior Notes due 2012 is payable uponmaturity. Interest is payable at a rate that is equal to 10.25%.

(2)                Represents indebtedness under our credit facility.Interest is payable at a rate that is equal to a margin over LIBOR. The marginvaries from 0.60% to 0.85% depending on certain factors and is currently set at0.60%. On August 10, 2006 and August 11, 2006, the Company purchasedinterest rate caps to limit its interest rate exposure on U.S.$300 million ofthe total outstanding amount under its corporate credit facility. Theseinterest rate caps have a strike rate of 6.5%, limiting the maximum interestcosts on that principal amount to 6.5% excluding margin. The interest rate capshave fixed notional amounts of U.S.$200.0 million, U.S.$50.0 million andU.S.$50.0 million and are aligned with the maturity of the refinanced corporatefacility.

(3)                Represents indebtedness of the Company under our Jotunloan agreement. Interest is payable at a rate that is equal to a specifiedmargin over a monthly average of LIBOR for one month (or shorter applicableperiod). The margin is currently set at 0.60%. To limit its interest exposureafter July 3, 2006, the Company purchased an interest rate cap which has astrike rate of 4.4%, limiting the maximum interest costs to 5%. The interestrate cap has a starting notional amount of U.S.$143.9 million and the reductionschedule of the notional amount of the cap is aligned with the repaymentschedule of the loan.

(4)                Represents indebtedness of PR Jotun DA toSMNAS. Interest is payable at a rate of 5%.

**Exchange RateSensitivity**

The Company’s revenues are primarily denominated inU.S. dollars and, to a lesser extent, sterling and Euro. In 2006, approximately£16.2 million (U.S.$29.7 million) of the Company’s revenues was 

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denominated in sterlingand approximately €31.9 million (U.S.$42.0million) was denominated in Euro. Our expenses are denominated primarily inU.S. dollars and to a lesser degree, euro and sterling. We are exposed tofluctuations in foreign currency exchange rates, because a portion of ourexpenses and financial indebtedness is denominated in currencies that aredifferent from our revenues. The Company’s policy is to match, through our FPSOservice agreements, the revenues in a particular currency with its operatingcosts in that currency, thereby minimizing the risk associated withfluctuations in foreign currency exchange rates. The Company also matches itsindebtedness denominated in U.S. dollars with its revenues denominated in U.S.dollars. The Company purchases foreign currency exchange contracts fromfinancial institutions to the extent of any residual exposure. The Company managesits outstanding currency exposure on a regular basis and nets these exposuresacross its operations as a group. Gains and losses related to specific currencytransactions are recognized as part of its income from financing activities.

In the years 2005 and 2006the Company entered into foreign currency exchange contracts in relation toprojects to hedge against the risk of fluctuations in foreign currency exchangerates for expenditures in currencies other than the project currency. TheCompany has designated certain foreign currency exchange contracts as cash flowhedges. For such contracts designated and that qualify as cash flow hedges,gains and losses related to project specific currency transactions arerecognized as part of our accumulated other comprehensive income/(loss).

**ITEM 12:**        DESCRIPTIONOF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

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**PART II**

**ITEM 13:**        DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES

None.

**ITEM14:**        MATERIAL MODIFICATIONS TOTHE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

There have been nomaterial modifications in the rights of our security holders and there are nospecific assets securing any class of our securities.

**ITEM 15:**        CONTROLSAND PROCEDURES

*The information included in this section concerns theevaluation of disclosure controls and procedures and internal controls referredto in the Certifications included in this annual report under “Certifications”.This information should be read in conjunction with the statements set forth inthe “Certifications” for a more complete understanding of the topics presented.*

**(A) DisclosureControls and Procedures**

**Controls Evaluationand Related Certifications**

As of the end of theperiod covered by this annual report, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures. Disclosurecontrols are procedures designed to ensure that information is accumulated,recorded, processed, summarized and communicated to our management, including Mr. HugoHeerema (our principal executive officer) and Mr. Kees Voormolen (ourprincipal financial officer), in a manner that enables our management to maketimely decisions regarding required disclosures and to ensure that our annualreports and other filings with the Securities and Exchange Commission are filedwithin required time periods. In connection with this evaluation, we alsoreviewed our internal controls, because we believe that those controls areimportant to the efficacy of our disclosure controls and procedures and becausesuch a review is necessitated in connection with the Certifications set forthherein under “Certifications”. Internal controls are procedures designed toprovide reasonable assurance that our transactions are properly authorized, ourassets are safeguarded against unauthorized or improper use and ourtransactions are properly recorded and reported, in each case to permit thepreparation of our financial statements in conformity with U.S. GAAP.

**Scope of ControlsEvaluation**

The establishment andevaluation of our disclosure controls and procedures and our internal controlswas performed under the supervision and with the participation of our managingdirectors and executive officers, including Mr. Heerema and Mr. Voormolen,and included a review of the controls’ objectives and design, ourimplementation of the controls and the effect of the controls on theinformation generated for use in this annual report. In the course ofevaluation, we sought to identify data errors, problems with our controls andprocedures and acts of fraud, if any, and to confirm, if necessary, that anyappropriate corrective actions, including process improvements, were beingundertaken. Our finance administration has, with the assistance of othermembers of our management, begun conducting this evaluation on a regular basis.

**Limitations on theEffectiveness of Controls**

It should be noted thatany system of controls, however well designed and operated, can provide onlyreasonable, and not absolute, assurance that the objectives of the system willbe met. In addition, the 

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designof any control system is based in part upon certain assumptions about thelikelihood of future events.

**Conclusions**

Based upon our evaluation,Mr. Heerema and Mr. Voormolen have concluded that our disclosurecontrols are effective to ensure that material information relating to us ismade known to management, including Mr. Heerema and Mr. Voormolen,particularly during the period when our filings with the Securities andExchange Commission are being prepared, and that our internal controls areeffective to provide reasonable assurance that our financial statements arefairly presented in all material respects in conformity with U.S. GAAP.

**(B) Management’sAnnual Report on Internal Control Over Financial Reporting**

Contained in substance inItem 15(A) above and the relevant certifications.

**(C) AttestationReport of the Registered Public Accounting Firm**

Not applicable.

**(D) Changes inInternal Control Over Financial Reporting**

During fiscal year 2006there have been no changes in our internal controls over financial reporting.

**ITEM16A:**          AUDIT COMMITTEEFINANCIAL EXPERT

Neither our outstandingpreference A shares nor our outstanding common B shares are listed on asecurities exchange or otherwise quoted in the United States or elsewhere and,accordingly, we are not required by any applicable law, regulation or rule toestablish or maintain an audit committee. Our articles of association andby-laws do not require us to establish or maintain an audit committee.

**ITEM16B:**         CODE OF ETHICS

We have adopted a code ofethics applicable to the managing directors and executive officers withinAurelia Energy N.V. and its consolidated subsidiaries. See “Item 6: Directors,Senior Management and Employees”. A copy of the code of ethics has been filedas Exhibit 11.1 to this to this annual report.

**ITEM16C:**         PRINCIPAL ACCOUNTANT FEESAND SERVICES

DeloitteAccountants B.V. has served as our independent registered public accountantsfor each of the years ended in the three-year period ended December 31,2006. The following table presents the aggregate fees for professional auditservices and other services rendered by Deloitte Accountants B.V. in 2005 and2006.

| ** **          | ** ** | **2005**                       | ** ** | **2006** | ** ** |
|---------------------|------------|--------------------------------|------------|----------|------------|
| ** **          | ** ** | **(in U.S.$  thousands)** | ** ** |
| Audit fees          |       |                           | 464        |     |       |   | 505 |   |   |
| Audit-related  fees |       |                           | 28         |     |       |   | — |   |   |
| Tax fees            |       |                           | —     |     |       |   | — |   |   |
| All other fees      |       |                           | —     |     |       |   | — |   |   |
| Total               |       |                           | 492        |     |       |   | 505 |   |   |

 

91

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Note:

(1)          Allfee amounts are exclusive of value added tax.

**Audit Fees**

Audit fees primarilyrelate to the audit of our annual financial statements included in our annualreport on Form 20-F, work on our quarterly financial results,services related to statutory and regulatory filings of our subsidiaries, and servicesprovided in connection with accounting consultations.

**Audit-relatedfees**

Audit related feesprimarily relate to services provided in connection with consultations onimplementing the requirements of Section 404 of the Sarbanes-OxleyAct.

**ITEM16D:**        EXEMPTIONS FROM THELISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

**ITEM16E:**         PURCHASES OF EQUITYSECURITIES BY ISSUER AND AFFILIATED PURCHASERS

Not applicable.

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**PART III**

**ITEM 17:**        FINANCIALSTATEMENTS

We have responded to Item18 in lieu of responding to this Item 17.

**ITEM 18:**        FINANCIALSTATEMENTS

The following consolidatedfinancial statements, together with the report of Deloitte Accountants B.V.,are filed as part of this annual report.

**Index to Consolidated Financial Statements**

|                                                                  | ** ** | **Page** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|
| Report of  Independent Registered Public Accounting Firm         |       |     | F-1        |   |   |
| Consolidated  Balance Sheets                                     |       |     | F-2        |   |   |
| Consolidated  Statements of Income                               |       |     | F-4        |   |   |
| Consolidated  Statements of Changes in Shareholder’s Equity |       |     | F-5        |   |   |
| Consolidated Cash  Flow Statements                               |       |     | F-6        |   |   |
| Notes to Consolidated  Financial Statements                      |       |     | F-7        |   |   |

 

**ITEM 19:**        EXHIBITS

Thefollowing instruments and documents are included as exhibits to this annualreport.

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                              |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1*            |       | Articles of Incorporation of Aurelia Energy N.V.                                                                                                                                                             |
| 2.1*            |       | Indenture, dated as of February 22, 2002,  between the Registrants and The Bank of New York, as trustee, which includes  the form of 101¤4%  Senior Note due 2012 as an exhibit thereto.           |
| 2.2****         |       | Supplemental Indenture, dated as of March 31,  2004, between the Registrants and The Bank of New York, as trustee, which  includes the form of 101¤4% Senior  Note due 2012 as an exhibit thereto. |
| 3.1**           |       | Settlement Constituting the Jacaranda Trust, dated  January 29, 2003, by and between Hugo Jan Heerema and Bailhache Labesse  Trustees Limited and Graham Radford Boxall.                                |
| 4.1*†      |       | Agreement for a Floating Production, Storage and  Offtake Facility for the Fife Field Development, dated March 24, 1994,  between Amerada Hess Ltd. and Bluewater Offshore Production Systems Ltd.      |
| 4.2*            |       | Variation Order No. P03, dated June 19,  1996, between Bluewater Offshore Production Systems Ltd. and Amerada Hess  Ltd.                                                                           |
| 4.3*†      |       | Variation Order No. P09, dated July 12,  1996, between Bluewater Offshore Production Systems Ltd. and Amerada Hess  Ltd.                                                                           |
| 4.4*†      |       | Variation Order No. P13, dated  September 27, 1996, between Bluewater Offshore Production Systems Ltd.  and Amerada Hess Ltd.                                                                      |
| 4.5*†      |       | Variation Order No. P15, dated April 7,  1997, between Bluewater Offshore Production Systems Ltd. and Amerada Hess  Ltd.                                                                           |
| 4.6*            |       | Variation Order No. P40, dated January 10,  2000, between Bluewater Offshore Production Systems Ltd. and Amerada Hess  Ltd.                                                                        |
| 4.7*†      |       | Variation Order No. P42, dated January 29,  2001, between Bluewater Offshore Production Systems Ltd., and Amerada Hess  Ltd.                                                                       |

 

93

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                   |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.8*†      |       | Agreement for the Provision and Operation of a  Floating Production, Storage and Offloading Vessel for the Ross Field and the  Blake Field, dated June 29, 2001, between Talisman Energy (UK) Ltd. and  Bluewater (Floating Production) Ltd. |
| 4.9*†      |       | Agreement for a Floating Production, Storage and  Offtake Facility for the Sable Field Development, dated June 12, 2001,  between Soekor E & P (PTY) Ltd. and Bluewater (UK) Ltd.                                                   |
| 4.10*†     |       | Contract for the Provision of Production, Storage,  Offtake and Transportation Services for the Pierce Field, dated  February 22, 1997, between Enterprise Oil/Shell plc and Den Norske Stats  Oljeslkap A.S.                                |
| 4.11*           |       | Novation Agreement, dated September 8, 1998,  between Enterprise Oil/Shell plc and Pierce Production Company Ltd.                                                                                                                            |
| 4.12*†     |       | Supplementary Agreement Relating to Facilities  Upgrades, dated December 22, 1999, between Enterprise Oil/Shell plc and  Pierce Production Company Ltd.                                                                                      |
| 4.13*†     |       | Contract ANS022731, dated September 24, 1996,  between Statoil Orient Inc. and Lufeng Development Company.                                                                                                                                   |
| 4.14*†     |       | Amendment No. 3 to Contract ANS022731, dated  January 31, 2001, between Statoil Orient Inc. and Lufeng Development  Company.                                                                                                            |
| 4.15*           |       | Memorandum of Agreement, dated August 31, 2001,  among Navion Offshore AS, Navion Hugin AS, Bergesen d.y. Hugin Shipping AS  and Aurelia Holding N.V.                                                                                        |
| 4.16*           |       | Partnership Shares Purchase Agreement, dated  August 31, 2001, between Advanced Production Systems DA, Navion ASA,  Aurelia Holding N.V. and Marenco Investments Ltd.                                                                        |
| 4.17*†     |       | Memorandum of Agreement, dated August 31, 2002,  among Navion Maritime AS, Advanced Petroleum DA, Navion ASA and Aurelia  Holding N.V.                                                                                                       |
| 4.18*           |       | Share Purchase Agreement, dated August 31,  2001, between Advanced Production Systems DA, Navion ASA, Bergesen d.y ASA,  and Aurelia Holding N.V.                                                                                            |
| 4.19*           |       | Share Purchase Agreement, dated January 28,  2002, between Aurelia Holding N.V. and Bluewater Services (UK) Ltd.                                                                                                                             |
| 4.20*           |       | Share Purchase Agreement, dated January 28,  2002, between Aurelia Holding N.V. and Bluewater Floating Production B.V.                                                                                                                       |
| 4.21*           |       | Deed of Transfer of Shares, dated January 28,  2002, between Aurelia Holding N.V. and Bluewater Floating Production B.V.                                                                                                                     |
| 4.22*           |       | Share Purchase Agreement, dated January 28,  2002, between Aurelia Holding N.V., Marenco Investments Ltd., Bluewater  International B.V. and Bluewater Holding B.V.                                                                          |
| 4.23*           |       | Agreement of the Sale and Purchase of the Economic  Entitlement to the Assets of the Bluewater Group, dated as of January 1,  2000, between Bluewater Holding B.V., Aurelia Energy N.V. and other Group  Companies.                          |
| 4.24*           |       | Amendment to the Agreement of the Sale and Purchase  of the Economic Entitlement to the Assets of the Bluewater Group, dated  September 2001, between Bluewater Holding B.V., Aurelia Energy N.V. and  other Group Companies.                |
| 4.25***         |       | Amended and Restated Intercompany Loan Agreement,  dated April 30, 2003, between Bluewater Finance Limited and Bluewater  Holding B.V.                                                                                                       |
| 4.26*           |       | Unsubordinated Marenco Loans (included in the  Schedule to Exhibit 10.27).                                                                                                                                                                   |
| 4.27*           |       | Amended and Restated Marenco Loan Agreement, dated  November 21, 2001, between Aurelia Holding N.V. and Marenco Investments  Limited.                                                                                                        |
| 4.28*           |       | Guarantee Facility, dated February 24, 1997,  among Lloyds Bank Plc, Bluewater Terminal Systems N.V., and Bluewater Energy  N.V.                                                                                                             |

 

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.29*           |       | Guarantee Facility, dated December 19, 2001,  among ING Bank N.V., Bluewater Holding B.V., Bluewater Energy Services B.V.  and Bluewater Terminal Systems N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.30*           |       | Revolving Credit Facility Agreement, dated  January 15, 2002, between Bluewater Holding B.V., Bluewater Energy  Services B.V., Bluewater Offshore Production Systems Limited, Bluewater  (Haewene Brim) N.V., Bluewater (Munin) N.V., Ranberger Holding N.V., Luludia  Asset Finance B.V., Refugio B.V., Barclays Capital, Fortis Bank (Nederland)  N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.31*           |       | Facility Guarantee, dated January 28, 2002,  among Aurelia Energy N.V., Bluewater (Bleo Holm) N.V., Bluewater (Floating  Production) Ltd., Bluewater (Glas Dowr) N.V., Bluewater (Malta) Ltd.,  Bluewater (New Hull) N.V., Bluewater (UK) Ltd., Bluewater Brasil Ltda.,  Bluewater Energy N.V., Bluewater Equipment Leasing Ltd., Bluewater Floating  Productions B.V., Bluewater International B.V., Bluewater Offshore Production  Systems N.V., Bluewater Offshore Production Systems Nigeria Ltd., Bluewater  Offshore Production Systems (USA), Inc., Bluewater Operations (UK) Ltd.,  Bluewater Services (UK) Ltd., Bluewater Terminal Systems N.V., Bluewater  Norway ANS, Lufeng Development Company ANS, Pierce Production Company Ltd.,  Bleo Holm Standby Purchaser N.V., Barclays Bank PLC and Bluewater Energy  Services B.V. |
| 4.32*           |       | Trust Deed and Deed of Proceeds and Priorities,  dated January 28, 2002, between Bluewater Holding B.V., Bluewater Energy  Services B.V., Bluewater Offshore Production Systems Limited, Bluewater  (Haewene Brim) N.V., Bluewater (Munin) N.V., Ranberger Holding N.V., Luludia  Asset Finance B.V., Refugio B.V., Barclays Capital, Fortis Bank (Nederland)  N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.33*           |       | Deed of Amendment, dated January 28, 2002,  between Bluewater Holding B.V., Bluewater Energy Services B.V., Bluewater  Offshore Production Systems Limited, Bluewater (Haewene Brim) N.V., Bluewater  (Munin) N.V., Ranberger Holding N.V., Luludia Asset Finance B.V., Refugio  B.V., Barclays Capital, Fortis Bank (Nederland) N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.34*           |       | Uisge Gorm Mortgage, dated January 25, 2002,  between Bluewater Offshore Production Systems N.V. and Barclays Bank PLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.35*           |       | Glas Dowr Mortgage, dated January 25, 2002,  between Bluewater (Glas Dowr) N.V. and Barclays Bank PLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.36*           |       | Bleo Holm Mortgage, dated January 25, 2002,  between Bluewater (Bleo Holm) N.V. and Barclays Bank PLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.37*           |       | Haewene Brim Mortgage, dated January 25, 2002,  between Bluewater (Haewene Brim) N.V. and Barclays Bank PLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.38*           |       | Munin Mortgage, dated January 25, 2002, between  Bluewater (Munin) N.V. and Barclays Bank PLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.39*           |       | Recognition of Rights Deed, dated January 28,  2002, between Barclays Bank PLC, Bluewater (Floating Production) Limited,  Bluewater (Bleo Holm) N.V., Bluewater (Malta) Limited, Bluewater Energy N.V.,  Bluewater Energy Services B.V., Hill Samuel Leasing (No.4) Limited, Asterix  Exploration Foundation, Bleo Holm Standby Purchaser N.V., Alice Exploration  Foundation, Ariel Exploration Foundation and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.40***         |       | Recognition of Rights Deed, dated June 12,  2003, in relation to the floating production, storage and off-loading  unit “Haewene Brim” between Bluewater (Haewene Brim) N.V., Pierce Production  Company Limited, Barclays Bank PLC, Bluewater Energy N.V., Bluewater Holding  B.V., Hill Samuel Leasing (No. 4) Limited, Ola Dunk II Foundation,  Asterix Exploration Foundation, Alice Exploration Foundation, Ariel  Exploration Foundation, ING Bank N.V. and Bluewater Energy Services B.V. |
| 4.41*           |       | Notice of Assignment in Relation to AHL, dated  January 28, 2002, between Bluewater (UK) Limited, Barclays Bank PLC and  Amerada Hess Limited.                                                                                                                                                                                                                                                                                                                                                                  |
| 4.42*           |       | Notice of Assignment in Relation to Soekor, dated  January 28, 2002, between Soekor E&P (PTY) Limited and Bluewater  (UK) Limited.                                                                                                                                                                                                                                                                                                                                                                          |
| 4.43*           |       | Notice of Assignment in Relation to Talisman, dated  January 28, 2002, between Bluewater (Floating Production) Limited,  Barclays Bank PLC and Talisman Energy (UK) Limited.                                                                                                                                                                                                                                                                                                                                    |
| 4.44*           |       | Notice of Assignment in Relation to Talisman Parent  dated, January 28, 2002, between Bluewater (Floating Production)  Limited, Barclays Bank PLC and Talisman Energy (UK) Limited.                                                                                                                                                                                                                                                                                                                             |
| 4.45*           |       | Notice of Assignment in Relation to Statoil, dated  January 28, 2002, between Lufeng Development Company ANS, ING Bank N.V.,  and Statoil (Orient) Inc.                                                                                                                                                                                                                                                                                                                                                         |
| 4.46*           |       | Notice of Assignment in Relation to Enterprise,  dated January 28, 2002, between Enterprise Oil/Shell PLC, Pierce  Production Company Limited and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                 |
| 4.47*           |       | Berge Hugin Field Contract dated, January 28,  2002, between Enterprise Oil/Shell PLC, Pierce Production Company Limited,  Bluewater (Haewene Brim) N.V., Ranberger Holding N.V., Aurelia Holding N.V.,  and Aurelia Energy N.V.                                                                                                                                                                                                                                                                                |
| 4.48*           |       | Conditional Sale and Conversion Agreement, dated  April 27, 1998, between Bluewater Offshore Production Systems Limited  and Hill Samuel Leasing (No. 4) Limited.                                                                                                                                                                                                                                                                                                                                          |
| 4.49*           |       | Head Lease, dated April 27, 1998, between Hill  Samuel Leasing (No. 4) Limited and Refugio B.V.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.50*           |       | Sub-Lease, dated April 27, 1998, between  Refugio B.V. and Bluewater Operations (UK) Limited.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.51*           |       | Conditional Sale and Conversion Agreement, dated  April 27, 1998, between Bluewater (Glas Dowr) N.V., Hill Samuel Leasing  (No. 4) Limited, and Brightfield Corporation.                                                                                                                                                                                                                                                                                                                                   |
| 4.52*           |       | Head Lease, dated April 27, 1998, between Hill  Samuel Leasing (No. 4) Limited and Luludia Asset Finance B.V.                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.53*           |       | Sub-Lease, dated April 27, 1998, between  Luludia Asset Finance B.V. and Bluewater (UK) Limited.                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.54*           |       | Head Lease, dated January 29, 1999, between  Hill Samuel Leasing (No. 4) Limited, Bluewater (Malta) Limited and  Bluewater Energy N.V.                                                                                                                                                                                                                                                                                                                                                                     |
| 4.55*           |       | Berge Hugin Topside Contract, dated August 31,  2001, between Advanced Production Systems DA, Ranberger Holding N.V. and  Aurelia Holding N.V.                                                                                                                                                                                                                                                                                                                                                                  |
| 4.56***         |       | Lease Relating to Topsides Processing Plant for the  FPSO “Haewene Brim”, dated April 8, 2003, between Pierce Production  Company Limited, Hill Samuel Leasing (No. 4) Limited and Bluewater  Energy N.V.                                                                                                                                                                                                                                                                                        |

 

96

----

 

| Exhibit  Number                  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.57**                           |       | Deed of Amendment, Release and Consent, dated 21  February 2003, in relation to a Revolving Credit Facility Agreement of  up to U.S.$600,000,000 to Bluewater Holding B.V., Bluewater Energy Services  B.V., Bluewater Offshore Production Systems Limited, Bluewater (Haewene Brim)  N.V., Ranberger Holding N.V., Luludia Asset Finance B.V., Refugio B.V., Barclays  Capital, Fortis Bank Nederland N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                           |
| 4.58***                          |       | Deed of Consent and  Amendment, dated June 12, 2003, in respect of the financing of FPSO  “Haewene Brim”, between Bluewater Holding B.V., Bluewater Energy Services  B.V., Bluewater Offshore Production Systems Limited, Bluewater (Haewene Brim)  N.V., Bluewater Energy N.V., Aurelia Energy N.V., Ranberger Holding N.V.,  Luludia Asset Finance B.V., Refugio B.V., Barclays Bank PLC, Barclays  Capital, Pierce Production Company Limited, Fortis Bank Nederland N.V., Hill  Samuel Leasing (No. 4) Limited, Alice Exploration Foundation, Ariel  Exploration Foundation, Asterix Exploration Foundation, Ola Dunk II  Foundation, ING Bank N.V. and the Banks and Financial Institutions listed in  Schedule 6 included therein. |
| 4.59***††              |       | Supplementary Agreement Relating to Contract  No. 97.22.02 For the Provision of Production, Storage, Offtake and  Transportation vices for the Pierce Field, dated 28 January 2003,  between Enterprise Oil/Shell plc and Pierce Production Company Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.60***                          |       | Standby Sub-Lease Agreement for Topside  Facilities relating to the topsides processing plant for the Floating  Production, Storage and Off-Loading Facility “Haewene Brim”, dated  April 8, 2003, between Bluewater Holding B.V. and Pierce Production  Company Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.61***                          |       | Standby Lease Agreement relating to the topsides  processing plant for the Floating Production, Storage and Off-Loading  Facility “Haewene Brim”, dated April 8, 2003, between Ola Dunk II  Foundation, Bluewater Holding B.V. and Pierce Production Company Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.62****†††       |       | Xijiang Oil South China Sea FPSO Lease Contract  relating to the “Munin”, dated October 20, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.63***                          |       | Purchase Agreement, dated April 23, 2003, among  the Registrants, Morgan Stanley & Co. International Limited and ING  Bank N.V., London Branch.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.64***                          |       | Registration Rights Agreement, dated as of  April 30, 2003, among the Registrants, Morgan Stanley & Co.  International Limited and ING Bank N.V., London Branch.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.65****†††† |       | Amendment No. 5 to Contract ANS 022731, dated  16 June 2004, between Statoil (Orient) Inc. and Lufeng Development  Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.66*****                        |       | Restated Revolving Credit Facility Agreement, dated  June 29, 2006, between Bluewater Holding B.V., Bluewater Energy Services  B.V., Bluewater (Aoka Mizu) N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.67*****                        |       | Restated Facility Guarantee, dated June 29, 2006,  among Aurelia Energy N.V., Bluewater Energy N.V., Bluewater Offshore  Production Systems Limited, Bluewater Floating Production B.V., Bluewater  (Bleo Holm) N.V., Bluewater (Glas Dowr) N.V., Bluewater (Haewene Brim) N.V.,  Bluewater (Munin) N.V., Bluewater Offshore Production Systems N.V., Bluewater  International B.V., Lufeng Development Company ANS, Bluewater Services (UK)  Limited, Bluewater Ettrick Production (UK) Limited, Bluewater (Floating  Production) Limited, Bluewater Operations (UK) Limited, Bluewater (UK)  Limited, Pierce Production Company Limited, Bluewater Energy Services B.V.  and ING Bank N.V.                                                                 |

 

97

----

 

| Exhibit  Number                         | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.68*****                               |       | Trust Deed and Deed of Proceeds  and Priorities, dated June 29, 2006, between Bluewater Holding B.V.,  Bluewater Energy Services B.V., Bluewater (Aoka Mizu) N.V., ING Bank N.V.,  Aurelia Energy N.V., Bluewater Energy N.V., Bluewater Offshore Production  Systems Limited, Bluewater Floating Production B.V., Bluewater (Bleo Holm) N  .V., Bluewater (Glas Dowr) N.V., Bluewater (Haewene Brim) N.V., Bluewater  (Munin) N.V., Bluewater Offshore Production Systems N.V., Bluewater  International B.V., Lufeng Development Company ANS, Bluewater Services (UK)  Limited, Bluewater Ettrick Production (UK) Limited, Bluewater (Floating  Production) Limited, Bluewater Operations (UK) Limited, Bluewater (UK)  Limited and Pierce Production Company Limited. |
| 4.69*****                               |       | Notice of Assignment in Relation to Nexen dated June  29, 2006, between Bluewater Ettrick Production (UK) Limited, ING Bank N.V.  and Nexen Petroleum UK Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.70*****                               |       | Notice of Assignment in Relation to Nexen Parent,  dated June 29, 2006, between Bluewater Ettrick Production (UK) Limited, ING  Bank N.V. and Nexen Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.71*****                               |       | Notice of Assignment in Relation to PetroSA, dated  June 29, 2006, between Bluewater (UK) Limited, ING Bank N.V. and PetroSA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.72*****                               |       | Notice of Assignment in  Relation to Talisman, dated June 29, 2006, between Bluewater (Floating  Production) Limited, ING Bank N.V. and Talisman Energy (UK) Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.73*****                               |       | Notice of Assignment in Relation to Talisman Parent,  dated June 29, 2006, between Bluewater (Floating Production) Limited, ING  Bank N.V. and Talisman Energy Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.74*****                               |       | Notice of Assignment in Relation to Enterprise,  dated June 29, 2006, between Pierce Production Company Limited, ING Bank N.V.  and Enterprise Oil Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.75*****                               |       | Notice of Assignment in Relation to Statoil, dated  June 29, 2006, between Lufeng Development Company ANS, ING Bank N.V. and  Statoil Orient Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.76*****                               |       | Notice of Assignment in Relation to Statoil, dated  July 12, 2006, between Bluewater Energy Services B.V., ING Bank N.V. and  Statoil Orient Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.77*****                               |       | Notice of Assignment in Relation to AHL, dated June  29, 2006, between Bluewater Operations (UK) Limited, Bluewater Offshore  Production Systems Limited, Bluewater (UK) Limited, ING Bank N.V. and Hess  Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.78*****                               |       | Bluewater (Aoka Mizu) Mortgage, dated June 29, 2006,  between Bluewater (Aoka Mizu) N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.79*****                               |       | Glas Dowr Mortgage, dated June 29, 2006, between  Bluewater (Glas Dowr) N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.80*****                               |       | Bleo Holm Mortgage, dated June 29, 2006, between  Bluewater (Bleo Holm) N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.81*****                               |       | Haewene Brim Mortgage, dated June 29, 2006, between  Bluewater (Haewene Brim) N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.82*****                               |       | Munin Mortgage, dated June 29, 2006, between  Bluewater (Munin) N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.83*****                               |       | Uisge Gorm Mortgage, dated June 29, 2006, between  Bluewater Offshore Production Systems N.V. and ING Bank N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.84*****††††† |       | Agreement for the Provision and Operation of a  Floating Production, Storage and Offloading Vessel for the Ettrick Field,  dated March 31, 2006, between Nexen Petroleum (UK) Limited and Bluewater  Ettrick Production (UK) Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.85*****                               |       | Revised Marenco Loan Agreement, dated June 30, 2006,  between Aurelia Holding N.V. and Marenco Investments Limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 7.1*****                                |       | Statement Regarding Computation of Ratios.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 8.1****                                 |       | Subsidiaries of Aurelia Energy N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 11.1****                                |       | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

98

----

 

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                          |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1*****       |       | Certification of principal executive officer  pursuant to Rule 15d- 14(a) of the Securities Exchange Act of  1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
| 12.2*****       |       | Certification of principal financial officer  pursuant to Rule 15d- 14(a) of the Securities Exchange Act of  1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
| 13.1*****       |       | Certification by principal executive officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                       |
| 13.2*****       |       | Certification by principal financial officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                       |

----

Notes:

*                                              Previouslyfiled as an exhibit to the Registrant’s Registration Statement on Form F-4/S-4(SEC File Nos. 333-87336; 333-87436), dated April 26,2002, as amended.

**                                       Previouslyfiled as an exhibit to the Registrant’s Annual Report on Form 20-Ffor the year ended December 31, 2002, as filed with the Securities andExchange Commission on April 15, 2003, as amended.

***                                Previouslyfiled as an exhibit to the Registrant’s Registration Statement on Form F-4/S-4(SEC File No. 333-106170), dated June 16, 2003, asamended.

****                         Previouslyfiled as an exhibit to the Registrant’s Annual Report on Form 20-Ffor the year ended December 31, 2003, as filed with the Securities andExchange Commission on April 20, 2004.

*****                  Filed herewith.

†                                              Portionsof the exhibit have been omitted pursuant to the Securities Exchange Commission’sOrder Granting Confidential Treatment Under the Securities Act of 1933 (SECFile No. 333-87336-CF#12672), dated August 21, 2002.

††                                       Portionsof the exhibit have been omitted pursuant to the Securities Exchange Commission’sOrder Granting Confidential Treatment Under the Securities Act of 1933 (SECFile No. 333-106170-CF#14072), dated June 27, 2003.

†††                                Portionsof the exhibit have been omitted pursuant to the Securities Exchange Commission’sOrder Granting Confidential Treatment Under the Securities Act of 1933 (SECFile No. 333-87336-01-CF#15007), dated August 20,2004.

††††                         Portionsof the exhibit have been omitted pursuant to the Securities ExchangeCommission’s Order Granting Confidential Treatment Under the SecuritiesExchange Act of 1934 (SEC File No. 333-873601-CF#16799), datedJanuary 16, 2006.

†††††                  Portions of theexhibit have been omitted pursuant to a Request for Confidential Treatment.

 

99

----

**SIGNATURE**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.
|        |     |     |     | AURELIA  ENERGY N.V.                                                                        |
|--------|----------|----------|----------|---------------------------------------------------------------------------------------------|
|   |     | By:      |     | /s/ G.E. ELIAS                                                                              |
|   | * * | * * | * * | *United International Trust N.V.,*G.E. Elias*Managing Director*                             |
|   |     | By:      | * * | /s/ V.M.G. HASETH-PORTILLO                                                                  |
|   | * * | * * | * * | *United International Trust N.V.,*Represented by V.M.G. Haseth-Portillo*Attorney-in-Fact A* |

 

Date: April 10, 2007

100

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholder of Aurelia Energy N.V.

We have audited the accompanying consolidated balancesheets of Aurelia Energy N.V. and subsidiaries (the “Company”) as of December 31,2006 and 2005 and the related consolidated statements of income, changes inshareholder’s equity, and cash flows for each of the three years in the periodended December 31, 2006. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of AureliaEnergy N.V. and subsidiaries as of December 31, 2006 and 2005 and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

As discussed in note 34, the Company restated itsstatement of cash flows for the year ended December 31, 2005.

Deloitte Accountants B.V.Amsterdam, The NetherlandsApril 10, 2007

F-1

----

**AureliaEnergy N.V.Consolidated Balance Sheets**

| ** **                           | ** ** | ** ** | ** ** | **At December 31,**                                                                | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Note**   | ** ** | **2006**                                                                                     | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **(in U.S.$ thousands,  except share and per share  amounts)** | ** ** |
| **ASSETS**                           | ** ** | ** ** | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Current assets**                   | ** ** | ** ** | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| Cash  and cash equivalents           |       | 6          |       | 42,503                                                                                       |       | 43,026 |   |
| Accounts  receivable                 |       | 7          |       |                                                                                         |       |   |   |
| Trade, net                           |       |       |       | 43,480                                                                                       |       | 31,529 |   |
| Related party                        |       |       |       | —                                                                                       |       | 99 |   |
| Other receivables                    |       | 8          |       | 45,038                                                                                       |       | 25,654 |   |
| Loan                                 |       | 10         |       | 2,036                                                                                        |       | — |   |
| Prepaid  expenses                    |       |       |       | 8,230                                                                                        |       | 4,027 |   |
| *Total current assets*               |       |       |       | 98,784                                                                                       |       | 61,309 |   |
| Inventory                            |       |       |       |                                                                                         |       |   |   |
| Work in process                      |       | 9          |       | 29,654                                                                                       |       | 15,174 |   |
|                                 |       |       |       | 170,941                                                                                      |       | 119,509 |   |
| **Non current assets**               |       |       |       |                                                                                         |       |   |   |
| Financial  investment                |       | 11         |       | 23,000                                                                                       |       | 9,500 |   |
| Loan                                 |       | 10         |       | 150                                                                                          |       | 150 |   |
| Tangible  fixed assets               |       |       |       |                                                                                         |       |   |   |
| Tangible fixed assets, net           |       | 12         |       |                                                                                         |       |   |   |
| FPSOs                                |       |       |       | 1,111,978                                                                                    |       | 1,213,532 |   |
| Other tangible fixed assets          |       |       |       | 297,089                                                                                      |       | 61,429 |   |
| Income  tax receivable               |       |       |       | 2,626                                                                                        |       | 2,330 |   |
| Deferred  income taxes               |       | 26,30      |       | 122,177                                                                                      |       | 106,783 |   |
| Financial  instruments at fair value |       | 28         |       | 3,293                                                                                        |       | 2,125 |   |
| Debt  arrangement fees               |       | 13         |       | 17,756                                                                                       |       | 14,327 |   |
| *Total non current assets*           |       |       |       | 1,578,069                                                                                    |       | 1,410,176 |   |
|                                 |       |       |       | 1,749,010                                                                                    |       | 1,529,685 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-2

----

**AureliaEnergy N.V.Consolidated Balance Sheets (Continued)**

| ** **                                                                                                                                                                            | ** ** | ** ** | ** ** | **At December 31,**                                                                      | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **Note**   | ** ** | **2006**                                                                                           | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                            | ** ** | ** ** | ** ** | **(in U.S.$ thousands, except   share and per share  amounts)** | ** ** |
| **LIABILITIES AND  SHAREHOLDER’S EQUITY**                                                                                                                                        | ** ** | ** ** | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** |
| **Current liabilities**                                                                                                                                                               |       |       |       |                                                                                               |       |   |   |
| Accounts  payable                                                                                                                                                                     |       |       |       | 25,599                                                                                             |       | 18,070 |   |
| Related  party                                                                                                                                                                        |       |       |       | 125                                                                                                |       | 125 |   |
| Income  taxes                                                                                                                                                                         |       | 26,30      |       | 726                                                                                                |       | 1,010 |   |
| Wage  taxes and social security contributions                                                                                                                                         |       |       |       | 2,914                                                                                              |       | 2,564 |   |
| Other  liabilities and accrued expenses                                                                                                                                               |       | 14         |       | 82,012                                                                                             |       | 85,766 |   |
| Billings  in excess of cost and unrealized income                                                                                                                                     |       | 9          |       | 12,300                                                                                             |       | 11,624 |   |
| Short-term  loan                                                                                                                                                                      |       | 15         |       | 3,441                                                                                              |       | — |   |
| Current  portion of long-term debt                                                                                                                                                    |       | 17         |       | 51,101                                                                                             |       | 52,116 |   |
| *Total current liabilities*                                                                                                                                                           |       |       |       | 178,218                                                                                            |       | 171,275 |   |
| **Non current liabilities**                                                                                                                                                           |       |       |       |                                                                                               |       |   |   |
| Long  term bank loans                                                                                                                                                                 |       | 16,17      |       | 551,665                                                                                            |       | 356,266 |   |
| 101¤4% Senior  Notes due 2012                                                                                                                                                    |       | 18,19      |       | 310,381                                                                                            |       | 306,810 |   |
| Long  term loans, related party                                                                                                                                                       |       | 20         |       | 153,823                                                                                            |       | 147,031 |   |
| Financial  instruments at fair value                                                                                                                                                  |       | 28         |       | —                                                                                             |       | 17,258 |   |
| Pensions                                                                                                                                                                              |       | 21         |       | 1,119                                                                                              |       | 1,381 |   |
| *Total non current liabilities*                                                                                                                                                       |       |       |       | 1,016,988                                                                                          |       | 828,746 |   |
| **Minority interest**                                                                                                                                                                 |       | 31         |       | 44,607                                                                                             |       | 34,182 |   |
| **Shareholder’s equity**                                                                                                                                                         |       |       |       |                                                                                               |       |   |   |
| Non  profit sharing 5% non cumulative preference shares, U.S.$1,000 par value,  34,000 shares authorized, issued and outstanding as of December 31, 2006  and 2005, respectively |       |       |       | 34,000                                                                                             |       | 34,000 |   |
| Common  shares, U.S.$1,000 par value, 136,000 shares authorized, issued and  outstanding as of December 31, 2006 and 2005, respectively                                          |       |       |       | 136,000                                                                                            |       | 136,000 |   |
| Retained  earnings                                                                                                                                                                    |       | 32         |       | 353,628                                                                                            |       | 348,207 |   |
| Accumulated  other comprehensive loss                                                                                                                                                 |       | 33         |       | (14,431                                                                                            | )          | (22,725 | ) |
| *Total shareholder’s equity*                                                                                                                                                     |       |       |       | 509,197                                                                                            |       | 495,482 |   |
|                                                                                                                                                                                  |       |       |       | 1,749,010                                                                                          |       | 1,529,685 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3

----

**Aurelia Energy N.V.Consolidated Statements of Income**

| ** **                                            | ** ** | ** ** | ** ** | **For the years ended December 31,**                                          | ** ** |
|-------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Note**   | ** ** | **2006**                                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | **(in U.S.$ thousands, except share   and per share amounts)** | ** ** |
| **Revenues**                                          |       | 27         |       | 437,912                                                                                                |       | 398,990 |   | 437,665 |   |
| **Operating expenses**                                |       |       |       |                                                                                                   |       |   |   |   |   |
| Operations  expenses                                  |       | 22         |       | 246,795                                                                                                |       | 255,597 |   | 314,073 |   |
| Selling,  general and administrative                  |       | 23         |       | 13,047                                                                                                 |       | 11,310 |   | 9,754 |   |
| Depreciation  of tangible fixed assets                |       | 12         |       | 106,344                                                                                                |       | 94,953 |   | 72,995 |   |
| Other  operating income                               |       | 25         |       | —                                                                                                 |       | (30,702 | ) | (3,738 | ) |
|                                                  |       |       |       | 366,186                                                                                                |       | 331,158 |   | 393,084 |   |
| Operating  income                                     |       |       |       | 71,726                                                                                                 |       | 67,832 |   | 44,581 |   |
| **Financial income and  expense**                     |       |       |       |                                                                                                   |       |   |   |   |   |
| Interest  income                                      |       |       |       | 1,831                                                                                                  |       | 3,550 |   | 3,355 |   |
| Interest  expense                                     |       |       |       | (79,065                                                                                                | )          | (54,464 | ) | (44,940 | ) |
| Currency  exchange results                            |       |       |       | 9,931                                                                                                  |       | (14,873 | ) | 2,924 |   |
|                                                  |       |       |       | (67,303                                                                                                | )          | (65,787 | ) | (38,661 | ) |
| Income  before income taxes and minority interest     |       |       |       | 4,423                                                                                                  |       | 2,045 |   | 5,920 |   |
| Income  tax benefits                                  |       | 26,30      |       | (11,548                                                                                                | )          | (16,421 | ) | (469 | ) |
| Income  before minority interest                      |       |       |       | 15,971                                                                                                 |       | 18,466 |   | 6,389 |   |
| Minority  interest                                    |       | 32         |       | 10,550                                                                                                 |       | 5,163 |   | — |   |
| Net  income                                           |       | 31         |       | 5,421                                                                                                  |       | 13,303 |   | 6,389 |   |
| Basic  and diluted earnings per common share          |       |       |       | 40                                                                                                     |       | 98 |   | 47 |   |
| Weighted  average number of common shares outstanding |       |       |       | 136,000                                                                                                |       | 136,000 |   | 136,000 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4

----

**AureliaEnergy N.V.Consolidated Statements of Changes in Shareholder’s Equity**

| ** **                                                                                                    | ** ** | **For the years ended December 31, 2006, 2005 and 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **Issued and  Paid-in Capital**                                                             | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Shareholder’s Equity** | ** ** |
| ** **                                                                                                    | ** ** | **(in U.S.$ thousands)**                                                                    | ** ** |
| **Balance at December 31, 2003**                                                                         |       |                                                                                                  | 170,000    |   |   | 328,515 |   |   | (23,127 | ) |   |   | 475,388 |   |   |
| Net  income 2004                                                                                              |       |                                                                                                  | —     |   |   | 6,389 |   |   | — |   |   |   | 6,389 |   |   |
| Increase  in fair value of cash flow hedges (net of tax of U.S.$555)                                          |       |                                                                                                  | —     |   |   | — |   |   | 1,032 |   |   |   | 1,032 |   |   |
| Reclassification  adjustments for settled portion of hedge realized in net income (net of tax  of U.S.$299)   |       |                                                                                                  | —     |   |   | — |   |   | 556 |   |   |   | 556 |   |   |
| Translation  result                                                                                           |       |                                                                                                  | —     |   |   | — |   |   | (1,620 | ) |   |   | (1,620 | ) |   |
| Comprehensive  income for the year                                                                            |       |                                                                                                  | —     |   |   | — |   |   | — |   |   |   | 6,357 |   |   |
| **Balance at December 31, 2004**                                                                         |       |                                                                                                  | 170,000    |   |   | 334,904 |   |   | (23,159 | ) |   |   | 481,745 |   |   |
| Net  income 2005                                                                                              |       |                                                                                                  | —     |   |   | 13,303 |   |   | — |   |   |   | 13,303 |   |   |
| Decrease  in fair value of cash flow hedges (net of tax of U.S.$412)                                          |       |                                                                                                  | —     |   |   | — |   |   | (961 | ) |   |   | (961 | ) |   |
| Reclassification  adjustments for settled portion of hedge realized in net income (net of tax  of U.S.$84)    |       |                                                                                                  | —     |   |   | — |   |   | (197 | ) |   |   | (197 | ) |   |
| Translation  result                                                                                           |       |                                                                                                  | —     |   |   | — |   |   | 1,592 |   |   |   | 1,592 |   |   |
| Comprehensive  income for the year                                                                            |       |                                                                                                  | —     |   |   | — |   |   | — |   |   |   | 13,737 |   |   |
| **Balance at December 31, 2005**                                                                         |       |                                                                                                  | 170,000    |   |   | 348,207 |   |   | (22,725 | ) |   |   | 495,482 |   |   |
| Net  income 2006                                                                                              |       |                                                                                                  | —     |   |   | 5,421 |   |   | — |   |   |   | 5,421 |   |   |
| Increase  in fair value of cash flow hedges (net of tax of nil)                                               |       |                                                                                                  | —     |   |   | — |   |   | 6,643 |   |   |   | 6,643 |   |   |
| Reclassification  adjustments for settled portion of hedge realized in net income (net of tax  of U.S.$1,798) |       |                                                                                                  | —     |   |   | — |   |   | (583 | ) |   |   | (583 | ) |   |
| Translation  result                                                                                           |       |                                                                                                  | —     |   |   | — |   |   | 2,234 |   |   |   | 2,234 |   |   |
| Comprehensive  income for the year                                                                            |       |                                                                                                  | —     |   |   | — |   |   | — |   |   |   | 13,715 |   |   |
| **Balance at  December 31, 2006**                                                                        |       |                                                                                                  | 170,000    |   |   | 353,628 |   |   | (14,431 | ) |   |   | 509,197 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

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**AureliaEnergy N.V.Consolidated Statements of Cash Flows**

| ** **                                                                        | ** ** | **For the years ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | ** **                                                | ** ** | **(as restated,  see note 34)** | ** ** | ** ** | ** ** |
| **Cash flows from operating activities**                                          |       |                                                      |       |   |   |   |   |   |   |
| Net income                                                                        |       | 5,421                                                     |       |   | 13,303 |   |   | 6,389 |   |
| **Adjustments to reconcile net income to cash  provided by operating activities** |       |                                                      |       |   |   |   |   |   |   |
| Depreciation of  tangible fixed assets                                            |       | 106,344                                                   |       |   | 94,953 |   |   | 72,995 |   |
| Amortization of  debt arrangement fees                                            |       | 3,109                                                     |       |   | 2,938 |   |   | 2,730 |   |
| Increase in  deferred income tax assets                                           |       | (13,597                                                   | )          |   | (19,858 | ) |   | (1,431 | ) |
| Accrued interest  on long-term loan from related party                            |       | 10,256                                                    |       |   | 9,946 |   |   | 7,426 |   |
| Amortization of  discount on 101¤4% Senior Notes due 2012                    |       | 355                                                       |       |   | 355 |   |   | 355 |   |
| Amortization  benefit from unwinding swap                                         |       | 3,058                                                     |       |   | (674 | ) |   | (767 | ) |
| Change in pension  provision                                                      |       | 393                                                       |       |   | (92 | ) |   | 326 |   |
| Increase/(decrease)  in provision for uncollectible accounts receivable           |       | (10                                                       | )          |   | (520 | ) |   | 212 |   |
| (Gain)/loss on  foreign currency forward contracts                                |       | (6,398                                                    | )          |   | 4,801 |   |   | (1,607 | ) |
| Change in fair  value of interest rate swap and caps                              |       | 6,760                                                     |       |   | (6,650 | ) |   | — |   |
| Interest accrued  on restricted deposits                                          |       | —                                                    |       |   | 4,270 |   |   | (5,426 | ) |
| Minority interest  in income of subsidiaries                                      |       | 10,550                                                    |       |   | 5,163 |   |   | — |   |
| **Change in operating assets and liabilities, net  of effect of acquisitions**    |       |                                                      |       |   |   |   |   |   |   |
| (Increase)/decrease  income taxes receivable                                      |       | (296                                                      | )          |   | 1,078 |   |   | (297 | ) |
| Increase in work  in process                                                      |       | (14,480                                                   | )          |   | (1,327 | ) |   | (5,779 | ) |
| (Increase)/decrease  in trade receivables                                         |       | (11,941                                                   | )          |   | 7,329 |   |   | (8,555 | ) |
| (Increase)/decrease  in related party receivables                                 |       | 99                                                        |       |   | 11 |   |   | (8 | ) |
| (Increase)/decrease  in other receivables                                         |       | (19,384                                                   | )          |   | (787 | ) |   | 1,135 |   |
| (Increase)/decrease  in prepaid expenses                                          |       | (4,203                                                    | )          |   | 842 |   |   | (2,125 | ) |
| Interest withdrawn  from restricted deposits                                      |       | —                                                    |       |   | (2,992 | ) |   | (3,103 | ) |
| Increase in  accounts payable                                                     |       | (777                                                      | )          |   | (8,512 | ) |   | (1,579 | ) |
| (Increase)/decrease  in other liabilities and accrued expenses                    |       | (14,136                                                   | )          |   | 23,015 |   |   | 11,422 |   |
| Increase/(decrease)  in other short term liabilities other than loans             |       | 66                                                        |       |   | (26 | ) |   | (220 | ) |
| Increase in  billings in excess of cost and unrealized income                     |       | 676                                                       |       |   | 3,172 |   |   | 4,131 |   |
| Decrease of non  current liabilities, other than loans                            |       | —                                                    |       |   | (34,422 | ) |   | (4,563 | ) |
| Net cash provided  by operating activities                                        |       | 61,865                                                    |       |   | 95,316 |   |   | 71,661 |   |
| **Cash flows from (used in) investing activities**                                |       |                                                      |       |   |   |   |   |   |   |
| Additions to  tangible fixed assets                                               |       | (218,090                                                  | )          |   | (391,596 | ) |   | (22,643 | ) |
| Disposals of  tangible fixed assets                                               |       | —                                                    |       |   | 25 |   |   | 1,476 |   |
| Loans provided                                                                    |       | (2,000                                                    | )          |   | — |   |   | (50 | ) |
| Additions to  financial investments                                               |       | (13,500                                                   | )          |   | (2,000 | ) |   | (7,500 | ) |
| Proceeds from  restricted deposits                                                |       | —                                                    |       |   | 88,656 |   |   | 54,130 |   |
| Deposited to  restricted deposits                                                 |       | —                                                    |       |   | (1,865 | ) |   | (44,157 | ) |
| Net cash used in  investing activities                                            |       | (233,590                                                  | )          |   | (306,780 | ) |   | (18,744 | ) |
| **Cash flows provided by (used in) financing  activities**                        |       |                                                      |       |   |   |   |   |   |   |
| Proceeds from long  term and short term loans from banks and third parties        |       | 487,108                                                   |       |   | 442,194 |   |   | 110,966 |   |
| Premium paid for  interest rate cap                                               |       | (1,984                                                    | )          |   | (1,462 | ) |   | — |   |
| Payments from  unwinding swap transaction                                         |       | (23,750                                                   | )          |   | (6,898 | ) |   | — |   |
| Redemption of  loans and short term bank liabilities                              |       | (292,625                                                  | )          |   | (246,004 | ) |   | (151,248 | ) |
| Debt arrangement  fees                                                            |       | (6,538                                                    | )          |   | (1,137 | ) |   | — |   |
| Minority interest                                                                 |       | —                                                    |       |   | 29,019 |   |   | — |   |
| Net cash provided  by (used in) financing activities                              |       | 162,211                                                   |       |   | 215,712 |   |   | (40,282 | ) |
| Translation effect  on cash                                                       |       | 8,991                                                     |       |   | (3,209 | ) |   | (3,585 | ) |
| Net increase in  available cash and cash equivalents                              |       | (523                                                      | )          |   | 1,039 |   |   | 9,050 |   |
| Cash and cash  equivalents at beginning of the year                               |       | 43,026                                                    |       |   | 41,987 |   |   | 32,937 |   |
| Cash and cash  equivalents at end of the year                                     |       | 42,503                                                    |       |   | 43,026 |   |   | 41,987 |   |
| **Additional cash flow disclosures**                                              |       |                                                      |       |   |   |   |   |   |   |
| Interest paid                                                                     |       | 65,298                                                    |       |   | 39,930 |   |   | 35,169 |   |
| Income taxes paid                                                                 |       | 2,152                                                     |       |   | 2,945 |   |   | 2,115 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-6

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**Aurelia Energy N.V.Notes to Consolidated Financial Statementsat December 31, 2006 and 2005 and each of the three years in the periodended December 31, 2006(all amounts in U.S.$ thousands, except share and per share amounts)**

**1.**                 General

***(a)******          Structure***

Aurelia Energy N.V. (the “Company”) has its legal seatin Willemstad (Curaçao), Netherlands Antilles. The Company’s principal activityis to act as a holding company for the Bluewater group.

All common shares and preference shares of the Companyare held by a newly founded company Aurelia Holding N.V., Willemstad (Curaçao),Netherlands Antilles, of which all shares are directly held by the JacarandaTrust, an irrevocable discretionary trust constituted under the laws of Jersey.The former Aurelia Holding N.V., which previously held all common andpreference shares of the Company, has been liquidated.

Its major investment is Bluewater Energy N.V., theholding company of a group of companies engaged in the supply of services andproducts to the oil industry. Bluewater Energy N.V. together with its groupcompanies are referred to herein as Bluewater.

The registrant’s office address is Landhuis Joonchi,Kaya Richard J. Beaujun z/n, Curaçao, the Netherlands Antilles.

***(b)******           Activities***

Bluewater is a specialized service provider to, andoperator in, the offshore oil industry. Bluewater (i) designs, develops,owns and operates floating production storage and offloading units (“FPSOs”)which are leased to oil companies under medium and long-term lease contracts,and (ii) designs, develops, performs project management with respect to,and constructs, single point mooring systems (“SPMs”).

An FPSO is a type of floating production unit used byoil companies to produce, process, store and offload hydrocarbons from offshorefields. FPSOs are either newly built or converted tankers upon which productionequipment is mounted. The fluids (oil, gas and water) are processed onboard theFPSO vessel, and the treated crude oil is stored before being exported by an offtakesystem utilizing shuttle tankers. Bluewater’s fleet of FPSOs is involved in theproduction, rather than the exploration or drilling, of oil. The FPSOs areleased to oil companies under medium and long-term contracts.

SPMs are used to transfer fluids to and from afloating production unit, an offshore storage vessel or shuttle tanker whilesecuring the unit, vessel or tanker to the ocean floor. Most SPMs consistof an anchoring system that is connected to the ocean floor and a fluidtransfer system that permits the transfer of fluids between fixed and rotatingparts of the mooring system. SPMs are generally developed and constructedfor oil companies and contractors.

Revenues are earned fromthe fixed day rates consisting of a facility fee and depending on the contractan indexed operating fee that is received from the operation of FPSOs pursuantto leases with oil companies, supplemented primarily with fees frompredetermined thresholds on volumes produced (oil production, water injection,and gas uplift) and predetermined levels of uptime, and from the design,engineering and management services that are provided in the various FPSO andSPM projects being managed. FPSO and SPM projects are being managed from theinitial design and engineering phase to final installation. Further Bluewaterengages subcontractors in the fabrication of FPSOs, SPMs and auxiliaryequipment.

F-7

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**2.**                 Principlesof Consolidation

Allsignificant intercompany balances and transactions are eliminated inconsolidation. The consolidated financial statements integrally include thefinancial statements of the Company and the following group companies:
| Name                                                           | ** ** | ** **                          | ** ** | **Legal Seat** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------|------------|---------------------|------------|
| Bluewater After  Sales N.V. (former Bluewater (New Hull) N.V.) |       | Willemstad,  Curaçao           |       |
| Bluewater (Aoka  Mizu) N.V                                     |       | Willemstad,  Curaçao           |       |
| Bluewater (Bleo  Holm) N.V.                                    |       | Willemstad,  Curaçao           |       |
| Bluewater Brazil  Ltda                                         |       | Rio  de Janeiro, Brazil             |       |
| Bluewater China  Offshore Equipment Production Co Ltd          |       | Tianjin,  China                     |       |
| Bluewater  (Dyphavet) B.V                                      |       | Hoofddorp,  The Netherlands         |       |
| Bluewater Energy  N.V.                                         |       | Willemstad,  Curaçao           |       |
| Bluewater Energy  Services B.V.                                |       | Haarlemmermeer,  The Netherlands    |       |
| Bluewater Energy  Services (Malaysia) Bhd. Sdn                 |       | Kuala  Lumpur, Malaysia             |       |
| Bluewater  Equipment Leasing Ltd.                              |       | Valletta,  Malta                    |       |
| Bluewater Ettrick  Production (UK) Ltd.                        |       | London,  United Kingdom             |       |
| Bluewater Finance  Ltd.                                        |       | George  Town, Cayman Islands        |       |
| Bluewater  Floating Production B.V.                            |       | Hoofddorp,  The Netherlands         |       |
| Bluewater  (Floating Production) Ltd.                          |       | London,  United Kingdom             |       |
| Bluewater (Glas  Dowr) N.V.                                    |       | Willemstad,  Curaçao           |       |
| Bluewater  (Haewene Brim) N.V.                                 |       | Willemstad,  Curacao                |       |
| Bluewater Holding  B.V.                                        |       | Hoofddorp,  The Netherlands         |       |
| Bluewater  International B.V.                                  |       | Hoofddorp,  The Netherlands         |       |
| Bluewater (Malta)  Ltd.                                        |       | Valletta,  Malta                    |       |
| Bluewater Manning  Services Ltd.                               |       | London,  United Kingdom             |       |
| Bluewater (Munin)  N.V.                                        |       | Willemstad,  Curacao                |       |
| Bluewater New  Hull B.V. (former Refugio B.V.)                 |       | Hoofddorp,  The Netherlands         |       |
| Bluewater Norway  ANS.                                         |       | Oslo,  Norway                       |       |
| Bluewater  Offshore Production Systems Ltd.                    |       | Valletta,  Malta                    |       |
| Bluewater  Offshore Production Systems Nigeria Ltd.            |       | Lagos,  Nigeria                     |       |
| Bluewater  Offshore Production Systems N.V.                    |       | Willemstad,  Curaçao           |       |
| Bluewater  Offshore Production Systems (USA) Inc.              |       | Delaware,  United States of America |       |
| Bluewater  Offshore France S.A.S                               |       | Paris,  France                      |       |
| Bluewater  Oil & Gas Investments Ltd.                 |       | Lagos,  Nigeria                     |       |
| Bluewater  Operations (UK) Ltd.                                |       | London,  United Kingdom             |       |
| Bluewater  Services International Private Ltd.                 |       | Singapore                           |       |
| Bluewater  Services (UK) Ltd.                                  |       | London,  United Kingdom             |       |
| Bluewater  Terminal Systems N.V.                               |       | Willemstad,  Curaçao           |       |
| Bluewater  (Tullebuk) B.V                                      |       | Hoofddorp,  The Netherlands         |       |
| Bluewater (UK)  Ltd.                                           |       | London,  United Kingdom             |       |
| Lufeng  Development Company ANS                                |       | Oslo,  Norway                       |       |
| Pierce Production  Company Ltd.                                |       | London,  United Kingdom             |       |
| PR Jotun DA.                                                   |       | Sandnes,  Norway                    |       |
| Supernova Energy B.V. (former Luludia Asset Finance  B.V.)     |       | Hoofddorp,  The Netherlands         |       |
| Certain non-operating  or dormant entities                     |       |                                |       |

 

All consolidated groupcompanies are controlled and 100% owned by the Company, except for PR Jotun DAin which the Company has a 55% ownership interest and Bluewater Energy Services(Malaysia) 

F-8

----

Bhd.Sdn., in which the Company has a 49% ownership interest. Both are fullyconsolidated in accordance with the provisions of FIN 46R.

**3.**                 AccountingPrinciples

***(a)******          General***

The accompanying financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America as summarized below. These accounting principles havebeen applied consistently throughout all years presented.

All significant intercompany accounts and transactionsare eliminated in consolidation.

The financial statements have been prepared under thehistorical cost convention.

***(b)******           Use of estimates***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect certainreported amounts and disclosures. Accordingly, actual results can differ fromthose estimates.

***(c)******            Foreign currencies***

*i.**                    Reportingcurrency*

Because of the international nature of the Company’sactivities and the fact that the Company’s transactions are primarilydenominated in U.S. dollars, the financial statements are presented in U.S.dollars.

*ii.**                 Functionalcurrency*

Consolidated group companies having other functionalcurrencies than U.S. dollars are the group companies legally seated in theNetherlands having Euros and the group companies legally seated in the UnitedKingdom having pound sterling as functional currency.

*iii.**              Foreigncurrency assets, liabilities and transactions*

Monetary assets and liabilities denominated in foreigncurrencies are remeasured into the respective functional currencies at the rateof exchange prevailing at year-end. Transactions in foreign currencies areremeasured into the respective functional currencies at the exchange rate ineffect at the time of the transaction. The exchange results are recorded underfinancial income and expense in the statement of income.

*iv.**              Foreignentities*

Assets and liabilities of foreign group companies notdenominated in U.S. dollars are for consolidation purposes translated into U.S.dollars at the rates of exchange prevailing at year-end. Each month, income andexpenses are translated at the weighted average rates of exchange for themonth.

Gains and losses resulting from the translation arerecorded directly in shareholder’s equity, as a foreign currency translationadjustment.

***(d)******           Cash and cash equivalents***

Cash includes cash on hand and cash with banks. Cashequivalents are short-term deposits with original maturities of three months orless.

***(e)******            Accounts receivable***

Accounts receivable are stated at face value, less anallowance for possible uncollectible accounts.

F-9

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***(f)******             Inventory***

Work in process for construction of SPM and auxiliaryequipment projects are accounted for on the basis of percentage of completion(see note 3(n) Recognition of income).

Project cost includes materials, direct labor and anattributable proportion of manufacturing overheads based on normal levels ofactivity. Anticipated losses on projects because net realizable value is lowerthan budgeted cost are fully provided for. Net realizable value is based onestimated selling price, less further costs expected to be incurred forcompletion and disposal. The provision for anticipated losses on contracts ispresented under other liabilities and accrued expenses.

***(g)******           Tangible fixed assets***

Tangible fixed assets are stated at the construction orthe acquisition cost, less straight-line depreciation. The construction costincludes interest cost from interest bearing debts. The depreciation iscalculated on the basis of acquisition cost less residual value and theestimated useful life of the related asset.

Theestimated useful lives are:

| Buildings                                         |   | 33 years   |   |
|---------------------------------------------------|--------|------------|--------|
| FPSOs                                             |   | 15 years   |   |
| Trading vessels                                   |   | 25 years   |   |
| Machinery and  other equipment                    |   | 3-12 years |   |
| Office equipment and  other tangible fixed assets |   | 4-10 years |   |

 

Tangible fixed assets operated by the Company under afinancial lease agreement are capitalized.

***(h)******          Impairment of long-lived assets***

The Company periodically evaluates the recoverabilityof the carrying amount of its long-lived assets in accordance with SFAS No. 144,“Accounting for the Impairment of Long-Lived Assets”. Whenever events orchanges in circumstances indicate that the carrying amounts of those assets maynot be recoverable, the Company will compare undiscounted net cash flowsestimated to be generated by those assets to the carrying amount of thoseassets. When these undiscounted cash flows are less than the carrying amountsof the assets, the Company will record impairment losses to write the assetdown to fair value, measured by the discounted estimated net future cash flowsexpected to be generated from the assets. During the three years ended December 31,2006, no impairment losses have been recorded by the Company.

***(i)******             Debt arrangement fees***

Debt arrangement fees represent costs incurred inarranging and refinancing the corporate credit facility, costs incurred in theissuance of 101¤4%Senior Notes due 2012 and costs incurred in arranging a loan agreement tofinance the acquisition of a 55% ownership in PR Jotun DA. The debt arrangementfees are amortized on a straight line basis to interest expenses over the termof the refinanced credit facility, the term of the 101¤4% Senior Notesdue 2012 and the term of the loan agreement, respectively. Amortization on astraight-line basis approximates the effective interest rate method over theduration of the related debt.

F-10

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***(j)******              Accounting for leases***

*i.**                    Financelease (lessee)*

The Company accounts for finance leases bycapitalizing the related asset and by recognizing the related debt at amountsequal to the fair value of the leased asset and related debt, respectively, atinception of the lease.

*ii.**                 Operatinglease (lessor)*

Income from operating leases is recognized in incomeon a straight-line basis over the duration of the contracts.

Period operating costs incurred to earn revenues froman operating lease are recognized as an expense in the income statement in theperiod in which they are incurred. Direct operating costs incurred specificallyto earn future revenues from an operating lease are recognized as an expense inthe period in which the related revenues are also recognized in income.

***(k)******           Pensions***

*i.**                    Definedbenefit plan*

The Company provides defined benefit pension plans forall employees in the Netherlands. The funds are valued every year byprofessionally qualified independent actuaries. The obligations and costs ofpension benefits are determined using a projected unit credit method. Theprojected unit credit method considers each period of service as giving rise toan additional unit of benefit entitlement and measures each unit separately tobuild up the final obligation.

Actuarial gains or losses are amortized based on theexpected average remaining working lives of the employees, when these gains orlosses exceed the 10% corridor of the pension benefit obligation.

The pension obligation is measured at the presentvalue of estimated future cash flows using a discount rate that is similar tothe interest rate of Dutch government bonds, where the currency and terms ofthe government bond are consistent with the currency and estimated terms of thedefined benefit obligation.

*ii.**                 Definedcontribution plan*

In addition to the defined benefit plans describedabove, the group companies in the United Kingdom sponsor defined contributionplans based on local practice and regulations. The plans provide forcontributions amounting to 5% of salary. The contributions relating to definedcontribution plans are charged to income in the year to which they relate.

***(l)******              Financial instruments***

Derivative instruments are recorded in the balancesheet as either an asset or a liability measured at its fair value. Changes inthe derivative instrument’s fair value are recognized  in earnings unless specific hedge accountingcriteria are met.

SFAS No. 133 prescribes requirements fordesignation and documentation of hedging relationships and ongoingretrospective and prospective assessments of effectiveness in order to qualifyfor hedge accounting. Hedge accounting is considered to be appropriate if theassessment of hedge effectiveness indicates that the change in fair value ofthe designated hedging instrument is 80 to 125% effective at offsetting thechange in fair value due to the hedged risk of the hedged item or transaction.Measurement of amounts to be recorded in income due to ineffectiveness of hedgesis based on the dollar-offset method as required by SFAS No. 133.Hedge ineffectiveness, if any is recognized in earnings.

F-11

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If a hedged forecasted transaction is no longerprobable of occurring, application of hedge accounting ceases and amountspreviously deferred in accumulated other comprehensive income are reclassifiedinto income in the same period in which the previously hedged transactionaffects earnings. However, if it is probable that the originally forecasttransaction will not occur by the end of the originally specified time period,the unrealized gain or loss in accumulated other comprehensive income isreclassified immediately to income.

For derivative financial instruments designated andthat qualify as cash flow hedges, changes in the fair value of the effectiveportion of the derivative financial instruments are recorded as a component ofaccumulated other comprehensive income in shareholder’s equity until the hedgeditem is recognized in earnings. The ineffective portion of the change in fairvalue of the derivative financial instruments is immediately recognized inearnings. For derivative financial instruments designated and that qualify asfair value hedges, changes in the fair value of the financial instrument andthe change in the fair value of the hedged component offset each other in thebalance sheet and income statement.

Currently, the Company actively uses both interestrate caps and foreign currency exchange contracts to mitigate its potentialexposures to movements in interest rates and currency exchange rates. TheCompany elected to designate both the interest rate caps and some of theforeign currency exchange contracts as hedging instruments. The net gains andlosses on the revaluation of the derivative instruments that are designated andqualify as cash flow hedges are reported as a separate component of accumulatedother comprehensive income/(loss) to the extent the hedge is effective.Accordingly, the foreign currency exchange contracts and interest rate caps aremarked to market at each reporting date with the fair value being recognized inthe balance sheet and the corresponding gains and losses being reported as aseparate component of accumulated other comprehensive income/(loss) to theextent the hedge is effective and for the ineffective part under interestexpense and currency exchange results in the income statement for the interestrate caps and the foreign currency exchange contracts respectively.

***(m)******       Revenue recognition***

In general, the Company recognizes revenues from operatinglease arrangements of FPSOs and from the construction (design, engineering andproject management) of SPMs and the installation and mobilization of FPSOsand SPMs.

*i.**                    Operatinglease arrangements for FPSOs*

Revenues under operating lease arrangements arerecognized when the FPSO is made available to the lessee and the fee is duebased on a signed lease contract.

Income under thelease agreements for FPSOs comprises, depending on the vessel, the following:

(1)   A facilityfee;

(2)   Anoperational fee;

(3)   Amountsrelated to the volumes of water, gas and oil produced;

(4)   Paymentswhich may become payable depending on changes in the price of oil.

The contingent payments that depend on changes in theprice index, the volume produced (typically the volume of oil produced and incertain instances, the volume of water produced and the volume of gas lifted),and the price of oil are only included in the determination of income when therelevant index is adjusted or the specified volume has been produced or theprice of oil has changed. All other payments due under the lease are recognizedon a straight line basis over the lease term.

For more specific disclosure with respect to thematerial terms of the operating lease arrangements and the related revenue recognitionpolicies by FPSO, reference is made to note 4.

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*ii.**                 Constructionof SPMs and auxiliary equipment*

Revenue from construction(design, engineering and project management) of SPMs and auxiliaryequipment are recognized under the percentage of completion method ofaccounting as the project is performed. Percentage of completion is measured bythe labor and material cost incurred to total estimated labor and material costmethod.

Billings issued to andcash payments received from customers in excess of estimated earnings are notshown as sales revenues, but deducted without effect on income from cost andestimated earnings in excess of billings on uncompleted contracts or added tobillings in excess of cost and estimated earnings on uncompleted contracts.

Changes in projectconditions may result in revisions to previously recorded costs and revenuesfor a particular project. These changes are recognized in the period in whichthe revisions are determined; this generally occurs when formal change ordersare signed between a group company and the customer. Furthermore, provisionsfor estimated losses of uncompleted contracts are made in the period in whichsuch losses are determined.

*iii.**              Installation,mobilization and other services*

In connection with FPSOsand SPMs, the Company recognizes revenues from installation, mobilization andother services when the services are provided based on written serviceagreements, the services have been accepted by the customer and thecollectability of the receivable is reasonable assured.

***(n)******          Researchand development costs***

Research and developmentcosts are expensed in the period in which they are incurred. Research anddevelopment expenditures for the years 2006, 2005 and 2004 amount to U.S.$550,U.S.$500 and U.S.$450, respectively.

***(o)******           Incometaxes***

The income tax charge isbased on the tax regime applicable to the various group companies in thecountries in which they are legally seated. These tax regimes charge incometaxes based on operating profits or on the basis of other criteria as agreedupon by the group in specific tax rulings. Deferred taxation is considered inaccounting for the income tax charge for the year.

Deferred income taxes areaccounted for using the balance sheet liability method. Deferred income taxesare provided for temporary differences between the tax bases of assets orliabilities and their reported amounts in the financial statements. Future taxbenefits attributable to these differences, if any, are recognized to theextent that realization of such benefits is more likely than not.

***(p)******           Provisions***

Provisions are recognizedwhen a present obligation as a result of a past event exists, it is probablethat an outflow of resources will be required to settle the obligation and areliable estimate can be made of the amount of the obligation.

***(q)******           Contingenciesand litigation***

Fromtime to time the Company is party to various legal proceedings arising out ofthe ordinary course of business, as disclosed in note 30 to theconsolidated statements. In connection with these proceedings and claims, theCompany evaluates, based on the relevant facts and legal principles, thelikelihood of an unfavorable outcome and whether the amount of the loss can bereasonably estimated. Significant subjective judgments are required in theseevaluations, including judgments regarding the validity of asserted claims andthe likely outcome of legal and administrative proceedings. The outcome ofthese proceedings, however, is subject to a number of factors beyond theCompany’s control, most notably the uncertainty associated with predictingdecisions by courts and administrative agencies.

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The Company accrues for legal costs related to litigation at the timewhen the related legal services are rendered.

***(r)******            New Accounting Principles***

**SFAS 153**

In December 2004, the FASB issued Statement No. 153(“SFAS 153”), “Exchanges of Non-monetary Assets, an amendment of APBOpinion No. 29”. SFAS 153 eliminates the exception in Opinion No. 29for non-monetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of non-monetary assets that lack commercialsubstance. The statement became effective on January 1, 2006. AdoptingSFAS 153 did not have a material impact on the Company’s consolidated financialstatements.

**SFAS 123R**

In December 2004, theFASB issued SFAS No. 123 (revised 2004) (“SFAS 123R”), concerningShare-Based Payment. SFAS 123R is a revision of Statement No. 123,“Accounting for Stock-Based Compensation”, which the Company adopted fordisclosure purposes in 2003. SFAS 123R supersedes APB Opinion No. 25,that allowed the use of the intrinsic value for measuring stock-basedcompensation expenses for stock issued to employees. SFAS 123R focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions. SFAS 123R containscertain changes compared with the original pronouncement. The provisions ofthis statement are effective for financial statements issued for fiscal yearsbeginning after January 1, 2006. The statement became effective on January 1,2006. Adopting SFAS 123R did not have a material impact on the Company’sconsolidated financial statements.

**SFAS 155**

In February 2006, theFASB issued Statement No. 155 (“SFAS 155”), “Accounting for Certain HybridFinancial Instruments”, an amendment of FASB Statements No. 133 and 140.SFAS 155 provides entities with relief from having to separately determine thefair value of an embedded derivative that would otherwise be required to bebifurcated from its host contract in accordance with Statement 133. Theprovisions of this statement will be effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The Company does not anticipate that theadoption of SFAS 155 will have a material impact on the Company’s consolidatedfinancial statements.

**SFAS 156**

In March 2006, theFASB issued Statement No. 156 (“SFAS 156”), “Accounting for Servicing ofFinancial Assets”, an amendment of FASB Statement No. 140. SFAS 156requires an entity to recognize a servicing asset or servicing liability eachtime it undertakes an obligation to service a financial asset by entering intoa servicing contract. The provision of this statement will be effective for allfinancial statements issued for fiscal years beginning after September 15,2006. The Company does not anticipate that the adoption of SFAS 156 will have amaterial impact on the Company’s consolidated financial statements.

**FIN 46(R)-6**

In April 2006, theFASB issued interpretation No. 46(R)-6. This interpretationaddresses how a company should determine the variability to be considered forvariable interest entities. FIN 46(R)-6 becomes effective on January 1,2007. The Company does not expect that application of the interpretation 

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willchange the conclusions of assessment of variable interest entities in previousperiods if a reconsideration event would occur that would require areassessment under FIN 46(R).

**FIN 48**

In June 2006, theFASB issued interpretation No. 48 (“FIN 48”), “Accounting for Uncertaintyin Income Taxes”. This interpretation clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with FASB Statement No. 109. This interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. The Company is still in the process of determiningthe effects of this interpretation. The interpretation is effective for fiscalyears beginning after December 15, 2006.

**SFAS 157**

In September 2006,the FASB issued Statement No. 157 (“SFAS 157”), “Fair Value Measurements”.This statement defines fair value, clarifies various concepts used in fairvalue measurements, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007. The Company is still in theprocess of reviewing possible impacts of this new standard.

**SFAS 158**

In September 2006,the FASB issued Statement No. 158 (“SFAS 158”), “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans”. This statementrequires an employer to recognize the funded status of a defined-benefitpension plan—measured as the difference between plan assets at fair value andthe defined-benefit pension obligation—in its balance sheet. The offset ofrecognizing the funded status is recorded in accumulated other comprehensiveincome (within stockholders’ equity). Actuarial gains or losses andprior-service costs or credits that arise during the period but are notrecognized as components of net periodic benefit cost pursuant to FASBStatement No. 87 or 106, are recognized as a component of othercomprehensive income, net of taxes. Amounts recognized in accumulated othercomprehensive income, including the gains or losses, prior service costs orcredits, and the transition obligation remaining from the initial applicationof FASB Statement No. 106, are adjusted as they are subsequentlyrecognized as components of net periodic benefit cost pursuant to therecognition and amortization provisions of those Statements. SFAS 158 will alsorequire measurement of defined-benefit plan assets and obligations as of thedate of the employer’s fiscal year-end balance sheet. Because the Company doesnot have publicly traded equity securities, the recognition and disclosurerequirements are effective for the Company for fiscal years ending after June 15,2007. As described in note 21, as of December 31, 2006 the Company hasunrecognized actuarial losses of U.S.$810 that will be required to berecognized upon adoption of SFAS 158. The measurement date requirement iseffective for fiscal years ending after December 15, 2008.

**SAB 108**

In September 2006, the US Securities and ExchangeCommission issued SAB 108 “Considering the effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”. SAB 108requires a “dual approach” under which both the rollover method and the ironcurtain method must be used to quantify financial statement misstatements. SAB108 is effective for fiscal years ending after November 15, 2006. Theadoption of SAB 108 did not result in any restatements or additionaldisclosures.

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**4.**   Operating Lease Arrangements for FPSOs

The material terms of the Company’s FPSO agreements and the relatedrevenue recognition policies are as follows:

***(a)****          FPSO Uisge Gorm*

The FPSO*Uisge Gorm* fees earned consistof:

·       A facilityfee per day which is fixed for the lease period on the basis of a maximumnumber of days’ downtime per quarter. If the number of days’ downtime perquarter exceeds a certain limit, the facility fee can be reduced by a maximumof 50%, unless the Company demonstrates practical best endeavors in restartingproduction. The facility fee is recognized on a straight-line basis over thelease period. The reductions for downtime, if any, are recognized quarterlywhen incurred. This fee was terminated as of December 31, 2004 andreplaced by  fee payments which arerelated to specified and agreed upon volumes of oil produced. Tariff paymentsthat depend on the volumes of oil are recognized when the specified and agreedupon volumes have been produced, with a guaranteed minimum per day.

·       An operationalfee per day for the operation, maintenance and insurance of the FPSO on thebasis of minimum average oil production and water reinjection uptimes per yearthat exceed 95% and 85%, respectively. If the oil production and waterreinjection uptimes fall below these thresholds, the operational fee is reducedaccording to a predetermined formula. The operational fee is adjustedperiodically based on changes in agreed-upon official price indices applicablein the industry. The operational fee is recognized on a straight-line basisover the lease term. Contingent payments that depend on the uptimes for oilproduction and water injection or on changes in the price indices arerecognized when the specified uptimes are realized or when the applicable priceindices have changed. This fee was terminated as of December 31, 2004 andreplaced by  an operational fee per dayfor the operation, maintenance and insurance of the FPSO on the basis of anagreed annual Operations Budget. A new Operations Budget is agreed each year.The operational fee is recognized on a straight-line basis over the lease term.

·       Feepayments which relate to the specified and agreed upon volume of oil and waterproduced and gas lifted. Fee payments that depend on the volumes of oil and waterproduced and gas lifted are recognized when the specified and agreed-uponvolumes have been produced. These fees ceased to be paid on December 31,2004.

·       Fee payments that depend on the price of oil are recognized up to a specifiedmaximum when the agreed-upon price level of oil has been reached. This maximumwas reached in October 2001.

***(b)****           FPSO Bleo Holm*

Until November 30,2005 the FPSO *Bleo Holm* feesearned consist of:

·       A facilityfee per day which is fixed for the lease period on the basis of an averageweighted oil production, water reinjection and gas uplift uptime per quarterthat exceeds 92.5%. If this weighted uptime exceeds or falls below thisthreshold, the facility fee is adjusted upward or downward quarterly on a prorata basis. The facility fee is recognized on a straight-line basis over thelease period. The upward and/or downward adjustments for uptime, if any, arerecognized quarterly when incurred. This fee ceased on November 30, 2005.

·       Anoperational fee per day for the operation, maintenance and insurance of theFPSO, which is adjusted periodically based on changes in agreed-upon officialprice indices applicable in the industry. The operational fee is recognized ona straight line basis over the lease term. Contingent 

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payments thatdepend on the changes in the price indices are recognized when the applicableprice indices have changed. This fee ceased on November 30, 2005.

·       Feepayments which are related to specified and agreed upon volumes of oilproduced. Fee payments that depend on the volumes of oil are recognized whenthe specified and agreed-upon volumes have been produced.

On November 30,2005 the FPSO agreement was terminated and simultaneously the production of thevessel was continued under a bareboat agreement. The fees earned under thebareboat agreement consist of a charter fee per day which is fixed for thecharter period. The charter fee is recognized on a straight-line basis over thecharter period.

***(c)****            FPSO Glas Dowr*

The FPSO*Glas Dowr* fees earned consist of:

·       A facilityfee per day which is fixed for the lease period on the basis of minimum averageoil production and gas injection and separately water injection of whichuptimes per month exceeds 95%. The uptimes are determined by a predescribedformula based on the barrels of oil produced. If the oil production and gasinjection uptime falls below this threshold, the facility fee is adjusteddownward monthly. The facility fee is recognized on a straight-line basis overthe lease period. The downward adjustments for uptime, if any, are recognizedmonthly when incurred. In addition, the facility fee is adjusted downward ifthe actual water injection uptime over a two month period falls below theagreed threshold. After the minimum contract period, the facility fee will beadjusted upward.

·       A fixedoperational fee per day for the operation, maintenance and insurance of theFPSO and a fixed fee per day for the provision of shuttle tankers. The laborcharges included in the operational fee are adjusted yearly based on changes inagreed-upon official price indices. The operational fee and shuttle tanker feeis recognized on a straight-line basis over the lease period. Payments thatdepend on changes in actual costs are made on a monthly basis.

·       Fee payments which are related to specified and agreed upon volumesof oil produced and which are guaranteed for a minimum amount of barrels. Aftera minimum amount of barrels are produced, the tariff payment will be adjustedupwards but is no longer guaranteed.

***(d)****           FPSO Haewene Brim*

The FPSO *HaeweneBrim* fees earned consist of:

·       A facility fee per day which is fixed for the lease period on thebasis of minimum gas reinjection uptime per year of 85%. If this gasreinjection uptime falls below this threshold, the facility fee is adjusteddownward yearly on a pro rata basis. If the gas reinjection uptime is above92%, the facility fee is adjusted upward yearly on a pro rata basis. Thefacility fee is recognized on a straight-line basis over the lease period. Theupward and/or downward adjustments for uptime, if any, are recognized annuallywhen incurred.

·       An operational fee per day for the operation, maintenance andinsurance of the FPSO, which is adjusted periodically based on changes inagreed upon official price indices applicable in the industry. The operationalfee is recognized on a straight line basis over the lease term. Contingentpayments that depend on changes in the price indices are recognized when theapplicable price indices have changed.

·       Feepayments which are related to a reduction in the number of required shut downdays, subject to a specified maximum.

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***(e)****            FPSO Munin*

From October 2004 until March 2005 the FPSO *Munin* fees earned consist of:

·       A definedday rate that consisted of a facility fee and a fixed operating fee. In orderto receive the full facility fee, the Company had to maintain a production rateof at least 50,000 barrels of oil produced per day and achieve an uptime of atleast 97% in each month, unless otherwise agreed with Conoco Phillips. When theCompany’s production level or uptime was below the applicable threshold, theCompany’s facility fee was reduced on a pro rata basis.

·       Fixedancillary fees to reimburse the Company for various costs associated with theperformance of the Company’s our duties under the agreement.

Thecontract with Conoco Phillips ended in March 2005 as per contract. In June 2005the vessel restarted production from the Lufeng field for Statoil Orient Inc.Under this revised agreement  the FPSOMunin fees earned consist of:

·       A fixeddaily hire rate per day plus a tariff for every barrel of oil produced. Theaverage anticipated revenue over this 3 year period is expected to beapproximately U.S.$55 to U.S.$60 per day.

·       A monthlylump sum payment to cover a pre-defined scope of work for operations support,including the vessel insurance.

·       All othercosts incurred by Bluewater such as crew costs, flag and classificationservices etc., are reimbursed by Statoil Orient Inc. at cost.

The daily feeis recognized on a straight-line basis over the lease period. Fee payments thatdepend on the volumes of oil are recognized when the specified and agreed-uponvolumes have been produced.

***(f)****             FPSO Jotun A*

The FPSO *Jotun A* fees earned consist of a charter fee per day whichis fixed at different levels for certain periods during the term of the lease. Thecharter fee is recognized on a straight-line basis over the charter period.

***(g)****           Shuttle tanker Hanne Knutsen*

On February 9, 2006,the Company entered into an agreement to purchase the shuttle tanker MT ”HanneKnutsen”. Delivery and payment of the shuttle tanker occurred on June 29,2006. Since then the Company has agreed to bareboat charter the vessel back tothe previous owner for a period of eleven months in anticipation of a new FPSOproject at a charter fee per day which is fixed for the charter period. Thecharter fee is recognized on a straight-line basis over the charter period.

***(h)****          Contingent payments*

Contingentpayments recognized as revenue for the years 2006, 2005 and 2004 amounted toU.S.$50,953, U.S.$94,740 and U.S.$156,252, respectively.

***(i)****             Guaranteed day rates*

*Uisge Gorm.**  *The Companyreceives from Amerada Hess a minimum day rate of approximately U.S.$94 per daythat consists of a minimum facility fee for the provision of the FPSO andassociated equipment and a budget defined operating fee for the operation andmaintenance of the vessel. The Company is currently operating the *Uisge Gorm* (at pre-agreed rates) pursuantto a three year extension of the service agreement with Amerada Hess obligatedto continue to make payments until December 2007.

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*Bleo Holm.**  *The Companyreceives from Talisman a defined day rate of approximately U.S.$114 which is acharter fee for the provision of the FPSO and associated equipment. Under theterms of the existing Bare Boat Charter, Talisman is obligated to continue tomake payments until May 2007, after which the contract will continue atpre-agreed rates until July 2012 unless terminated by Talisman.

*Glas Dowr.**  *During the minimumcontract period of three years, PetroSA will be required to pay a minimum feeof approximately U.S.$124 per day plus guaranteed tariff payments for eachbarrel of oil produced commencing on the date of first oil, which was achievedin the end of December 2003. The minimum fee per day consists of a fixedfacility fee, a fixed operating fee and a fee for shuttle tanker services. Theminimum guaranteed tariff payments until the end of the minimum contract periodamount to U.S.$44,000. The minimum contract period under the service agreementcommences on the date of first oil and will last for three years. Following theexpiration of the minimum contract period, the service agreement will continuefor a further seven years unless terminated by PetroSA with 8 months’notice. As a consequence, without termination, the contract term is ten years.

*Haewene Brim.**  *The Companyreceives from Enterprise Oil/Shell a defined day rate of approximately U.S.$150that consists of a facility fee for the provision of the FPSO and associatedequipment (indexed to the pound sterling-U.S.$ exchange rate) and an indexedoperating fee for the operation, maintenance and insurance of the vessel.Enterprise Oil/Shell is obligated to continue to make payments to the Companyunder its service agreement until the agreement expires in March 2014. Theminimum guaranteed term of the service agreement expired in March 2005,permitting Enterprise Oil/Shell to terminate the agreement at any time upon12 months’ written notice.

*Munin.**  *The *Munin* left the Lufeng field in June 2004and went to the Sembawang shipyard for modifications to make the vessel fit forpurpose for production on the Xijiang field for Conoco Philips which startedlate October 2004. Production on Xijiang ended in March 2005 as percontract. After decommissioning at Xijiang, the *Munin* in June 2005 sailed under its own power from HKto the Lufeng field for reconnection to the subsea buoy and mooring system. On June 9,2005 the *Munin* restarted producing oil from theLufeng field. Under its current serviceagreement, the Company receives from Statoil (Orient) Inc a day rate of approximatelyU.S.$30 consisting of a facility fee plus tariff payments linked to the actualvolume of oil produced. Statoil (Orient) Inc is obliged to continue tomake payments to the Company under the current agreement until April 2008.

*Jotun A.**  *The Company receives from Exxon adefined day rate of approximately U.S.$180 for theperiod July 1, 2005 - June 30, 2007. For the period July 30,2007 - June 30, 2010 the Company receives a defined day rate of U.S.$160per day. Under the existing bareboat charter, Exxon is obliged to continue tomake payments until June 30, 2010, after which the contract will continueat pre-agreed rates until June 30, 2020 unless terminated by Exxon.

**5.**   Tax Lease Structures for FPSOs *UisgeGorm*, *Glas Dowr*, *Bleo Holm* and *Haewene Brim*

As of December 31, 2004 the Companywas party to tax lease structures with a leasing subsidiary of a UK bank (“thelessor”). The Company leased the FPSOs *UisgeGorm* and *Glas Dowr* andthe process facilities on board the FPSO *BleoHolm* and on board of the FPSO *HaeweneBrim* from the lessor for a period of 15 years commencing forthe *Uisge Gorm* in August 1995,for the FPSO *Glas Dowr* in August 1997and for the process facilities on board the FPSO *Bleo Holm* in April 1999 and for the process facilitieson board the FPSO *Haewene Brim* inApril 2003. Substantially, all risks and rewards relating to the assets,including the proceeds in case the assets are sold, were for the account of theCompany. As a consequence, the Company owned the full future economic rights tothese assets. The above was reflected in the Company’s balance sheet bycontinuing to reflect the FPSOs as tangible fixed assets, at historical cost.

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On November 3,2005 all tax lease structures that were in effect for FPSO *Uisge Gorm*, FPSO *Glas Dowr* and the topsides of FPSO *Bleo Holm* and FPSO *Haewene Brim*were terminated. As a result of the termination, the Companyregained full ownership of the FPSO *UisgeGorm*, the FPSO *Glas Dowr*and the topsides of FPSO *Bleo Holm*and FPSO *Haewene Brim.*The related tax lease benefitsliability has been released as other operating income and restricted depositswere discharged and proceeds were used for repayment of the corporate credit facility.

**6.**   Cash and Cash Equivalents

Facility feesreceived under operating leases are kept in restricted accounts amounting toU.S.$5,966 at December 31, 2006. These funds are used to make repaymentsunder the corporate credit facility.

**7.**   Accounts Receivable

Accounts receivable are as follows:

| ** **                                 | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in U.S.$ thousands)** | ** ** |
| Trade                                      |       | 44,413                             |       | 32,452   |       |
| Less  provision for uncollectible accounts |       | 933                                |       | 923      |       |
| Net  trade receivables                     |       | 43,480                             |       | 31,529   |       |
| Related  party                             |       | —                             |       | 99       |       |
|                                       |       | 43,480                             |       | 31,628   |       |

 

The movement in the provision for uncollectible accounts is as follows:

| ** **       | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **       | ** ** | **(in U.S.$ thousands)** | ** ** |
| January 1   |       |                               | 923        |     |       | 1,443    |       | 1,231 |   |
| Additions        |       |                               | 15         |     |       | 36       |       | 486 |   |
| Release          |       |                               | (5         | )        |       | (556     | )          | (27 | ) |
| Write  offs      |       |                               | —     |     |       | —   |       | (247 | ) |
| December 31 |       |                               | 933        |     |       | 923      |       | 1,443 |   |

 

Accountsreceivable as presented under current assets mature within one year.

**8.**   Other Receivables

Other receivables are specified as follows:

| ** **                                                    | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                                    | ** ** | **(in U.S.$ thousands)** | ** ** |
| Accrued  income                                               |       | 26,207                             |       | 21,636   |       |
| Fair  value of forward currency exchange contracts            |       | 1,072                              |       | —   |       |
| Accrued  interest on the fixed-to-floating interest rate swap |       | —                             |       | 11       |       |
| Insurance  receivables                                        |       | 13,530                             |       | 1,925    |       |
| VAT                                                           |       | 4,177                              |       | 791      |       |
| Other                                                         |       | 52                                 |       | 1,291    |       |
| Total                                                         |       | 45,038                             |       | 25,654   |       |

 

**9.**   Work in Process

Work in process arises when revenues havebeen earned but the amounts cannot be billed under the terms of the contracts.Such amounts are recoverable from customers upon various measures of 

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performance,including achievement of certain milestones, completion of specified units orcompletion of the contract. Work in process contains directly allocable costs(labor costs of services provided by third parties) as well as the appropriateportion of overheads including pro rata administrative expenses.

Also included in work in process areamounts the Company seeks or will seek to collect from customers or others forerrors or changes in contract specifications or design, contract change ordersin dispute or unapproved as to both scope and price, or other customer relatedcauses of unanticipated additional contract costs claims and pending changeorders. These amounts are recorded at their estimated net realizable value whenrealization is probable and can be reasonably estimated. No profit isrecognized on the costs incurred in connection with these amounts. Pendingchange orders involve the use of estimates and it is reasonably possible thatrevisions to the estimated recoverable amounts or recorded pending changeorders may be made in the near term.

Work in process is specified as follows:

| ** **                                             | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                             | ** ** | **(in U.S.$ thousands)** | ** ** |
| Cost  incurred on projects                             |       | 123,370                            |       | 90,271   |       |
| Profit/(loss)  recognized, less loss provisions taken  |       | 11,597                             |       | (25,109  | )          |
| Revenues  recognized                                   |       | 134,967                            |       | 65,162   |       |
| Invoiced  to customers                                 |       | (117,613                           | )          | (61,612  | )          |
|                                                   |       | 17,354                             |       | 3,550    |       |
| Which  is specified as follows:                        |       |                               |       |     |       |
| Cost  incurred in excess of billings (work in process) |       | 29,654                             |       | 15,174   |       |
| Billings  in excess of cost and unrealized income      |       | (12,300                            | )          | (11,624  | )          |
|                                                   |       | 17,354                             |       | 3,550    |       |

 

**10.**   Loan

A loan amounting to U.S.$100 was providedto Emerald Energy Resources Ltd. (“Emerald”) on November 13, 2003. On January 16,2004 an additional amount of U.S.$50 was provided. Repayment was due on November 13,2005, however the management of the Company has the intention of extending theloan agreement. The loan bears an interest at a margin of 2.5% over LIBOR.

On October 13,2006 a loan of U.S.$2,000 was provided to Emerald, AERD Projects Nigeria Ltd.and Amni Oil and Gas Ltd. Repayment is due on April 13, 2007. The loanbears an interest at a margin of 3% over LIBOR.

**11.**   Financial Investment

On May 26, 2004, BluewaterInternational B.V. entered into an agreement with Emerald Energy Resources Ltd.(“Emerald”), a Nigerian indigenous oil company, which holds a 33% workinginterest in Nigerian oil producing license OPL229, for the acquisition ofshares of Emerald at a total price of U.S.$3,000. On November 25, 2004 andApril 27, 2005, Bluewater International B.V. obtained additional ordinaryshares of Emerald at a total price of U.S.$4,500 and U.S.$2,000 respectively.The total investment in Emerald consists of 4,800,000 shares which representsapproximately 11.4% of its outstanding capital and is stated at historicalcost.

On August 1, 2006, Bluewater InternationalB.V acquired 11,111,111 shares which represents 11.1% ownership interest at thetotal price of U.S.$13,500 in Amni Oil and Gas Ltd., a Nigerian company whichholds a 27% working interest in Nigerian Oil producing license OPL229. Theinvestment is stated at historical cost.

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**12.**   Tangible FixedAssets

| ** **                   | ** ** | **FPSOs**                          | ** ** | **Hull and  Trading  Vessel** | ** ** | **Machinery  and  Equipment** | ** ** | **Office  Equipment  and Other  Tangible  Fixed Assets** | ** ** |
|------------------------------|------------|------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **(in U.S.$ thousands)** | ** ** |
| **Cost**                     |       |                               |       |                               |       |                          |       |                                                               |       |   |   |   |   |
| January 1               |       | 1,708,277                          |       | 54,797                             |       |                          | 38,389     |                                                               |       |   | 6,385 |   |   |
| Additions                    |       | 1,891                              |       | 131,471                            |       |                          | —     |                                                               |       |   | 485 |   |   |
| Disposal                     |       | —                             |       | —                             |       |                          | —     |                                                               |       |   | (1 | ) |   |
| Transfer                     |       | —                             |       | (54,797                            | )          |                          | —     |                                                               |       |   | — |   |   |
| Translation  result          |       | 573                                |       | —                             |       |                          | —     |                                                               |       |   | 219 |   |   |
| December 31             |       | 1,710,741                          |       | 131,471                            |       |                          | 38,389     |                                                               |       |   | 7,088 |   |   |
| **Accumulated depreciation** |       |                               |       |                               |       |                          |       |                                                               |       |   |   |   |   |
| January 1               |       | 494,745                            |       | —                             |       |                          | 38,389     |                                                               |       |   | 4,577 |   |   |
| Depreciation for  the year   |       | 103,553                            |       | 2,235                              |       |                          | —     |                                                               |       |   | 556 |   |   |
| Disposal                     |       | —                             |       | —                             |       |                          | —     |                                                               |       |   | (1 | ) |   |
| Translation  result          |       | 465                                |       | —                             |       |                          | —     |                                                               |       |   | 173 |   |   |
| December 31             |       | 598,763                            |       | 2,235                              |       |                          | 38,389     |                                                               |       |   | 5,305 |   |   |
| Net book value               |       | 1,111,978                          |       | 129,236                            |       |                          | —     |                                                               |       |   | 1,783 |   |   |

 

| ** **                   | ** ** | **Fixed Assets  under  Construction** | ** ** | **Total 2006** | ** ** | **Total 2005** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                   | ** ** | **(in U.S.$ thousands)**         | ** ** |
| **Cost**                     |       |                                       |       |                |       |                |       |   |   |
| January 1               |       |                                       | 4,824      |                |       | 1,812,672           |       | 1,420,853 |   |
| Additions                    |       |                                       | 106,449    |                |       | 240,296             |       | 392,276 |   |
| Disposal                     |       |                                       | —     |                |       | (1                  | )          | (29 | ) |
| Transfer                     |       |                                       | 54,797     |                |       | —              |       | — |   |
| Translation  result          |       |                                       | —     |                |       | 792                 |       | (428 | ) |
| December 31             |       |                                       | 166,070    |                |       | 2,053,759           |       | 1,812,672 |   |
| **Accumulated depreciation** |       |                                       |       |                |       |                |       |   |   |
| January 1               |       |                                       | —     |                |       | 537,711             |       | 443,092 |   |
| Depreciation for  the year   |       |                                       | —     |                |       | 106,344             |       | 94,953 |   |
| Disposal                     |       |                                       | —     |                |       | (1                  | )          | (2 | ) |
| Translation  result          |       |                                       | —     |                |       | 638                 |       | (332 | ) |
| December 31             |       |                                       | —     |                |       | 644,692             |       | 537,711 |   |
| Net book value               |       |                                       | 166,070    |                |       | 1,409,067           |       | 1,274,961 |   |

 

The Company’s hull that is not in service and is heldin anticipation of use in future FPSO projects is not depreciated. On March 31,2006 the Company entered into a service agreement with Nexen Petroleum U.K.Ltd. (“Nexen”) with respect to the provision and operation of a FPSO forproduction on the Ettrick field on the UK continental shelf. For this projectthe Company’s existing hull *Aoka Mizu* isbeing converted into a FPSO*.*

As of December 31, 2006, an amount of U.S.$59,536(2005—U.S.$53,072) relating to capitalized interest is included in the costvalue of the FPSOs and fixed assets under construction. Interest capitalizedfor the years 2006, 2005 and 2004 amounts to U.S.$6,464, U.S.$nil and U.S.$385respectively.

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As of December 31, 2006, the gross carryingamount of certain machinery and equipment amounting to U.S.$38,389 and ofcertain office equipment amounting to U.S.$3,372 is fully depreciated. As of December 31,2006, all these items are still in active use.

The carrying amount of tangible fixed assets soldduring December 31, 2006 amounted to U.S.$nil (2005—U.S.$27).

On April 4, 2005 Bluewater Oil and GasInvestments Ltd. (“BOGI”) obtained a 2% working interest in a Nigerian OilProcessing Block OPL229, operated by Emerald, at a price of U.S.$400. During2005 and 2006, BOGI invested U.S.$796 in OPL 229. This investment consists ofexpenditures in connection with the development of OPL 229. The workinginterest in OPL 229 qualifies as a mineral interest in property and istherefore capitalized under Other Tangible Fixed Assets. Once the field goesinto production the costs will be amortized as the related oil and gas reservesare produced under the unit of production method.

On February 9, 2006,the Company entered into an agreement to purchase the shuttle tanker MT “HanneKnutsen” for the amount of U.S.$131,471. Delivery and payment of the shuttletanker occurred on June 29, 2006. Since then the Company has agreed to bareboatcharter the vessel back to the previous owner for a period of eleven months inanticipation of a new FPSO project. The vessel is held for use in future FPSO projects.

**13.**   DebtArrangement Fees

Debt arrangement fees asof December 31, 2006 represent costs incurred relating to arranging andrefinancing the long term corporate credit facility, the issuance of the 101¤4%Senior Notes due 2012 and the loan agreement to finance the acquisition of a55% ownership in PR Jotun DA. At December 31, 2006, the net book value ofthe debt arrangement fees relating to the arranging and refinancing of thecorporate credit facility, the 101¤4%Senior Notes due 2012 and the loan agreement amount to U.S.$10,863, U.S.$6,029and U.S.$865 respectively. These fees are amortized on a straight line basis tointerest expenses over the term of the facilities; being, 51⁄2 years for thecurrent corporate credit facility, 10 years for the 101¤4% Senior Notesdue 2012, and 61¤4 yearsfor the loan agreement.

**14.**   OtherLiabilities and Accrued Expenses

Otherliabilities and accrued expenses are specified as follows:

| ** **                                         | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                         | ** ** | **(in U.S.$ thousands)** | ** ** |
| Accrued interest                                   |       | 14,998                             |       | 14,092   |       |
| Deferred revenues                                  |       | 7,332                              |       | 12,014   |       |
| Accrued expenses                                   |       | 52,248                             |       | 44,646   |       |
| Fair value of  forward currency exchange contracts |       | —                             |       | 7,417    |       |
| Short term  portion of pension liability           |       | 2,894                              |       | 2,240    |       |
| Provision project  loss                            |       | 2,435                              |       | 4,305    |       |
| Other                                              |       | 2,105                              |       | 1,052    |       |
| Total                                              |       | 82,012                             |       | 85,766   |       |

 

**15.**   ShortTerm Loan

The loan has been providedby Enterprise Oil on December 13, 2006 to fund accelerated maintenance andrepair works that would otherwise have been performed in 2007. The loan doesnot carry any interest and repayment is due on or before August 31, 2007.

F-23

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**16.**   Linesof Credit

As of December 31, 2006 the maximum amountavailable under the Company’s corporate credit facility was U.S.$822,000 ( 2005—U.S.$320,000),being 66.7% of the aggregate fair market value of the Company’s current FPSOfleet, excluding FPSO Jotun. As of this date an amount of U.S.$363,354 has beendrawn and therefore the remaining borrowing capacity under the corporate creditfacility as of December 31, 2006 amounted to U.S.$458646 (2005—U.S.$203,146).The used portion of the facility is presented under long-term loans in thebalance sheet.

The conditions to thecorporate credit facility are disclosed with the related borrowings aspresented under note 17.

**17.**   Long-TermBank Loans

Long-term bank loans at December 31, 2006 and2005 represent loans as part of the lines of credit described undernote 16, granted by a bank consortium for financing Bluewater’s ownershipof the FPSO’s.

On June 29, 2006, the Company refinanced itsoutstanding debt under the U.S.$600,000 revolving credit facility with fundsdrawn under a U.S.$850,000 syndicated secured reducing revolving creditfacility (the “RCF”). The RCF has been used to refinance outstanding amountsunder the existing U.S.$600,000 revolving credit facility, to finance theconstruction of the FPSO *Aoka Mizu,* topurchase the *Hanne Knutsen*, and will be usedto upgrade existing FPSOs and for general corporate purposes. The costsincurred in arranging the corporate credit facility have been capitalized asdebt arrangement fees under non-current assets and will be amortized over theterm of the facility. The margin, which is currently 0.60%, could increase to amaximum of 0.85% depending on, among other factors, the amount outstandingunder the facility. As of December 31, 2006 the interest rate on thecorporate credit facility including margin over LIBOR was approximately 5.95%.

The facility is primarily secured with mortgages overthe FPSOs and assignments of incoming cash flows generated from contracts withclients concerning the FPSOs.

To limit its interest exposure, on August 10,2006 and August 11, 2006 the Company purchased interest rate caps relatingto U.S.$300,000 of the total outstanding amount under its corporate creditfacility. These interest rate caps have a strike rate of 6.5%, limiting themaximum interest costs on that principal amount to 6.5% excluding margin. Theinterest rate caps have fixed notional amounts of U.S.$200,000, U.S.$50,000 andU.S.$50,000 and are aligned with the maturity of the refinanced corporatefacility.

On July 1, 2005, the Company entered into aU.S.$175,000 loan agreement to finance the acquisition of a 55% ownershipinterest in PR Jotun DA. This non-recourse loan will amortize to zero over aperiod of six and a quarter years, with the final amortization occurring in September 2011.Interest equals 0.60% over LIBOR. The average interest rate during the year2006 was 5.65%. To limit its interest exposure after July 3, 2006, theCompany purchased an interest rate cap which has a strike rate of 4.4%,limiting the maximum interest costs to 5%. The interest rate cap has a startingnotional amount of U.S.$143,900 and the reduction schedule of the notionalamount of the cap is aligned with the repayment schedule of the loan.

The costs incurred in arranging this loan agreementhave been capitalized as debt arrangement fees under non-current assets andwill be amortized over the term of the loan. The loan is secured with amortgage over the FPSO *Jotun A*and anassignment of the bareboat charter contract with the Jotun field partners tothe lenders.

On July 1, 2005, PR Jotun DA entered into aU.S.$143,182 loan agreement with Standard Marine Nordsjo AS (“SMNAS”) tofinance the acquisition of the FPSO *Jotun A*. Theloan will amortize to zero 

F-24

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over a period of six and aquarter years, with its final amortization occurring in September 2011.Interest equals 5%.

As of December 31,2006 the consolidated amount of debt borrowed in connection with PR Jotun DA wasU.S.$239,412. During the twelve months ended December 31, 2006 and thetwelve months ended December 31, 2005 repayments of the borrowed debt weremade of U.S.$52,088 and U.S.$26,654 respectively.

**18.**   101¤4%Senior Notes due 2012

In February 2002, the Company issued U.S.$260,000aggregate principal amount of 101¤4% Senior Notesdue 2012 through its finance subsidiary, Bluewater Finance Limited, at a priceof 98.47% of the principal amount thereof. The Company used the gross proceedsfrom the issuance to repay approximately U.S.$248,500 of indebtednessoutstanding under its corporate credit facility and to pay approximatelyU.S.$7,500 of costs relating to the issuance. The Company and most of itsdirect and indirect subsidiaries have fully and unconditionally guaranteed the 101¤4%Senior Notes due 2012 on a joint and several basis.

In April 2003, the Company issued an additionalU.S.$75,000 aggregate principal amount of 101¤4% Senior Notesdue 2012 through its finance subsidiary, Bluewater Finance Limited, at a priceof 100.5% of the aggregate principal amount thereof plus accrued interest fromand including February 15, 2003 to but excluding the issue date. TheCompany used approximately U.S.$75,400 of the gross proceeds from the issuance,excluding the accrued interest from and including February 15, 2003 to butexcluding the issue date, to repay approximately U.S.$73,400 of indebtednessoutstanding under its corporate credit facility and to pay an estimatedU.S.$2,000 of costs relating to the issuance.

Bluewater Finance Limited is a wholly owned financesubsidiary of the Company. Each other subsidiary of the Company (except for PRJotun DA and Bluewater Energy Services (Malaysia) Bhd. Sdn.) is wholly-owned,directly or indirectly, by the Company. The Company has no independent assetsor operations. There are no significant contractual restrictions on the abilityof the Company or any other guarantor of the 101¤4% Senior Notesdue 2012 to obtain funds from its subsidiaries by dividend or loan. NeitherBluewater Finance Limited nor any of the guarantors of the 101¤4% Senior Notesdue 2012 (other than the Company) are restricted by any third party in theirability to transfer funds within the meaning of Rule 4-08(e)(3) ofRegulation S-X. As a result, the guarantees of the 101¤4% Senior Notesdue 2012 meet the conditions of Rule 3-10(d) ofRegulation S-X. The fair value of the 101¤4% Senior Notesdue 2012 at December 31, 2006 amounts to U.S.$351,750 and is based on thequoted market price.

To reduce the interest expense relating to the 101¤4%Senior Notes due 2012, the Company entered into a fixed-to-floating interestrate swap transaction, with effect from April 25, 2003, that enabled theCompany to swap the equivalent of the fixed rate amount of interest that ispayable on U.S.$335,000 aggregate principal amount of the 101¤4% Senior Notesdue 2012 for the floating rate amount of interest that would be payable on anequal amount of indebtedness. On May 27, 2003, the Company cancelled theswap transaction. Under the swap, prior to the cancellation, the Companyreceived interest payments that were calculated at a fixed rate of 101¤4%and made interest payments that were calculated at a floating rate that wasequal to a margin over LIBOR. The Company received U.S.$6,680 on May 30,2003, which represented its net gain from the cancellation of the swaptransaction. The Company deferred this gain, which will be credited to incomeover the remaining duration of the 101¤4%Senior Notes due 2012, and used this payment to repay outstanding indebtednessunder its replacement credit facility.

As of July 17, 2003, the Company entered into afixed-to-floating interest rate swap transaction, with terms identical to thoseof the previous swap transaction, that enabled the Company to swap theequivalents of the fixed rate amount of interest that is payable onU.S.$335,000 aggregate principal amount of the 101¤4% Senior Notesdue 2012 for a floating rate amount of interest that would be payable on an 

F-25

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equal amount ofindebtedness. Under the swap, the Company received payments that werecalculated at a fixed rate of 101¤4% and madeinterest payments that were calculated at a floating rate that was equal to amargin of 6.32% over LIBOR. As of February 15, 2005 the margin changed to6.44%.

On November 4, 2005 the Company partiallycancelled the fixed-to-floating interest rate swap transaction in relation tothe U.S.$335,000 aggregate principal amount of the 101¤4%Senior Notes due 2012 for the period from August 15, 2005 to August 15,2007. Due to the partial cancellation of the swap transaction the Company wouldincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. The Company paid U.S.$6,898 on November 4,2005 which represented its net cost from the partial cancellation of the swaptransaction. The Company has deferred this cost which will debited it to thestatement of income over the remaining duration of the 101⁄4% Senior Notes due2012.

On April 21, 2006, the Company cancelled theremainder of the fixed-to-floating interest rate swap transaction in relationto the U.S.$335,000 aggregate principle amount of the 101¤4%Senior Notes due 2012, which was already partially cancelled for the periodfrom August 15, 2005 to August 15, 2007. The Company paid U.S.$23,750on May 3, 2006, which represented its net cost from the cancellation ofthe swap transaction. The Company has deferred this cost which will be debitedto the statement of income over the remaining duration of the 101¤4% Senior Notesdue 2012. The 101¤4%Senior Notes due 2012 will continue at an interest percentage of 10.25%.

The unamortized premiumand discount of the 101¤4%Senior Notes due 2012 amounts to U.S.$(1,820) as of December 31, 2006. Theunamortized deferred gain and loss from the cancellations of the swaps amountsto U.S.$(22,799) as of December 31, 2006.

F-26

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**19.**          GuarantorFinancial Information

In connection with the 101¤4Senior Notes due 2012 as described above in note 18, the Company and most ofits direct and indirect subsidiaries have fully and unconditionally guaranteedthe 101¤4Senior Notes on a joint and several basis. Each subsidiary guarantor is owned100% by the Company. The following tables present parent guarantor, its financesubsidiary, subsidiary guarantors and combined non-guarantors condensedconsolidated balance sheets as at December 31, 2006, condensed consolidatedresults of operations and cash flows for the year ended December 31, 2006.

**CondensedConsolidated Balance Sheet**December 31,2006
|                                                  | ** ** | **Aurelia**                        | ** ** | **Bluewater**        | ** ** | **Subsidiary** | ** ** | **Combined**       | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|----------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Energy NV**                 | ** ** | **Finance Ltd** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| ** **                                       | ** ** | **(in U.S.$ thousands)** | ** ** |                 |
| **ASSETS**                                       |       |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current assets**                               |       |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       |                               | 688        |                 |       |           | 17         |               |       |             | 39,345     |             |       |   | 2,453 |   |   |   | — |   |   |   | 42,503 |   |   |
| Accounts receivable                              |       |                               | 25         |                 |       |           | —     |               |       |             | 37,775     |             |       |   | 5,680 |   |   |   | — |   |   |   | 43,480 |   |   |
| Prepaid expenses and other current assets        |       |                               | —     |                 |       |           | —     |               |       |             | 50,408     |             |       |   | 8,341 |   |   |   | (3,445 | ) |   |   | 55,304 |   |   |
| Intercompany receivables                         |       |                               | —     |                 |       |           | 140        |               |       |             | 7,179      |             |       |   | 9,453 |   |   |   | (16,772 | ) |   |   | — |   |   |
| *Total current assets*                           |       |                               | 713        |                 |       |           | 157        |               |       |             | 95,362     |             |       |   | 23,474 |   |   |   | (20,217 | ) |   |   | 98,784 |   |   |
| Work in process                                  |       |                               | —     |                 |       |           | —     |               |       |             | 29,654     |             |       |   | — |   |   |   | — |   |   |   | 29,654 |   |   |
|                                             |       |                               | 713        |                 |       |           | 157        |               |       |             | 164,361    |             |       |   | 25,927 |   |   |   | (20,217 | ) |   |   | 170,941 |   |   |
| **Non current assets**                           |       |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial investments                            |       |                               | —     |                 |       |           | —     |               |       |             | 23,000     |             |       |   | — |   |   |   | — |   |   |   | 23,000 |   |   |
| Tangible fixed assets                            |       |                               | —     |                 |       |           | —     |               |       |             | 934,127    |             |       |   | 474,940 |   |   |   | — |   |   |   | 1,409,067 |   |   |
| Deferred income taxes                            |       |                               | —     |                 |       |           | —     |               |       |             | 122,177    |             |       |   | — |   |   |   | — |   |   |   | 122,177 |   |   |
| Investment in subsidiaries                       |       |                               | (571,987   | )                    |       |           | —     |               |       |             | 13,550     |             |       |   | — |   |   |   | 558,437 |   |   |   | — |   |   |
| Loan intercompany                                |       |                               | 1,262,595  |                 |       |           | 346,056    |               |       |             | 34,320     |             |       |   | — |   |   |   | (1,642,971 | ) |   |   | — |   |   |
| Other non-current assets                         |       |                               | —     |                 |       |           | —     |               |       |             | 23,825     |             |       |   | — |   |   |   | — |   |   |   | 23,825 |   |   |
| *Total non current assets*                       |       |                               | 690,608    |                 |       |           | 346,056    |               |       |             | 1,150,999  |             |       |   | 474,940 |   |   |   | (1,084,534 | ) |   |   | 1,578,069 |   |   |
| Total                                            |       |                               | 691,321    |                 |       |           | 346,213    |               |       |             | 1,315,360  |             |       |   | 500,867 |   |   |   | (1,104,751 | ) |   |   | 1,749,010 |   |   |
| **LIABILITIES  AND**                             |       |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **SHAREHOLDER’S EQUITY**                    | ** ** |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   | ** ** |   |   |   |   |
| **Current liabilities**                          |       |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       |                               | —     |                 |       |           | —     |               |       |             | 24,987     |             |       |   | 612 |   |   |   | — |   |   |   | 25,599 |   |   |
| Other liabilities and accrued expenses           |       |                               | 300        |                 |       |           | 12,924     |               |       |             | 70,580     |             |       |   | 22,190 |   |   |   | (20,217 | ) |   |   | 85,777 |   |   |
| Billings in excess of cost and unrealized income |       |                               | —     |                 |       |           | —     |               |       |             | 12,300     |             |       |   | — |   |   |   | — |   |   |   | 12,300 |   |   |
| Current debt                                     |       |                               | —     |                 |       |           | —     |               |       |             | 3,928      |             |       |   | 51,101 |   |   |   | (487 | ) |   |   | 54,542 |   |   |
| *Total current liabilities*                      |       |                               | 300        |                 |       |           | 12,924     |               |       |             | 111,795    |             |       |   | 73,903 |   |   |   | (20,704 | ) |   |   | 178,218 |   |   |
| **Non-current  liabilities**                     |       |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long term bank loans                             |       |                               | —     |                 |       |           | —     |               |       |             | 363,354    |             |       |   | 188,311 |   |   |   | — |   |   |   | 551,665 |   |   |
| 101¤4% Senior Notes due 2012                |       |                               | —     |                 |       |           | 333,180    |               |       |             | (22,799    | )                |       |   | — |   |   |   | — |   |   |   | 310,381 |   |   |
| Long term loans, related party                   |       |                               | 153,823    |                 |       |           | —     |               |       |             | —     |             |       |   | — |   |   |   | — |   |   |   | 153,823 |   |   |
| Other non current liabilities                    |       |                               | 28,001     |                 |       |           | —     |               |       |             | 1,434,997  |             |       |   | 180,605 |   |   |   | (1,642,484 | ) |   |   | 1,119 |   |   |
| *Total non-current liabilities*                  |       |                               | 181,824    |                 |       |           | 333,180    |               |       |             | 1,775,552  |             |       |   | 368,916 |   |   |   | (1,642,484 | ) |   |   | 1,016,988 |   |   |
| Minority interest                                |       |                               | —     |                 |       |           | —     |               |       |             | —     |             |       |   | 44,607 |   |   |   | — |   |   |   | 44,607 |   |   |
| Shareholder’s  equity:                      |       |                               |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Share capital                                    |       |                               | 170,000    |                 |       |           | 1          |               |       |             | 76,764     |             |       |   | 3,235 |   |   |   | (80,000 | ) |   |   | 170,000 |   |   |
| Other shareholder’s equity                  |       |                               | 339,197    |                 |       |           | 108        |               |       |             | (648,751   | )                |       |   | 10,206 |   |   |   | 638,437 |   |   |   | 339,197 |   |   |
| *Total equity*                                   |       |                               | 509,197    |                 |       |           | 109        |               |       |             | (571,987   | )                |       |   | 13,441 |   |   |   | 558,437 |   |   |   | 509,197 |   |   |
| Total                                            |       |                               | 691,321    |                 |       |           | 346,213    |               |       |             | 1,315,360  |             |       |   | 500,867 |   |   |   | (1,104,751 | ) |   |   | 1,749,010 |   |   |
|                                                  |            |                                    |            |                      |            |                |            |                    |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-27

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**CondensedConsolidated Statement of IncomeYear ended December 31, 2006**
|                                                          | ** ** | **Aurelia**                        | ** ** | **Bluewater**        | ** ** | **Subsidiary** | ** ** | **Combined**       | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|----------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **Energy NV**                 | ** ** | **Finance Ltd** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| ** **                                               | ** ** | **(in U.S.$ thousands)** | ** ** |
| Revenues                                                 |       |                               | —     |                 |       |           | 29         |               |       |             | 362,839    |             |       |   | 76,863 |   |   |   | (1,819 | ) |   |   | 437,912 |   |   |
| Operating expenses                                       |       |                               | 161        |                 |       |           | 1          |               |       |             | 332,833    |             |       |   | 34,811 |   |   |   | (1,620 | ) |   |   | 366,186 |   |   |
| Operating income (loss)                                  |       |                               | (161       | )                    |       |           | 28         |               |       |             | 30,006     |             |       |   | 42,052 |   |   |   | (199 | ) |   |   | 71,726 |   |   |
| Financial income (expense)                          |       |                               | 101,515    |                 |       |           | 1          |               |       |             | (148,230   | )                |       |   | (20,788 | ) |   |   | 199 |   |   |   | 67,303 |   |   |
| Income (loss) from subsidiaries                          |       |                               | (95,843    | )                    |       |           | —     |               |       |             | 10,715     |             |       |   | — |   |   |   | 85,128 |   |   |   | — |   |   |
| Income (loss) before income taxes and minority  interest |       |                               | 5,511      |                 |       |           | 29         |               |       |             | (107,509   | )                |       |   | 21,264 |   |   |   | 85,128 |   |   |   | 4,423 |   |   |
| Income tax (benefits) expenses                           |       |                               | 90         |                 |       |           | 7          |               |       |             | (11,666    | )                |       |   | 21 |   |   |   | — |   |   |   | (11,548 | ) |   |
| Income (loss) before minority  interest                  |       |                               | 5,421      |                 |       |           | 22         |               |       |             | (95,843    | )                |       |   | 21,243 |   |   |   | 85,128 |   |   |   | 15,971 |   |   |
| Minority interest                                        |       |                               | —     |                 |       |           | —     |               |       |             | —     |             |       |   | 10,550 |   |   |   | — |   |   |   | 10,550 |   |   |
| Net income (loss)                                        |       |                               | 5,421      |                 |       |           | 22         |               |       |             | (95,843    | )                |       |   | 10,693 |   |   |   | 85,128 |   |   |   | 5,421 |   |   |

 

**CondensedConsolidated Statement of Cash Flows**Year endedDecember 31, 2006
|                                                            | ** ** | **Aurelia**                                                          | ** ** | **Bluewater**        | ** ** | **Subsidiary** | ** ** | **Combined**       | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Energy NV**                                                   | ** ** | **Finance Ltd** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Totals**       | ** ** |
| ** **                                                 | ** ** | **(in U.S.$ thousands)  (dollars in thousands)** | ** ** |
| Cash flows from (used  in):                                |       |                                                                 |       |                 |       |           |       |               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating activities                                       |       |                                                                 | 203        |                 |       |           | 14         |               |       |             | 14,900     |             |       |   | 46,748 |   |   |   | — |   |   |   | 61,865 |   |   |
| Investing activities                                       |       |                                                                 | —     |                 |       |           | —     |               |       |             | (102,090   | )                |       |   | (131,500 | ) |   |   | — |   |   |   | (233,590 | ) |   |
| Financing activities                                       |       |                                                                 | —     |                 |       |           | —     |               |       |             | 82,799     |             |       |   | 79,412 |   |   |   | — |   |   |   | 162,211 |   |   |
| Subtotal                                                   |       |                                                                 | 203        |                 |       |           | 14         |               |       |             | (4,391     | )                |       |   | (5,340 | ) |   |   | — |   |   |   | (9,514 | ) |   |
| Translation effect on cash                                 |       |                                                                 | —     |                 |       |           | —     |               |       |             | 8,991      |             |       |   | — |   |   |   | — |   |   |   | 8,991 |   |   |
| Net increase (decrease) in cash and cash  equivalents |       |                                                                 | 203        |                 |       |           | 14         |               |       |             | 4,600      |             |       |   | (5,340 | ) |   |   | — |   |   |   | (523 | ) |   |
| Beginning cash balance                                     |       |                                                                 | 485        |                 |       |           | 3          |               |       |             | 34,745     |             |       |   | 7,793 |   |   |   | — |   |   |   | 43,026 |   |   |
| Ending cash  balance                                       |       |                                                                 | 688        |                 |       |           | 17         |               |       |             | 39,345     |             |       |   | 2,453 |   |   |   | — |   |   |   | 42,503 |   |   |

 

**20.**   Long-TermLoans Related Party

The long-term loansfrom a related party represent a long-term loan from Marenco InvestmentLimited, a company of which all the shares are ultimately owned by thePresident of the Company. The Jacaranda Trust is the indirect owner of 100% ofthe Company’s outstanding shares. The major conditions of these loans are asfollows:

1.      Therepayment of the loans is subordinated to the full repayment of the corporatecredit facility unless an allowed dividend distribution is replaced by arepayment of the loans. Accordingly, redemption is not expected to take placebefore December 31, 2012.

2.      The loancarries interest at a rate of 7% per annum (2005—7%).

3.      Subjectto certain permitted exceptions, interest amounts shall not be paid, but shallbe added to the loan on a yearly basis.

4.      Beforethe repayment of the corporate credit facility, the Company shall not give anysecurity for the repayment of the loan.

The fair value of theseloans at December 31, 2006 and 2005 amounted to U.S.$173,864 andU.S.$172,030, respectively. The fair value as of December 31, 2006 and2005 has been determined based on 

F-28

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thediscounted cash flow method assuming redemption in 5 equal annual installmentsas from December 2012. On November 3, 2006 and  September 14, 2005 U.S.$3,500 andU.S.$5,000 of interest respectively, was repaid.

**21.**   EmployeeBenefits Obligations

***(a) Defined Benefit Plan***

The group companies in the Netherlands provide definedbenefit pension plans for all its employees. Provisions for pension obligationsare established for benefits payable in the form of retirement and survivingdependant pensions. Benefits are dependent on years of service and therespective employee’s compensation.

The obligation resulting from defined benefit pensionplans is determined using the projected unit credit method. Unrecognized gainsand losses resulting from changes in actuarial assumptions are recognized asincome (expense) over the expected remaining service life of the activeemployees, when these gains or losses exceed the 10% corridor of the pensionbenefit obligation. There were no plan terminations, curtailments orsettlements for the three years ended in the period December 31, 2006.

Plan assets are part of pooled assets held by aninsurance company. The insurer guarantees a minimum yield of 4%.

Themovement in the defined benefit obligations is as follows:

| ** **                              | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                              | ** ** | **(in U.S.$ thousands)** | ** ** |
| Benefit  obligation at January 1   |       | 18,008                             |       | 21,959   |       |
| Service cost                            |       | 2,184                              |       | 2,595    |       |
| Interest cost                           |       | 901                                |       | 955      |       |
| Plan  participants’ contributions  |       | —                             |       | 55       |       |
| Actuarial  gain/(loss)                  |       | 1,057                              |       | (4,343   | )          |
| Benefits paid                           |       | (379                               | )          | (363     | )          |
| Translation  result                     |       | (2,241                             | )          | (2,850   | )          |
| Benefit obligation at  December 31 |       | 24,012                             |       | 18,008   |       |

 

Themovement in plan assets is as follows:

| ** **                                     | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                     | ** ** | **(in U.S.$ thousands)** | ** ** |
| Fair value of  plan assets at January 1   |       | 13,356                             |       | 20,481   |       |
| Actual return on  plan assets                  |       | 2,096                              |       | (6,599   | )          |
| Employer  contribution                         |       | 2,383                              |       | 2,239    |       |
| Plan  participants’ contributions         |       | —                             |       | 55       |       |
| Benefits paid                                  |       | (379                               | )          | (363     | )          |
| Translation  result                            |       | 1,732                              |       | (2,457   | )          |
| Fair value of plan  assets at December 31 |       | 19,188                             |       | 13,356   |       |

 

F-29

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Thefollowing table reconciles the funded items of defined benefit plans to theamounts recognized in the balance sheet:

| ** **                       | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|----------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                       | ** ** | **(in U.S.$ thousands)** | ** ** |
| Benefit  obligation              |       | 24,012                             |       | 18,008   |       |
| Fair value of  plan assets       |       | (19,188                            | )          | (13,356  | )          |
| Funded status                    |       | 4,824                              |       | 4,652    |       |
| Unrecognized net  actuarial loss |       | 810                                |       | 1,031    |       |
| Accrued benefit cost             |       | 4,014                              |       | 3,621    |       |

 

Componentsof net periodic benefit cost:

| ** **                      | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in U.S.$ thousands)** | ** ** |
| Service cost                    |       | 2,184                              |       | 2,595    |       | 2,394    |       |
| Interest cost                   |       | 901                                |       | 955      |       | 816      |       |
| Expected return  on plan assets |       | (718                               | )          | (885     | )          | (754     | )          |
| Recognized net  actuarial gain  |       | —                             |       | (3       | )          | (79      | )          |
| Net periodic benefit  cost      |       | 2,366                              |       | 2,662    |       | 2,377    |       |

 

Principalactuarial assumptions used to determine pension obligations as ofDecember 31, 2006 and 2005 were as follows:

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Discount rate                   |       | 4.50     | %          | 4.75     | %          |
| Expected return on plan  assets |       | 4.50     | %          | 4.75     | %          |
| Wage and salary  increases      |       |     |       |     |       |
| 25-34                           |       | 2.0      | %          | 2.0      | %          |
| 35-44                           |       | 1.5      | %          | 1.5      | %          |
| 45-54                           |       | 1.0      | %          | 1.0      | %          |
| 55-64                           |       | 0.5      | %          | 0.5      | %          |
| Retirement benefit  increases   |       | 2.0      | %          | 1.75     | %          |
| Average employee  turnover      |       |     |       |     |       |
| 25-34                           |       | 7.0      | %          | 7.0      | %          |
| 35-39                           |       | 6.0      | %          | 6.0      | %          |
| 40-44                           |       | 4.0      | %          | 6.0      | %          |
| 45-54                           |       | 4.0      | %          | 4.0      | %          |
| 55-65                           |       | 0.0      | %          | 0.0      | %          |

 

Theaccumulated benefit obligation as at December 31, 2006 amounted toU.S.$21,262 (2005—U.S.$15,975), of which U.S.$16,060 (2005—U.S.$11,915) is foractive members. The benefits to be paid in the next four years together amountto U.S.$778 annually and for the following six years together U.S.$2,457. Allmeasurement dates are December 31, 2006. The expected contribution for2007 amounts to U.S.$2,697. All benefits are insured in accordance with Dutchpension law and no significant transactions have occurred between the Companyand the plan during the period.

***(b) Defined Contribution Plan***

The group companies in theUnited Kingdom sponsor defined contribution plans based on local practice andregulations. The plans provide for contributions amounting to 5% of salary. Thecontributions relating to defined contribution plans are charged to income inthe year to which they relate. For the years 2006, 2005 and 2004 contributionscharged to income amount to U.S.$210, U.S.$218 and U.S.$426 respectively.

F-30

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**22.**   OperationsExpenses

Operationsexpenses are specified as follows:

| ** **     | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **(in U.S.$ thousands)** | ** ** |
| SPM contracts  |       | 126,675                            |       | 99,312   |       | 66,664   |       |
| FPSO contracts |       | 120,120                            |       | 156,285  |       | 247,409  |       |
|           |       | 246,795                            |       | 255,597  |       | 314,073  |       |

 

**23.**   Selling,General and Administrative Expenses

Selling,general and administrative expenses are specified as follows:

| ** **                  | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **(in U.S.$ thousands)** | ** ** |
| Personnel                   |       | 8,362                              |       | 6,775    |       | 5,917    |       |
| Marketing/Advertising       |       | 419                                |       | 455      |       | 493      |       |
| Professional  advisory fees |       | 1,680                              |       | 1,334    |       | 1,187    |       |
| Rent                        |       | 250                                |       | 450      |       | 354      |       |
| Other                       |       | 2,336                              |       | 2,296    |       | 1,803    |       |
|                        |       | 13,047                             |       | 11,310   |       | 9,754    |       |

 

**24.**   PersonnelExpenses and Number of Personnel

Personnelexpenses are specified as follows:

| ** **                                           | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **(in U.S.$thousands)** | ** ** |
| Personnel on payroll:                                |       |                         |       |     |       |     |       |
| Wages and salaries                                   |       | 37,220                       |       | 26,374   |       | 29,491   |       |
| Pension costs                                        |       | 3,681                        |       | 3,535    |       | 3,360    |       |
| Other social security contributions                  |       | 2,507                        |       | 2,243    |       | 2,769    |       |
|                                                 |       | 43,408                       |       | 32,152   |       | 35,620   |       |
| Personnel costs  from temporary agencies (unaudited) |       | 14,400                       |       | 11,178   |       | 14,436   |       |
|                                                 |       | 57,808                       |       | 43,330   |       | 50,056   |       |

 

Theaverage number of personnel employed by the group was 758 (2005—745, 2004—590)and is specified as follows:

| ** **                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Personnel on payroll:      |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Engineers                  |       |     | 526        |     |       |     | 528        |   |   |   | 357 |   |   |
| Sales                      |       |     | 17         |     |       |     | 19         |   |   |   | 17 |   |   |
| General and administrative |       |     | 114        |     |       |     | 123        |   |   |   | 102 |   |   |
|                       |       |     | 657        |     |       |     | 670        |   |   |   | 476 |   |   |
| Temporary  agencies        |       |     | 101        |     |       |     | 75         |   |   |   | 114 |   |   |
|                       |       |     | 758        |     |       |     | 745        |   |   |   | 590 |   |   |

 

**25.**   OtherOperating Income

Other operating incomerepresents primarily the release of the tax lease benefits liability and thereceipts from/payments to the lessor as a result of fluctuation in marketinterest rates.

F-31

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**26.**   IncomeTaxes

The income tax receivable relates to prepaid incometaxes in the United Kingdom and the Netherlands, originating from 1995 and 2000respectively, which are collectable from the local tax authorities.

Thecurrent income tax liability at December 31, 2006 and 2005 is specified asfollows:

| ** **                                                                                                                                                                                                                                               | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                                                                                                                                                                                                                                               | ** ** | **(in U.S.$ thousands)** | ** ** |
| Current:                                                                                                                                                                                                                                                 |       |                               |       |     |       |   |   |   |   |
| The Netherlands Antilles                                                                                                                                                                                                                                 |       |                               | 288        |     |       |   | 258 |   |   |
| United Kingdom                                        |       |                               | 27         |     |       |   | 30 |   |   |
| Other countries (the Netherlands, Malta, Norway)                                                                                                                                                                                                         |       |                               | 411        |     |       |   | 722 |   |   |
|                                                                                                                                                                                                                                                     |       |                               | 726        |     |       |   | 1,010 |   |   |

 

Theprovision for income taxes is as follows:

| ** **      | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **(in U.S.$ thousands)** | ** ** |
| Current taxes:  |       |                               |       |     |       |     |       |
| Domestic        |       | 98                                 |       | 116      |       | (1,098   | )          |
| Foreign         |       | 1,951                              |       | 3,264    |       | 2,060    |       |
|            |       | 2,049                              |       | 3,380    |       | 962      |       |
| Deferred taxes: |       |                               |       |     |       |     |       |
| Foreign         |       | (13,597                            | )          | (19,801  | )          | (1,431   | )          |
| Total provision |       | (11,548                            | )          | (16,421  | )          | (469     | )          |

 

Thereconciliation of the computation of the provision for income taxes atstatutory tax rates to the effective provision for income taxes is as follows:

| ** **                                                 | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                 | ** ** | **(in U.S.$ thousands)** | ** ** |
| Income before  income taxes and minority interest:         |       |                               |       |     |       |     |       |
| Domestic                                                   |       | 102,306                            |       | 93,062   |       | 84,676   |       |
| Foreign                                                    |       | (97,883                            | )          | (91,017  | )          | (78,756  | )          |
|                                                       |       | 4,423                              |       | 2,045    |       | 5,920    |       |
| The Netherlands  Antilles statutory tax rate               |       | 3                                  | %          | 3        | %          | 3        | %          |
| Expected  provision for income taxes at statutory tax rate |       | 132                                |       | 61       |       | 178      |       |
| Increase/(reduction)  in income taxes from:                |       |                               |       |     |       |     |       |
| Difference  between statutory tax rate and tax ruling      |       | (34                                | )          | 55       |       | (1,276   | )          |
| Foreign taxes                                              |       | 1,951                              |       | 3,264    |       | 2,060    |       |
| Deductions in  foreign jurisdictions                       |       | (13,597                            | )          | (19,801  | )          | (1,431   | )          |
| Income tax benefit                                         |       | (11,548                            | )          | (16,421  | )          | (469     | )          |

 

Deductions in foreign jurisdictions relate primarilyto the amortization of goodwill and interest expense on intercompany debt whichresulted from the internal restructuring as disclosed in note 30(b). In2004 the statutory tax rate in the Netherlands changed from 34.5% to 30.0%which decreased the deferred tax asset by U.S.$12,954, resulting in a netdeduction in foreign jurisdictions of U.S.$1,431. Effective January 1, 2007the statutory tax rate in the Netherlands has decreased further, from 30.0% to25.5%, causing a decrease of the deferred tax asset of U.S.$22,246. Thisdecrease was offset by an increase of the total realizable loss carry forwardof U.S.$140,312, resulting in a net deduction in foreign jurisdictions ofU.S.$13,597.

F-32

----

The effective tax rate for financial statementpurposes differs from the statutory tax rate in the Netherlands Antilles as theCompany is subject to taxation in various countries with different statutorytax rates and taxable results vary in the various countries involved. Further,some group companies have specific tax rulings with local tax authorities andother group companies are registered as operating or non-operating offshorecompanies in the countries where they are legally seated. Consequently, taxableresults of various group companies are not related to the operating results ofthese companies.

At December 31,2006 and 2005, the tax effects of temporary differences and carry forwards thatgave rise to the Company’s deferred income tax assets and liabilities are asfollows:

| ** **                          | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|----------|------------|
| ** **                          | ** ** | **(in U.S.$ thousands)** | ** ** |
| Tax loss carry  forwards            |       | 150,254                            |       | 121,126  |       |
| Financial  instruments and pensions |       | 951                                |       | 583      |       |
| Deferred tax  assets                |       | 151,205                            |       | 121,709  |       |
| Valuation  allowance                |       | (29,028                            | )          | (14,926  | )          |
| Net deferred tax assets             |       | 122,177                            |       | 106,783  |       |

 

The tax loss carry forwards available to the Companyrelate primarily to the group companies in the Netherlands and the UK. The taxloss carry forwards in the Netherlands result primarily from the amortizationof goodwill and interest expense on intercompany debt which resulted from theinternal restructuring as disclosed in note 30(b).

The movement in the amount of deferred income taxassets on the loss carry forward in the Netherlands is due to the following:

On November 28, 2006, a new corporate income taxbill was passed by the Upper House of Dutch Parliament. The new act was enactedon November 28, 2006 and has entered into effect on January 1, 2007.Under the new act, the Dutch corporate income tax rate has been reduced from30% to 25.5%, thereby reducing the amount of realizable tax credits related tothe Company’s tax losses carried forward by U.S.$22,246. In addition, thecarry-forward term has been limited to a maximum of nine years. Transitional rules forlosses currently available, resulting from tax years before 2003, apply up toand including tax years starting in 2011.

Based on the developments in the ongoing discussionswith the Dutch tax authorities concerning the amount of goodwill andintercompany indebtedness at the level of Bluewater Holding B.V. pursuant tothe restructuring transactions, the Company has reassessed its estimate of theamount of goodwill that will ultimately result from the internal restructuringand be amortized for income tax purposes, and the amount of interest bearingintercompany debt relating thereto. The Company estimates that it is currentlyprobable that it will realize benefits relating to at least U.S.$591,774 (2005:U.S.$433,950) of amortizable goodwill and at least U.S.$1,041,077 (2005: U.S.$724,000)of interest bearing intercompany debt in connection with the Company’s internalrestructuring at January 1, 2000 and that such amounts will result in taxlosses which may be carried forward for Dutch income tax purposes, subject tothe potential application of the thin cap rules as of 2004. The Company’srevised estimate has resulted in an increase of available tax losses up to andincluding 2006 of U.S.$140,312, bringing the total loss carry forward to U.S.$494,357.

The Company has analysed the future realization ofthese losses carried forward, considering the Company’s history of earnings,projected earnings based on current contracts as well as future contracts, therevised tax rate, the non-deductible interest as a result of thin cap rules andthe maximum carry forward period of the tax losses. Based on this analysis, theCompany believes that it is more likely than not that an estimated amount oftax loss carry forwards resulting in a deferred tax asset of U.S.$122,177 willbe fully realized. The Company has therefore recorded a valuation allowance ofU.S.$4,835.

F-33

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The movement in the amount of deferred income taxassets on the loss carry forward in the United Kingdom is due to increasedlosses incurred and a corresponding increase of the valuation allowance. Basedon the history of earnings of the UK companies, the Company does not considerit more likely than not that these tax losses and the deferred tax assetrelating thereto will be realized and, accordingly the Company has accountedfor a full valuation allowance amounting to U.S.$24,193.

In a 2004 decision of the Dutch High Court regardingthe valuation of financial instruments for tax purposes, it was concluded thathedge accounting should be followed in the tax return. The advisory committeeto the High Court has followed this line of tax treatment of financialinstruments in a recent advice to the Dutch High Court in a different case. TheCompany has discussed these developments regarding the tax treatment offinancial instruments with its tax advisors and has concluded that, in caseswhere the Company applies hedge accounting under the provisions of FAS 133,movements in the mark-to-market value of the financial instruments should alsobe recorded through other comprehensive income for tax purposes. Therefore theCompany no longer records temporary differences on the fair value fluctuationsof financial instruments that are recorded through other comprehensive income.The deferred tax adjustment that had been recorded in other comprehensiveincome as per January 1, 2006 amounting to U.S.$1,798 has been reversed.

At December 31,2006 the Company has loss carry forwards in the Netherlands of a total nominalamount of U.S.$494,357 expiring between 2013 and 2017. The following tablespecifies the years in which the Company’s loss carry forwards will expire:

| ** **           | ** ** | **2013**                           | ** ** | **2014** | ** ** | **2015** | ** ** | **2016** | ** ** | **2017** | ** ** | **Total** | ** ** |
|----------------------|------------|------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|
| ** **           | ** ** | **(in U.S.$ thousands)** | ** ** |
| Loss carry  forwards |       | 214,641                            |       | 84,547   |       | 76,992   |       | 12,627   |       | 105,550  |       | 494,357   |       |

 

At December 31, 2006the Company has loss carry forwards in the UK of a total nominal amount ofU.S.$80,642 which do not expire.

F-34

----

**27.**   SegmentInformation

The Company considers that the business segments,FPSOs and SPMs, are strategically and operationally interrelated and providesimilar services to the same client base. The Company’s officers and directorsregularly review the operating results of these two segments in resourceallocation decisions and performance assessments based on internal managementinformation from which the following data have been derived.

For internal and external reporting purposes, theaccounting principles applied are identical.

The segment informationper business segment is as follows:

| ** **                        | ** ** | **2006**                           | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-----------------------------------|------------|------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                        | ** ** | **(in U.S.$ thousands)** | ** ** |
| **FPSO**                          |       |                               |       |      |       |      |       |
| Revenues                          |       | 302,945                            |       | 333,828   |       | 370,241   |       |
| Segment net income/(loss)         |       | (4,620                             | )          | 48,545    |       | 6,161     |       |
| Identifiable assets               |       | 1,651,276                          |       | 1,484,571 |       | 1,249,003 |       |
| Capital expenditures              |       | 237,625                            |       | 388,712   |       | 24,771    |       |
| Depreciation and amortization     |       | 106,282                            |       | 94,902    |       | 72,940    |       |
| Net interest income and (expense) |       | (78,281                            | )          | (50,949   | )          | (41,629   | )          |
| Income taxes                      |       | (10,456                            | )          | (14,698   | )          | (94       | )          |
| **SPM**                           |       |                               |       |      |       |      |       |
| Revenues                          |       | 134,967                            |       | 65,162    |       | 67,424    |       |
| Segment net income/(loss)         |       | 10,041                             |       | (35,242   | )          | 228       |       |
| Identifiable assets               |       | 97,021                             |       | 44,480    |       | 54,034    |       |
| Capital expenditures              |       | 2,670                              |       | 3,564     |       | 620       |       |
| Depreciation and amortization     |       | 62                                 |       | 51        |       | 55        |       |
| Net interest income and (expense) |       | 1,047                              |       | 35        |       | 44        |       |
| Income taxes                      |       | (1,092                             | )          | (1,723    | )          | (375      | )          |
| **Other**                         |       |                               |       |      |       |      |       |
| Revenues                          |       | —                             |       | —    |       | —    |       |
| Segment net income                |       | —                             |       | —    |       | —    |       |
| Identifiable assets               |       | 713                                |       | 634       |       | 483       |       |
| Capital expenditures              |       | —                             |       | —    |       | —    |       |
| Depreciation and amortization     |       | —                             |       | —    |       | —    |       |
| Net interest income and (expense) |       | —                             |       | —    |       | —    |       |
| Income taxes                      |       | —                             |       | —    |       | —    |       |
| **Consolidated**                  |       |                               |       |      |       |      |       |
| Revenues                          |       | 437,912                            |       | 398,990   |       | 437,665   |       |
| Segment net income                |       | 5,421                              |       | 13,303    |       | 6,389     |       |
| Identifiable assets               |       | 1,749,010                          |       | 1,529,685 |       | 1,303,520 |       |
| Capital expenditures              |       | 240,295                            |       | 392,276   |       | 25,391    |       |
| Depreciation and amortization     |       | 106,344                            |       | 94,953    |       | 72,995    |       |
| Net interest income and (expense) |       | (77,234                            | )          | (50,914   | )          | (41,585   | )          |
| Income taxes                      |       | (11,548                            | )          | (16,421   | )          | (469      | )          |

 

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Customersaccounting for 10% or more of consolidated revenue all relate to the FPSOsegment and are as follows:

| ** **   | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004**                             | ** ** |
|--------------|------------|--------------------------------------|------------|----------|------------|--------------------------------------|------------|
| ** **   | ** ** | **(in U.S.$   thousands)** | ** ** | **%**    | ** ** | **(in U.S.$   thousands)** | ** ** | **%** | ** ** | **(in U.S.$   thousands)** | ** ** | **%** | ** ** |
| Amerada Hess |       |                                 | 49,734     |     |       | 11                                   |       |   | 47,849 |   |   | 12 |   |   | 45,544 |   |   | 10 |   |
| Talisman     |       |                                 | 48,838     |     |       | 11                                   |       |   | 73,674 |   |   | 18 |   |   | 74,084 |   |   | 17 |   |
| Shell        |       |                                 | 44,368     |     |       | 10                                   |       |   | 86,549 |   |   | 22 |   |   | 163,477 |   |   | 37 |   |
| Exxon        |       |                                 | 61,320     |     |       | 16                                   |       |   | — |   |   |   |   |   | — |   |   |   |   |
| PetroSA      |       |                                 | 67,320     |     |       | 16                                   |       |   | 60,249 |   |   | 15 |   |   | 67,813 |   |   | 16 |   |

 

Revenuesper geographical area are as follows:

| ** ** | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|------------------------------------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **(in U.S.$ thousands)** | ** ** |
| **FPSO**   |       |                               |       |     |       |     |       |
| Europe     |       | 204,688                            |       | 241,706  |       | 285,775  |       |
| Asia       |       | 22,567                             |       | 31,851   |       | 19,395   |       |
| Africa     |       | 67,453                             |       | 60,250   |       | 65,071   |       |
| Other      |       | 8,237                              |       | 21       |       | —   |       |
| Total FPSO |       | 302,945                            |       | 333,828  |       | 370,241  |       |
| **SPM**    |       |                               |       |     |       |     |       |
| Europe     |       | 43,259                             |       | 5,935    |       | 31,826   |       |
| Asia       |       | 88,116                             |       | 31,719   |       | 21,295   |       |
| Africa     |       | 2,691                              |       | 24,565   |       | 6,229    |       |
| America    |       | 576                                |       | 2,886    |       | 7,956    |       |
| Other      |       | 325                                |       | 57       |       | 118      |       |
| Total SPM  |       | 134,967                            |       | 65,162   |       | 67,424   |       |
| Total      |       | 437,912                            |       | 398,990  |       | 437,665  |       |

 

The basis of attributing revenues to geographic areasis determined by the location of the vessel for FPSO revenues and the locationof the customer for SPM revenues.

Long-livedassets per geographical area are as follows:

| ** ** | ** ** | **2006**                           | ** ** | **2005**  | ** ** |
|------------|------------|------------------------------------|------------|-----------|------------|
| ** ** | ** ** | **(in U.S.$ thousands)** | ** ** |
| Europe     |       | 838,477                            |       | 832,343   |       |
| Asia       |       | 244,081                            |       | 90,314    |       |
| Africa     |       | 326,509                            |       | 352,304   |       |
| Total      |       | 1,409,067                          |       | 1,274,961 |       |

 

**28.**   FinancialInstruments

The Company uses (in the normal course of business)various types of financial instruments. The fair value of a financialinstrument is the amount for which an asset could be exchanged, or a liabilitysettled, between knowledgeable, willing parties in an arm’s length transaction.Fair values are determined from listed market prices, price quotations frombanks or from pricing models.

The Company has procedures and policies in place tocontrol risks related to financial instruments. These policies and proceduresinclude a clear segregation of duties between operating, settlement, accountingand controlling of all financial instruments used. The spread of the Company’sactivities limits 

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exposure to concentrationsof credit or market risk. The Company’s management is involved in the riskmanagement process.

The Company attempts to minimize the counterpartycredit risk associated with the financial instruments used by selectingcounterparties that it believes to be creditworthy.

***(a)******          Financial assets and liabilities***

Financialinstruments in the balance sheet substantially include accounts receivable trade,cash, deposits, long-term loans, short-term loans and trade accounts payable.The fair value of these financial instruments approximates their carryingvalue, unless indicated otherwise.

***(b)******           Derivative financial instruments***

The Company has entered into interest rate swapagreements to mitigate interest rate risks on specific external debt. Interestrate swap agreements which convert floating interest rate exposures into fixedinterest rate were designated as cash flow hedges. The cash flow hedge contractoutstanding at December 31, 2005 was a fixed interest rate payable of3.46% and a U.S.$ denominated floating interest rate receivable which maturedin January 2006. Its fair value amounted to an asset of U.S.$11.A corresponding amount was recorded as a positive component of accumulatedother comprehensive income at December 31, 2005 which was reclassified asa benefit to income as interest was paid on the underlying debt. The fair valueof the interest rate swap is based on quoted market prices.

To limit its interest exposure after July 3, 2006on the long-term bank loan entered into on July 1, 2005 for financing ofthe acquisition of its 55% ownership in PR Jotun DA, the Company purchased aninterest rate cap. This interest rate cap has a strike rate of 4.4%, limitingthe maximum interest costs including margin to 5%. The interest rate cap has astarting notional amount of U.S.$143,900 and the reduction schedule of thenotional amount of the cap is aligned with the repayment schedule of the loan.The interest rate cap is accounted for as cash flow hedge and change in thefair values are recorded in other comprehensive income. The fair value as of December 31,2006 was U.S.$2,209.

On August 10, 2006 and August 11, 2006, theCompany purchased interest rate caps to limit its interest rate exposure onU.S.$300,000 of the total outstanding amount under its corporate creditfacility. These interest rate caps have a strike rate of 6.5%, limiting themaximum interest costs on that principal amount to 6.5% excluding margin. Theinterest rate caps have fixed notional amounts of U.S.$200,000, U.S.$50,000 andU.S.$50,000 and are aligned with the maturity of the refinanced corporatefacility. The interest rate caps are treated as cash flow hedges and changes intheir fair values are recorded in other comprehensive income. The fair value asof December 31, 2006 was U.S.$1,084. The Company did not record any ineffectivenesson its interest rate caps in 2006 and 2005.

For designated derivative financial instruments thatqualify as fair value hedges, changes in the fair value of the financialinstrument and the change in the fair value of the hedged component offset eachother in the income statement. The net result of the interest rate swap isrecognized in the income statement.

To reduce the interest expense relating to the 101¤4%Senior Notes due 2012, the Company entered into a fixed-to-floating interestrate swap transaction, with effect from April 25, 2003, that enabled theCompany to swap the equivalent of the fixed rate amount of interest that ispayable on U.S.$335,000 aggregate principal amount of the 101¤4% Senior Notesdue 2012 for the floating rate amount of interest that would be payable on anequal amount of indebtedness. On May 27, 2003, the Company cancelled theswap transaction. Under the swap, prior to the cancellation, the Companyreceived interest payments that were calculated at a fixed rate of 101¤4%and made interest payments that were calculated at a floating rate that wasequal to a margin over LIBOR. The Company received U.S.$6,700 on May 30,2003, which represented its net gain from the cancellation of the swaptransaction. The Company deferred this gain, 

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which will be credited toincome over the remaining duration of the 101¤4% Senior Notesdue 2012, and used this payment to repay outstanding indebtedness under itscorporate credit facility.

As of July 17, 2003, the Company entered into afixed-to-floating interest rate swap transaction, with terms identical to thoseof the previous swap transaction, that enabled the Company to swap theequivalents of the fixed rate amount of interest that is payable onU.S.$335,000 aggregate principal amount of the 101¤4% Senior Notesdue 2012 for a floating rate amount of interest that would be payable on anequal amount of indebtedness. Under the swap, the Company received paymentsthat were calculated at a fixed rate of 101¤4% and madeinterest payments that were calculated at a floating rate that was equal to amargin of 6.32% over LIBOR. As of February 15, 2005 the margin changed to6.44%.

On November 4, 2005 the Company partiallycancelled the fixed-to-floating interest rate swap transaction in relation tothe U.S.$335,000 aggregate principal amount of the 101¤4%Senior Notes due 2012 for the period from August 15, 2005 to August 15,2007. Due to the partial cancellation of the swap transaction the Company wouldincur fair value fluctuations through the statement of income from the date ofcancellation until August 15, 2007. The Company paid U.S.$6,898 on November 4,2005 which represented its net cost from the partial cancellation of the swaptransaction. The Company has deferred this cost which will debited it to thestatement of income over the remaining duration of the 101⁄4% Senior Notes due2012. The Company has recorded ineffectiveness as a result of the partial cancellation resulting in again of U.S.$6,650 recognized under interest expense.

On April 21, 2006, the Company cancelled theremainder of the fixed-to-floating interest rate swap transaction in relationto the U.S.$335,000 aggregate principle amount of the 101¤4%Senior Notes due 2012, which was already partially cancelled for the periodfrom August 15, 2005 to August 15, 2007. The Company paid U.S.$23,750on May 3, 2006, which represented its net cost from the cancellation ofthe swap transaction. The Company has deferred this cost which will be debitedto the statement of income over the remaining duration of the 101¤4% Senior Notesdue 2012. The 101¤4%Senior Notes due 2012 will continue at an interest percentage of 10.25%.

***(c)******            Exchange Rate Sensitivity***

The Company’s revenues are primarily denominated inU.S. dollars and, to a lesser extent, sterling and Euro. In 2006, approximately£16,181 (U.S.$29,665) of the Company’s revenues was denominated in sterling andapproximately €31,889 (U.S.$42,049) wasdenominated in Euro. The Company’s expenses are denominated primarily in U.S.dollars and to a lesser degree, euro, sterling and rand. The Company is exposedto fluctuations in foreign currency exchange rates, because a portion of itsexpenses and financial indebtedness is denominated in currencies that aredifferent from the Company’s revenues. The Company’s policy is to match,through our FPSO service agreements, the revenues in a particular currency withits operating costs in that currency, thereby minimizing the risk associatedwith fluctuations in foreign currency exchange rates. The Company also matchesits indebtedness denominated in U.S. dollars with its revenues denominated inU.S. dollars. The Company purchases foreign currency exchange contracts fromfinancial institutions to the extent of any residual exposure. The Companymanages its outstanding currency exposure on a regular basis and nets theseexposures across its operations as a group. Gains and losses related to specificcurrency transactions are recognized as part of its income from financingactivities.

In the years 2005 and 2006 the Company entered intoforeign currency exchange contracts in relation to projects to hedge againstthe risk of fluctuations in foreign currency exchange rates for expenditures incurrencies other than the project currency. The Company has designated certainforeign currency exchange contracts as cash flow hedges. For such contractsdesignated and that qualify as cash flow hedges gains and losses related toproject specific currency transactions are recognized as part of the Company’saccumulated other comprehensive income/(loss).

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Thetotal notional amounts as per contract and the fair values of the Company’sforeign currency exchange contracts as of December 31, 2006 are asfollows:

| ** **                      | ** ** | **Expected  Maturity Date  As of December 31, 2006** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                                                     | ** ** | **Fair Value** | ** ** |
| ** **                      | ** ** | **(in U.S.$ thousands)**                                            | ** ** |
| **Forward Exchange Agreements** |       |                                                                          |       |   |   |   |   |
| (Receive €/Pay  U.S.$)     |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                |       | 100,755                                                                       |       |   | 579 |   |   |
| (Receive NOK/Pay U.S.$)         |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                |       | 1,957                                                                         |       |   | (37 | ) |   |
| (Receive SGD/Pay U.S.$)         |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                |       | 25,988                                                                        |       |   | 123 |   |   |
| (Receive ZAR/Pay U.S.$)         |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                |       | 2,992                                                                         |       |   | 232 |   |   |
| (Receive £/Pay U.S.$)      |       |                                                                          |       |   |   |   |   |
| Aggregate Amount                |       | 2,774                                                                         |       |   | 175 |   |   |
|                            |       | 134,466                                                                       |       |   | 1,072 |   |   |

 

These foreign currency exchange contracts mature onvarious dates through fiscal year 2007.

Thetotal notional amounts as per contract and the fair values of the Company’sforeign currency exchange contracts as of December 31, 2006 accounted foras cash flow hedges under FAS 133 are as follows:

| ** **                                    | ** ** | **Expected  Maturity Date  As of December 31,  2006** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Total**                                                                 | ** ** | **Fair Value** | ** ** |
| ** **                                    | ** ** | **(in U.S.$ thousands)**                                        | ** ** |
| **Forward Exchange Agreements**               |       |                                                                      |       |   |   |   |   |
| (Receive €/Pay  U.S.$)  Aggregate Amount |       | 69,511                                                                    |       |   | 243 |   |   |
| (Receive SGD/Pay  U.S.$)  Aggregate Amount    |       | 25,988                                                                    |       |   | 123 |   |   |
|                                          |       | 95,499                                                                    |       |   | 366 |   |   |

 

These foreign currencyexchange contracts mature on various dates through 2007 and are included atfair value in the other receivables. The fair value is calculated bymultiplying the nominal amounts with the difference between the contract ratesand the forward rates.

The Company recordedineffectiveness on its foreign currency exchange contracts in 2006 of U.S.$(1,546)and in 2005 of U.S.$1,796.

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***(d)****           Repaymentschedule for debt*

Thefollowing is a schedule of future repayments of debt for the next 5 years:

| ** ** | ** ** | **Year ending  December 31,  2006** | ** ** |
|------------|------------|-----------------------------------------------|------------|
| 2007       |       |                                          | 54,542     |   |   |
| 2008       |       |                                          | 50,140     |   |   |
| 2009       |       |                                          | 52,602     |   |   |
| 2010       |       |                                          | 51,612     |   |   |
| 2011       |       |                                          | 147,312    |   |   |
| Thereafter |       |                                          | 738,823    |   |   |
| Total      |       |                                          | 1,095,031  |   |   |

 

**29.**          Commitments

***(a)****          Rentobligations and operational lease agreements*

The Company leases buildings, office space and carsunder various operating lease agreements extending through fiscal year 2014.

Thefollowing is a schedule of future minimum rental payments for the next5 years:

| ** ** | ** ** | **Year ending  December 31, 2006** | ** ** |
|------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **(in U.S.$ thousands)**                | ** ** |
| 2007       |       |                                              | 3,061      |   |   |
| 2008       |       |                                              | 3,105      |   |   |
| 2009       |       |                                              | 2,906      |   |   |
| 2010       |       |                                              | 2,709      |   |   |
| 2011       |       |                                              | 2,615      |   |   |
| Thereafter |       |                                              | 8,801      |   |   |
|       |       |                                              | 23,197     |   |   |

 

Lease expenses for theyears ended December 31, 2006, 2005 and 2004 under all operating leasesamounted to approximately U.S.$2,541, U.S.$3,120 and U.S.$2,625 respectively.No contingent rental payments or clauses regarding any terms of renewal,purchase options, escalation clause or restrictions exist.

***(b)****           Guarantees*

The Company has guaranteefacilities with banks available amounting to U.S.$76,372. At December 31,2006, these facilities were used for a total amount of U.S.$45,965 (2005—U.S.$18,062)to provide bank guarantees of subsidiary debt to certain third parties.

***(c)****            Purchasecommitments*

The Company has in itsordinary course of business activities entered into purchase commitments forthe operations of the FPSOs and the activities in the SPM segment. As of December 31,2006 there are no significant purchase commitments in connection with theacquisition of tangible fixed assets.

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**30.**          LossContingencies

***(a)****          Claims*

From time to time, the Company is subject to variousclaims arising out of the ordinary course of business.

At December 31, 2006, a significant claim existedagainst the Company involving aggregate damages of U.S.$16,000. This claimrelates to the alleged breach of a contract for the design of equipment. Sincethe outcome of this claim is uncertain the Company cannot estimate a possibleloss or range of loss.

In addition, the Company is subject to proceedingsinitiated by certain of its competitors in the district court in The Hague inrespect of an alleged infringement of intellectual property rights. The claimsof these competitors failed during the injunctions proceedings before theDistrict Court as well as before the Court of Appeal. Plaintiffs continuedtheir claims by starting proceedings at the District Court in The Haguerequesting a judgment on the merits. In 2006 the Court nullified one of the twopatents relied upon by these competitors and rejected their claim related tothe nullified patent. The judgment of the District Court on the remaining partof the proceedings on the merits is expected in April 2007. With respectto the patents at stake, the Company has received advice from its patent agentthat our product design does not infringe upon any valid claim of the patents.The Company cannot estimate a possible loss or range of loss related to thisclaim.

While the ultimate resultof all such matters is not presently determinable, based upon current knowledgeand facts, management does not expect that their resolution will have amaterial adverse effect on the Company’s consolidated financial position orresults of operation.

***(b)****           Internalrestructuring and tax audit*

Effective January 1, 2000, the Company enteredinto an internal restructuring process. In connection with this restructuring,the economic interests in most of the assets and liabilities of certainnon-Dutch consolidated group companies (the “selling companies”) were sold toBluewater Holding B.V., while legal title to the assets and liabilities transferredremained with the selling entities. The valuation of the assets and liabilitiestransferred was based on a valuation report. The sales of these economicinterests resulted in intercompany profits at the level of the sellingcompanies and the creation of a corresponding amount of (amortizable) goodwilland intercompany indebtedness at the level of Bluewater Holding B.V. The taxconsequences of the Company’s internal restructuring have been the subject ofextensive discussions with the tax authorities and of a tax audit.

In 2002 and 2003 the Dutch tax authorities issued taxassessments with respect to certain non-Dutch group members pertaining to the1997, 1998, 1999 and 2000 tax years, for a total amount of €137,900(U.S.$181,835), based on the position that these group companies, prior to andat the time of the restructuring, were residents of the Netherlands for Dutchtax purposes or had a taxable presence in the Netherlands. The Company filed aletter of objection to these assessments and engaged in further discussionswith the Dutch tax authorities, in response to which these assessments havebeen reduced to zero.

The Dutch tax authorities also issued assessments withrespect to one of the Dutch group companies in respect of the years 1998 and1999 based on their assertion that certain transfer pricing adjustments wererequired. These assessments claimed additional tax payments were required in anaggregate amount of €23,300 (U.S.$30,723).Based upon a letter of objection against these assessments and subsequentdiscussions on this issue, the tax authorities have issued decisions in February andMarch 2006 to eliminate these additional tax assessment amounts, therebyreducing the assessments to the amounts that are equal to amounts originallyshown in the tax returns as filed.

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Prior to and after the restructuring that took placein 2000 the Company has also had extensive discussions with the Dutch taxauthorities concerning the amount of goodwill and intercompany indebtedness atthe level of Bluewater Holding B.V. pursuant to the restructuring transactions,and the amount of goodwill carried at one of the non-Dutch group companies atthe date it was redomiciled to the Netherlands as part of the samerestructuring. In 2005 the Company received tax assessments for these twocompanies for the tax year 2000 based on the tax authorities’ view that nogoodwill should be attributed to these companies and that, accordingly, theamount of intercompany debt and interest expense at the level of BluewaterHolding B.V. should be reduced. The Company has filed letters of objectionagainst these assessments and had subsequent discussions with the Dutch taxauthorities. In February 2006, the Company received decision letters fromthe Dutch tax authorities accepting some goodwill at the level of theredomiciled non-Dutch group company but no goodwill at the level of BluewaterHolding B.V., and at the same time reducing its intercompany debt and relatedinterest expense by a corresponding amount. On March 22, 2006, the Companystarted legal proceedings to have the assessments reviewed. The Company’sappeal will be heard before the lower tax court in Haarlem on April 25,2007.

In February 2007 the Company has received taxassessments for Bluewater Holding B.V. respect of the years 2001 and 2002,based on the same view of the tax authorities as mentioned above. The Companyhas filed letters of objection against these assessments as well and expectsthat the tax authorities will delay a decision on these until the litigation inrespect of the year 2000 has ended. As is permitted under Dutch law andregulations, the Company intends to withhold payment of amounts in respect ofcontested tax assessments pending final resolution of the issue.

During 2006 it has become clear from the defensepapers filed by the tax authorities that the tax authorities have focused thedispute in the current litigation stage before the tax court on variouscomponents of the valuation method that was used to establish the enterprisevalue at the time of the restructuring and hence the amount of goodwill thatarose upon the restructuring. It appears unlikely that other previouslydisputed matters, such as the amount of goodwill already present at the Dutchgroup company mentioned above at the time of the restructuring, will becomesubject to judicial review during the upcoming court hearing on April 25,2007. The valuation method that was used at the time of the restructuring is inaccordance with authoritative literature on this subject and is fully supportedby independent valuation experts. The effective elimination of the previouslydisputed matters, which has recently become apparent from the defense papersfiled by the tax authorities, and the support from independent experts for theCompany’s position regarding the principal points of discussion, has in theCompany’s view significantly reduced the risk of a reduction of the total amountof goodwill and intercompany indebtedness at the level of Bluewater HoldingB.V.

Based upon current facts and circumstances, applicabletax law, regulation and precedent, discussions with relevant tax authoritiesand professional advisers and other relevant criteria, the Company estimatesthat it is currently probable that the Company will realize benefits relatingto at least U.S.$591,774 (2005: U.S.$433,950) of amortizable goodwill and atleast U.S.$1,041,077 (2005: U.S.$724,000) of interest bearing intercompany debtin connection with the Company’s internal restructuring at January 1, 2000and that such amounts will result in tax losses which may be carried forwardfor Dutch income tax purposes, subject to the potential application of the thincap rules as of January 1, 2004 and loss carry forward limitations asof December 30, 2012. The Company has assessed the valuation of theseincreased amounts of realizable benefits in accordance with FAS 109 asdisclosed in note 26.

Notwithstanding the Company’s current estimates,however, it is impracticable to quantify definitively at this time the effectthat the outcome of such discussions may have on the Company’s actual taxposition, because such definitive quantification depends on a number ofpossible future events, including the specific factual findings and legal andregulatory positions that may be taken by the Dutch tax authorities in thecurrent legal proceedings, as well as the outcome of such proceedings.

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As of January 1, 2004 Dutch tax law containsso-called thin-capitalization, or ‘thin cap’ rules that may operate torestrict the deductibility of interest on intercompany debt (including externaldebt that is guaranteed by an affiliated company). In order, among otherthings, to defer applicability of the Dutch thin cap rules until December 30,2004 and periods thereafter, the fiscal years of all Bluewater’s Dutch groupcompanies were changed, although no assurance can be given that this measurewill be effective to preclude applicability of the thin cap rules to suchcompanies as of January 1, 2004. As the disallowed portion of the interestdeduction depends significantly on the debt-equity ratio of the relevant entityat the beginning and the end of any financial year, it is clear that theoutcome of the dispute with the Dutch tax authorities concerning the relevantgoodwill amount (and the annual amortization amount resulting there from) andthe corresponding intercompany debt amount will have a significant impact onthe effect of the thin cap rules on Bluewater Holding B.V.

In December 2001, U.S.$379,500 of theintercompany indebtedness of Bluewater Holding B.V. relating to the internalrestructuring was converted to share capital, thereby reducing the amount oftax benefits that the Company may take advantage of in subsequent periods, atthe same time increasing the equity amount for application of the thin cap rules asof 2004. In December 2006 a further amount of intercompany debt ofBluewater Holding B.V. relating to the internal restructuring was converted toshare capital. According to the terms of the agreement, the amount of this debtconversion will be determined based on the total debt and equity of Bluewater HoldingB.V. as per December 31, 2006, as well as the final amount of goodwill andintercompany debt that will be established based on the outcome of the pendinglegal proceedings.

The outcome of thesediscussions and judicial proceedings, which may take a considerable period oftime, could limit the Company’s ability to take advantage of future tax savingsassociated with the Company’s internal restructuring by limiting the amount ofgoodwill that the Company may amortize and the amount of interest that theCompany may deduct for tax purposes in future periods. In addition, the outcomeof the Company’s dispute with respect to thin cap rules may limit theamount of deductible interest for the tax year 2004 and subsequent periods.While the Company believes that it is probable that it will realize taxbenefits in amounts that are not less than the foregoing estimates as set forthabove and that it is unlikely that the outcome of these discussions and thepending proceedings relating thereto will have a material adverse effect on theCompany’s financial position, there can be no assurance in this regard and theCompany could lose some or all of the future anticipated tax savings associatedwith its internal restructuring.

***(c)****            Operationalrisks—not insured or insurable on economically favorable terms*

The Company maintains insurance coverage in suchamounts as it believes to be prudent against normal risks in operations,including, among other things, the risk of pollution and damage to FPSOs.Certain risks (such as business interruptions and environmental liabilities inexcess of certain limits), however, are either not insurable or are insurableonly at rates the Company considers uneconomical. The Company’s insurancecoverage does not protect against loss of revenues, although the Company isrequired under its corporate credit facility to obtain such assurance if thenumber of FPSOs from which it receives revenues falls below three.

At December 31, 2006,management believes that no uninsured events existed that will have a materialadverse effect on the consolidated financial position or operations of theCompany.

**31.**          MinorityInterest

Minority interests inconsolidated companies represent the third-party shareholding of 45% by SMNASin the underlying net assets of PR Jotun DA.

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**32.**          Shareholder’sEquity and Appropriation of Net Income

The Articles of Incorporation provide that the resultfor the year is subject to a disposition to be decided at the Annual GeneralMeeting of Shareholders. Each share (common and non-profit sharing five percentnon-cumulative preference share) is entitled to cast one vote. The preferenceshares do not have preference rights in case of liquidation of the Company.Directors of the Company are authorized to decide upon the payment of an interimdividend by way of an advance on dividends expected. No dividend is proposed tobe paid for 2006.

Management proposes to add the net income for the yearto retained earnings. This proposal has been reflected in the accompanyingfinancial statements.

There were no dividendsdeclared in 2006 and 2005.

**33.**          AccumulatedOther Comprehensive Income

Theaccumulated balances of other comprehensive income are as follows:

| ** **                   | ** ** | **Foreign  currency  items**       | ** ** | **Financial  instruments** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** |
|------------------------------|------------|------------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **(in U.S.$ thousands)** | ** ** |
| Balance at  January 1   |       | (18,696                            | )          |                       | (4,029     | )                                             |       |   | (22,725 | ) |   |
| Current-period  change       |       | 2,234                              |       |                       | 6,060      |                                          |       |   | 8,294 |   |   |
| Balance at  December 31 |       | (16,462                            | )          |                       | 2,031      |                                          |       |   | (14,431 | ) |   |

 

**34.**          Restatementof the 2005 Statement of Cash Flows

Subsequent to the issuance of the Company's 2005financial statements, the Company's management determined that, due to anunintentional error, the effect of the change in fair value of interest rateswap and caps was presented as a U.S.$6,650 cash increase in the cash flow fromoperations while the actual effect of this change was a U.S.$6,650 decrease. Asa result of this error in the cash flow from operations, a corresponding andoffsetting error was made in the cash flows from financing relating to theproceeds from long term and short term loans from banks and third parties.Accordingly, the statement of cash flows for 2005 was restated to reduce netcash provided by operating activities by U.S.$13,300 and to increase net cashprovided by financing activities by the same amount. This reclassification inthe statement of cash flows did not have any impact on cash and cashequivalents, total cash flows, statement of operations or balance sheets as ofand for the year ended December 31, 2005.

F-44

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